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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Two New England electric utilities cancelled their power-purchase agreements (PPAs) with the proposed $2.5 billion Cape Wind offshore wind project, raising questions about the project's viability. The two utilities, NSTAR (Boston, Massachusetts), a unit of Northeast Utilities (NYSE:NU) (Hartford, Connecticut) and National Grid (Waltham, Massachusetts), a subsidiary of National Grid plc (NYSE:NGG) (London, England), had contracted for about 77% of the project's 468 megawatts (MW) of capacity. These PPA cancellations could imperil Cape Wind's $150 million loan guarantee from the U.S. Department of Energy (DoE) (Washington, D.C.).
The utilities terminated their PPAs January 6, claiming Cape Wind missed a December 31 deadline to obtain financing and begin construction of the project. The contract reportedly could have been extended if Cape Wind developer Energy Management Incorporated (EMI) (Boston, Massachusetts) put up financial collateral, but the developer did not do that. The project, under development for more than a decade, would consist of 130 Siemens AG (NYSE:SI) (Munich, Germany) 3.6-MW offshore turbines located in Nantucket Sound, off the coast of Massachusetts.
"National Grid is disappointed that Cape Wind has been unable to meet its commitments under the contract, resulting in the termination of the power purchase agreement," National Grid said in a statement. "We still believe the solution to New England's energy challenge is a diversity of energy sources, which is why we support renewable projects consistent with our goal of reducing emissions while minimizing the cost impact on our customers. We will continue to pursue other renewable options, including solar, competitively priced on- and off-shore wind, and other technologies as they become available."
NSTAR spokesman Michael Durand said, "In 2012, we entered into an agreement with Cape Wind in good faith, fully committed to meet our obligations and purchase power from their off-shore facility to deliver to our customers. Under the terms of the contract, Cape Wind was required to secure financing and commence construction by December 31, 2014. Unfortunately, Cape Wind has missed these critical milestones. Additionally, Cape Wind has chosen not to exercise their right to post financial security in order to extend the contract deadlines. Therefore the contract is now terminated."
"Contracts such as the one between us and Cape Wind have these milestones so that projects that are unable to move forward do not burden customers for long periods of time in a high-priced market environment due to lack of supply," the NSTAR statement continued. "We remain committed to meeting (Massachusetts') clean energy goals through competitively bid contracts while also keeping prices down on behalf of our customers."
But EMI claimed the terminations are invalid. Earlier this month, it tweeted, "We do not regard these PPA terminations as valid due to the Force Majeure provision of the contracts that extends the milestone dates." In an email to The New York Times, Mark Rodgers, Cape Wind's spokesman, said, "We will pursue every option available to us to move this project forward and supply our power to this supply-constrained region."
Invoking a force majeure provision of a contract generally allows parties to that contract to extend deadlines. EMI's contract with National Grid reportedly defines force majeure as an "unusual, unexpected and significant event" outside the control of either party. Cape Wind officials reportedly claim the "unprecedented and relentless" onslaught of legal action against the project qualifies as a force majeure event, as the litigation was "completely beyond Cape Wind's control."
Legal experts are said to doubt whether litigation against the project would rise to the level of a force majeure event, which typically are defined as acts of God, wars, terrorism and the like. But it would be unwise to count Cape Wind out, as it has won more than two dozen previous legal and regulatory challenges.
For more than a decade, Cape Wind has battled powerful financial and political interests, including billionaire William Koch, a former leader at Koch Industries (Wichita, Kansas), and the Kennedy family, which owns a sprawling family compound on Hyannis. Koch, also a local property owner, reportedly is helping bankroll a $50 million fund to block Cape Wind. For more on the Cape Wind project, see October 26, 2012, article - Cape Wind Sets Sights on 2013 Construction Start.
Critics of the project claim Deval Patrick, the recently departed Democratic governor of Massachusetts, strong-armed NSTAR and National Grid into signing contracts with Cape Wind that were significantly above market prices. Last November, Massachusetts elected as governor Republican Charlie Baker, who is said to support Cape Wind, though less ardently than his predecessor.
For years, EMI officials have claimed Cape Wind would be the first offshore windfarm in the U.S. Europe, by contrast, has numerous offshore windfarms. But Cape Wind may lose that distinction, as the first phase of a planned 1,000-MW windfarm off the coast of Rhode Island and Massachusetts is being readied to begin construction. Deepwater Wind LLC (Providence, Rhode Island) is developing the Deepwater Offshore Wind Energy Center, which has total investment value (TIV) of about $4.2 billion. That fully permitted project will use 166 turbines, each with 6 MW, from Alstom S.A. (OTC:ALSMY) (Levallois-Perret, France). That project has signed a PPA with National Grid, one of the utilities seeking to walk away from the Cape Wind project.
The repercussions of the cancelled PPAs could extend beyond the Cape Wind project. Cape Wind is scheduled to be the first tenant at a port facility in New Bedford, Massachusetts, where the state has invested about $113 million. Cape Wind reportedly had a two-year, $4.5 million lease at the port, which would serve as a staging area for the project turbines and other equipment. Port officials said the potential loss of Cape Wind as a tenant would not kill the port project.
"New England has a lot of constraints in its electricity supply," said Brock Ramey, a power specialist with Industrial Info. "Older generators are closing, and building new gas-fired generation is a real challenge because of pipeline siting issues. So an offshore windfarm makes a lot of sense, in theory. But the Cape Wind project has been hamstrung for years by its high costs and litigation. The market may have moved on. Equipment manufacturers have introduced larger, more efficient turbines into the market."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
The utilities terminated their PPAs January 6, claiming Cape Wind missed a December 31 deadline to obtain financing and begin construction of the project. The contract reportedly could have been extended if Cape Wind developer Energy Management Incorporated (EMI) (Boston, Massachusetts) put up financial collateral, but the developer did not do that. The project, under development for more than a decade, would consist of 130 Siemens AG (NYSE:SI) (Munich, Germany) 3.6-MW offshore turbines located in Nantucket Sound, off the coast of Massachusetts.
"National Grid is disappointed that Cape Wind has been unable to meet its commitments under the contract, resulting in the termination of the power purchase agreement," National Grid said in a statement. "We still believe the solution to New England's energy challenge is a diversity of energy sources, which is why we support renewable projects consistent with our goal of reducing emissions while minimizing the cost impact on our customers. We will continue to pursue other renewable options, including solar, competitively priced on- and off-shore wind, and other technologies as they become available."
NSTAR spokesman Michael Durand said, "In 2012, we entered into an agreement with Cape Wind in good faith, fully committed to meet our obligations and purchase power from their off-shore facility to deliver to our customers. Under the terms of the contract, Cape Wind was required to secure financing and commence construction by December 31, 2014. Unfortunately, Cape Wind has missed these critical milestones. Additionally, Cape Wind has chosen not to exercise their right to post financial security in order to extend the contract deadlines. Therefore the contract is now terminated."
"Contracts such as the one between us and Cape Wind have these milestones so that projects that are unable to move forward do not burden customers for long periods of time in a high-priced market environment due to lack of supply," the NSTAR statement continued. "We remain committed to meeting (Massachusetts') clean energy goals through competitively bid contracts while also keeping prices down on behalf of our customers."
But EMI claimed the terminations are invalid. Earlier this month, it tweeted, "We do not regard these PPA terminations as valid due to the Force Majeure provision of the contracts that extends the milestone dates." In an email to The New York Times, Mark Rodgers, Cape Wind's spokesman, said, "We will pursue every option available to us to move this project forward and supply our power to this supply-constrained region."
Invoking a force majeure provision of a contract generally allows parties to that contract to extend deadlines. EMI's contract with National Grid reportedly defines force majeure as an "unusual, unexpected and significant event" outside the control of either party. Cape Wind officials reportedly claim the "unprecedented and relentless" onslaught of legal action against the project qualifies as a force majeure event, as the litigation was "completely beyond Cape Wind's control."
Legal experts are said to doubt whether litigation against the project would rise to the level of a force majeure event, which typically are defined as acts of God, wars, terrorism and the like. But it would be unwise to count Cape Wind out, as it has won more than two dozen previous legal and regulatory challenges.
For more than a decade, Cape Wind has battled powerful financial and political interests, including billionaire William Koch, a former leader at Koch Industries (Wichita, Kansas), and the Kennedy family, which owns a sprawling family compound on Hyannis. Koch, also a local property owner, reportedly is helping bankroll a $50 million fund to block Cape Wind. For more on the Cape Wind project, see October 26, 2012, article - Cape Wind Sets Sights on 2013 Construction Start.
Critics of the project claim Deval Patrick, the recently departed Democratic governor of Massachusetts, strong-armed NSTAR and National Grid into signing contracts with Cape Wind that were significantly above market prices. Last November, Massachusetts elected as governor Republican Charlie Baker, who is said to support Cape Wind, though less ardently than his predecessor.
For years, EMI officials have claimed Cape Wind would be the first offshore windfarm in the U.S. Europe, by contrast, has numerous offshore windfarms. But Cape Wind may lose that distinction, as the first phase of a planned 1,000-MW windfarm off the coast of Rhode Island and Massachusetts is being readied to begin construction. Deepwater Wind LLC (Providence, Rhode Island) is developing the Deepwater Offshore Wind Energy Center, which has total investment value (TIV) of about $4.2 billion. That fully permitted project will use 166 turbines, each with 6 MW, from Alstom S.A. (OTC:ALSMY) (Levallois-Perret, France). That project has signed a PPA with National Grid, one of the utilities seeking to walk away from the Cape Wind project.
The repercussions of the cancelled PPAs could extend beyond the Cape Wind project. Cape Wind is scheduled to be the first tenant at a port facility in New Bedford, Massachusetts, where the state has invested about $113 million. Cape Wind reportedly had a two-year, $4.5 million lease at the port, which would serve as a staging area for the project turbines and other equipment. Port officials said the potential loss of Cape Wind as a tenant would not kill the port project.
"New England has a lot of constraints in its electricity supply," said Brock Ramey, a power specialist with Industrial Info. "Older generators are closing, and building new gas-fired generation is a real challenge because of pipeline siting issues. So an offshore windfarm makes a lot of sense, in theory. But the Cape Wind project has been hamstrung for years by its high costs and litigation. The market may have moved on. Equipment manufacturers have introduced larger, more efficient turbines into the market."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
