So much for any honeymoon period between the Healey administration and energy company Avangrid.
Rebecca Tepper, the state’s new energy and environmental affairs secretary, chastised Avangrid’s chief executive with a harsh letter that essentially accuses the company of bailing on its promise to build an offshore wind farm for Massachusetts in waters south of Martha’s Vineyard. In the Feb. 27 missive to Pedro Azagra, Tepper said the CEO and his company misrepresented the status of its contracts for the massive Commonwealth Wind project. Their actions, she hinted, could be taken into consideration in the state’s future offshore wind auctions.
Translation: Be on your best behavior if you want to win a contract again.
It wasn’t supposed to go down like this when the Baker administration announced the winners of the third auction in December 2021. Avangrid won utility contracts to build a wind farm that could generate 1,200 megawatts of electricity, or enough power for roughly 700,000 homes. Also in that round, the venture known as Mayflower Wind (now SouthCoast Wind) won rights to provide 400 megawatts with its nearby project. The two names were already familiar to state officials: Avangrid’s Vineyard Wind joint venture won rights to build the first wind farm in 2018 for 800 megawatts, and Mayflower secured 800 megawatts of its own in a second round.
Round three would bring Massachusetts’ nascent offshore wind industry to critical mass. Avangrid’s contracts prompted an Italian cable manufacturer, Prysmian Group, to promise a factory where an old coal-fired plant once stood in Somerset, and Crowley Maritime Corp. agreed to set up shop in Salem to do wind-farm staging and storage. A happy day all around.
But the good times didn’t last. The war in Ukraine and rapidly rising interest rates upended those plans, driving up costs for construction and materials. Projects that once penciled out no longer came close to doing so.
Azagra broke the bad news in September, announcing he would try to renegotiate Commonwealth Wind’s contracts with the state’s big utilities — namely National Grid and Eversource. The price tag had skyrocketed from a previous $4 billion. (It’s now well over $5 billion.) Lining up financing suddenly seemed next to impossible — unless the utilities agreed to pay more. But they didn’t budge. A deal is a deal, after all, and opening up these long-term contracts could establish a bad precedent, or even legal liability if a rival decided to sue.
So Avangrid eventually chose to terminate the contracts. The company would resubmit, at higher prices, in round four.
Tepper’s boss, newly elected Governor Maura Healey, inherited this mess when she took office in January; both Tepper and Healey had followed the saga closely in their previous roles in the attorney general’s office. The new administration tried to bring Avangrid and the utilities together to discuss their options, apparently to no avail.
On a conference call with analysts last month, Azagra insisted the Commonwealth Wind contracts were no longer viable and would be terminated as soon as possible. He pointed to historic inflation, interest rates, supply chain bottlenecks, and the state’s offshore wind price cap. (That cap essentially has been lifted for future rounds.) He promised that the company was in a great position to rebid later this year because of all the work it has already done. He added that it’s important that future auctions take into account how unexpected events can change costs so dramatically.
It was that update that prompted Tepper to fire off her letter, accusing Azagra and his company of misrepresenting “the status of those contracts in a matter that is material.” That’s about as blunt as legalese can get. She reminded Azagra that bidders for these long-term contracts must assume some risk, and that electric ratepayers should not be the ones who absorb higher costs if economic conditions change. The Healey administration just accepted comments for how to proceed with round four, but Tepper assured Azagra that the “experience of the bidder will be evaluated in the selection process.”
In response, Avangrid issued a comment saying the company remains committed to reaching the state’s climate goals, but because of price increases outside of its control, the best option for Commonwealth Wind is to terminate the contracts and try again in round four.
Construction has started on Vineyard Wind, Avangrid’s joint venture with Copenhagen Infrastructure Partners, and most of its costs were set a while ago. The fate of the state’s third offshore wind farm remains an open question: Mayflower/SouthCoast faces many of the same financial hardships as Avangrid. But it has not been anywhere near as vocal with concerns, and it declined to comment about Tepper’s letter. (Connecticut-based Avangrid is a public company and the Mayflower/SouthCoast venture is not.)
Eversource also declined to comment about the Commonwealth Wind situation, citing negotiations with Avangrid. But Eversource has similar headaches: The company has been trying to sell its stake in offshore wind partnerships with Danish energy company Ørsted, and it’s taking much longer than expected. Analysts peppered Eversource boss Joe Nolan with questions on an earnings call last month about why the sale process has dragged on. And Ørsted announced a $366 million write-down for the value of one of those ventures in New York, citing several of the issues Avangrid faces.
National Grid, meanwhile, gave a big thumbs up to Tepper’s letter. Developers such as Commonwealth Wind, a spokesman said, need to stand by their commitments, especially at a time when energy costs are already high.
But state officials can’t force Avangrid to build a project the company can’t finance. That leaves two options. The utilities and Avangrid can reach an exit agreement, presumably including a penalty that could total in the tens of millions for Avangrid, a tiny fraction of the project’s cost overruns. Or they can duke it out in court.
And then there’s the next auction. Just how much will this episode hurt Avangrid’s chances?
The truth is, the Healey administration needs Avangrid. Healey has promised that the state’s electric grid will rely on 100 percent clean energy by 2030. That ambitious goal can’t be reached without big offshore wind farms. The field of players is limited: Essentially the lease areas off Massachusetts are divided among only five potential bidders. And Avangrid’s offshore wind arm already employs 150 people in Greater Boston, with many more jobs to come.
Tepper’s letter could be a legal warning to Avangrid from the administration, political posturing, or a savvy mixture of both.
The honeymoon may be over. But both partners know it’s in their best interests for this to be a relationship that lasts.
Jon Chesto can be reached at firstname.lastname@example.org. Follow him on Twitter @jonchesto.