Understanding—and Planning—for Regulatory Challenges to Offshore Wind

Offshore wind projects have been bolstered by federal and state initiatives that support the technology to achieve emissions-reduction goals. However, development and grid integration of these projects requires careful planning to navigate regulatory, environmental, and stakeholder hurdles that could lead to costly delays. This should include both an initial plan to address those hurdles, along with alternative approaches should the initial plan prove unworkable. Here are key points to consider to ensure that offshore wind projects are developed in alignment with projected costs and schedules.

COMMENTARY

Interconnection. Offshore wind installations are no different from other generation projects seeking to interconnect to the grid. A project can fall either under state or Federal Energy Regulatory Commission (FERC) jurisdiction, although most will fall under FERC due to the expected large voltage level of the interconnection. The process varies based on the relevant transmission provider, including regional transmission organizations and independent system operators, but generally includes an initial application or request; coordination meetings regarding scoping; one or more interconnection studies to determine feasibility, impacts, and costs; and execution of an interconnection agreement.

Throughout the interconnection process, a project must meet deadlines, or risk delays or a complete withdrawal from the interconnection queue. Without interconnection service, a project cannot sell capacity, energy, or ancillary services—and will be unable to generate income. This is also likely to be a breach of assorted representations and warranties in project financing agreements, which could result in a default and the exercise of remedies by secured creditors.

Offshore Renewable Energy Credits (ORECs). Offshore wind, like many onshore renewable energy projects, frequently receives renewable energy certificates (RECs). These are assets that represent the clean energy attributes of 1 MWh of electric generation from a renewable source. ORECs are a variation of RECs specific to offshore wind that a project may sell in certain jurisdictions. Both types of credits can be sold to comply with state-mandated renewable portfolio standards, and can be a significant revenue source, providing a level of income sufficient to support capital-intensive development. But in order to receive these credits, a project needs to meet developmental milestones, including energization and commercial operation by certain dates specified in its OREC award. Not meeting those milestones can result in the loss of those credits, and may make the project uneconomic.

Power Purchase Agreements (PPAs). Renewable energy projects, including offshore wind, also can receive revenue under PPAs, contracts between a customer and a generation company to buy a project’s power for a predetermined period at a predetermined price. PPAs benefit project developers by giving a project cash-flow predictability. These benefits are magnified by the typically long duration of the agreements, usually from 10 to 25 years. Like ORECs, PPAs are often tied to a project meeting a particular milestone. Missing these deadlines could result in the inability to sell ORECs or a breach of a PPA—making the project financially unviable.

Permitting. Even a well-planned and funded offshore wind project may encounter regulatory hurdles during the permitting process, which can be doubly challenging for projects that typically need federal permits (covering the turbines themselves and a portion of the lead line in federal waters), state approval (covering the portion of the lead line passing through state waters), and support from state/local government for the onshore lead line and substation. Each process may include milestones and deadlines that may be interrelated, requiring one permit before another can be sought. Construction cannot start without the necessary permits. The longer a delay in project construction, the higher the risk that OREC, interconnection, or other deadlines may be missed.

Planning for the Expected—and the Unexpected. Given the many ways in which offshore wind development can be delayed, it is important to (a) know what a project’s deadlines may be under interconnection requirements, PPAs, OREC awards, and the like; (b) plan for meeting those deadlines; and (c) develop contingent legal strategies in the event that the initial plans go awry. Most developers are very good at (a) and (b), but interesting and often time-sensitive issues arise with (c)—when the unexpected happens.

But it’s possible—and indeed critical—to plan for the unexpected. Legal strategies can be developed in advance to address risks to deadlines in the development process, thus avoiding the need to scramble to identify legal tools, such as contract extensions and tariff options.

Finally—know the other legal options that may exist and whether they can be leveraged. Always keep in mind that significant policy support for development of offshore power sources at both the federal and state levels can mean more flexibility. The unique nature of offshore wind and the policies supporting it may make it more likely that state regulators will modify OREC requirements and that FERC may grant waiver requests for tariff rules or interconnection agreement requirements. Starting a legal process may not ever provide a “sure thing,” but it can be a valuable mechanism when other contractual or tariff options fail. ■

—J. Daniel Skees ([email protected]) is a partner with Morgan, Lewis & Bockius LLP, where he represents electric utilities before FERC and other agencies on rate, regulatory, and transaction matters. Robert Goldfin ([email protected]) is an associate with Morgan, Lewis & Bockius LLP, where he represents major energy industry participants in regulatory and transactional matters.