United States

United States

Analysis: Cape Wind's crucial fight for existence

UNITED STATES: Cape Wind is on life support, and the next few weeks will be crucial for the 468MW offshore wind project and developer Energy Management Inc (EMI).

Cape Wind's meteorological mast is the sole installation at the project site
Cape Wind's meteorological mast is the sole installation at the project site

National Grid and Northeast Utilities-owned NStar recently said they had terminated their power purchase agreements (PPAs) for 77.5% of Cape Wind's power. The catalyst for this came when the project missed a 31 December deadline for financial close and starting construction.

Cape Wind could have posted collateral to extend the contracts. But the developer argued that "extended, unprecedented and relentless litigation" by the Alliance to Protect Nantucket Sound (APNS) triggered a "force majeure" clause that extended its contract without the need for collateral. For a six-month extension to National Grid's contract, the collateral was $1.17 million.

It would be a tragedy if the project were litigated to death, said Sean Mahoney, executive vice president of the Conservation Law Foundation, who thinks the project still has life.

The force majeure argument is a bit of a stretch, said lawyer Charlie Harak, energy unit manager at the National Consumer Law Centre in Boston, who stressed he is not a contract lawyer. Force majeure generally means floods, hurricanes, riots, strikes and wars, he added.

Currently, EMI is attempting to fight the move. A company spokesman said the company is "exercising its rights under the contracts' dispute resolution provisions". These allow for a "30-day process of the parties coming together and meeting to try to resolve differences". He declined to say if negotiations had started. "If that 30-day period [does] not result in a favourable outcome, Cape Wind would then have litigation as an option."

Cape Wind still faces three law suits out of 26 filed since it was proposed in 2001. APNS and others are challenging the high price of NStar's contract with Cape Wind in the US court of appeals in Boston, said APNS president Audra Parker. APNS, whose largest funder is wealthy conservative Bill Koch, is being represented by famous lawyer and constitutional scholar Laurence Tribe.

Also outstanding, in the US court of appeals in Washington, is a suit by APNS and others against federal agencies involved in Cape Wind's lease. And thirdly, the town of Barnstable is suing to block expansion of NStar's power transfer station to connect Cape Wind to the grid.

Cape Wind has announced $1.2 billion in debt and mezzanine financing and a Danish Export Credit Agency loan. It had sought a $500 million loan guarantee from the Department of Energy but got $150 million.

Jim Gordon, EMI president, said – in a court declaration in July — that project financing was to close in September 2014 so construction could keep to the PPAs' schedule. He added: "Without the PPAs in place, the project cannot be built and operated. If the PPAs are terminated, the project cannot be financed and the millions of dollars invested to date would be lost."

Lack of equity

Equity investment had been proving tough, noted Amy Grace, chief wind analyst at Bloomberg New Energy Finance (BNEF). Cape Wind needs about $1 billion, or about one-sixth of the total tax equity out there "in a good year", Grace said. Competing onshore wind projects are less risky. And the PPAs capped the return Cape Wind could generate, diminishing what EMI could offer investors. A far-sighted giant such as Google or Siemens would need to invest sizeable equity, and that did not happen. The latter has promised $100 million.

"I think one of the reasons the two utilities hurried to get out of the PPA[s] is that they want to sign something more likely to be completed while the tax credits are still in place," she said. "I would expect a renewable energy request for proposals from them sometime this year."

Massachusetts governor Deval Patrick, who championed Cape Wind and pushed for the PPAs, left office the day after the utilities announced their exit. Successor Charlie Baker, who was against Cape Wind but changed his mind, has hinted he may avoid jumping into the controversy.

EMI is one of 12 companies qualified for the federal auction on January 29 for commercial wind development tracts off Massachusetts, further offshore than Cape Wind. Asked if EMI would still participate, its spokesman said, "I cannot comment on what we will do."

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