Why Is New Jersey's Largest Utility (PSEG) Taking Its Time Buying an Equity Stake in Ørsted's Ocean Wind Project?
There are good reasons why PSEG is taking its time; it probably has to do with the "systemic risk" facing offshore wind projects along the East Coast after BOEM's surprise delay of Vineyard Wind
New Jersey’s Public Service Enterprise Group (PSEG) first dabbled in offshore wind more than 10 years ago: that’s when PSEG formed a 50-50 joint venture with Deepwater Wind to build an offshore wind farm along Jersey Shore. At the time, PSEG seemed to be gearing up to be a major player in the nascent offshore wind industry.
But New Jersey’s largest regulated utility lost focus when Governor Chris Christie came along in 2010. Gov. Christie shied away from pursuing some of the earlier commitments he had made to spur the growth of renewable energy. The industry went into a funk during his tenure as Gov. Christie pulled out of the Regional Greenhouse Gas Initiative (RGGI) and reduced New Jersey’s renewable energy standard (RES) from 30% to 22%.
Now, however, PSEG seems to be re-embracing offshore wind. But very slowly. For good reasons.
PSEG announced on October 30 that it will start negotiating with Ørsted to acquire a 25% interest in Ocean Wind. Ocean Wind is the 1,100-megawatt (MW) project proposed by its Danish developer Ørsted, which won New Jersey’s first offshore wind tender in June. The project will be built 15 miles off the coast of Atlantic City.
Thomas Brostrøm, CEO of Ørsted U.S. Offshore Wind, remarked:
“Ørsted’s experience in the offshore wind industry has taught us the importance of strong partnerships … Given PSEG’s track record for success and history providing energy solutions for communities across the Mid-Atlantic region, we are thrilled at the prospect of having them join the Ocean Wind project.”
PSEG does indeed have a “track record” of partnering with Ørsted: back in 2008, PSEG and Deepwater Wind formed a joint venture (“Garden State Offshore Energy”), to develop a wind farm in federal waters off the coasts of Delaware and New Jersey. But soon after, Ørsted purchased Deepwater Wind and inherited PSEG as its joint venture partner. Both companies are now leaseholders of the areas of the Atlantic Ocean leased by the Bureau of Ocean Energy Management (BOEM).
PSEG had previously announced that it will provide “energy management” and other project management services to Ørsted. It also disclosed that it had an option to purchase an equity stake in the Ocean Wind project.
During PSEG’s third-quarter earnings call, however, President and CEO Ralph Izzo indicated that the company could take “up to a year” to do “due diligence” before making its purchase decision:
“We're not experienced in building offshore wind and we have a full year ahead of us in terms of due diligence and further analysis to do … one cannot completely extricate themselves from the risk associated with the timing of the construction.
Notice the term, “timing of the construction.” Izzo doesn’t elaborate or explain fully and not all of the Wall Street analysts listening in seem to be getting the drift. But Izzo is presumably referring to Vineyard Wind, the winner of Massachusetts’s first offshore wind tender, which faces an indefinite delay after the Bureau of Ocean Energy Management (BOEM) withheld an environmental impact statement (EIS) necessary for the project’s approval. This happened in August when Vineyard Wind seemed well on its way of starting construction before year-end 2019.
The delay is hobbling not just Vineyard Wind but all offshore projects in federal waters for whom BOEM is the lessor: this is a systemic issue for all offshore wind developers in North America. In fact, it’s questionable whether Vineyard Wind can abide by the original LCOE (levelized cost of energy) of $65/MWh (in nominal 2017 USD terms). As of this writing, Vineyard Wind is in talks with the Internal Revenue Service to extend the federal investment tax credit, portions of which would have applied to the project had Vineyard Wind started construction on schedule (and met other requirements). Izzo is referring to this “project risk” and particularly to the construction cost, which could increase if BOEM does not green-light the Ocean Wind Project that just won New Jersey’s first offshore wind tender:
“[I]t's conceivable … one could protect oneself from the cost associated with the construction. So, we're learning as we go along how to balance that risk of the total project versus the components … [W]e just don't know the offshore wind business as well as we know, the nuclear business and the combined cycle business, …"
For PSEG and other regulated utilities, the power generated from offshore wind farms will be sold to ratepayers by being ratebased. In other words, this is not a “merchant” business; rather, the “merchant risk” is being exchanged with the “operational risk” of this new offshore business, which is elevated when BOEM withholds approval for all offshore project in federal waters:
“When we compare [the offshore wind business] to power business writ large, I would say that we are trading off merchant risk for some operational risk. So, we are comfortable enough at this point to enter into this option agreement that says that trade off of commercial risk versus operational risk with this partner is worth taking, and over the course of next year, we have to turn that into even greater comfort as a result of the [due] diligence that needs to be done.
After about a year, PSEG will be in a much better position to evaluate whether the operational risk of the offshore wind business has subsided enough. That’s what Izzo meant when he said PSEG is trying to “[e]nter this space in a more measured way.”