What Offshore Wind Means for U.S. Utilities

After reviewing the latest developments in the U.S. offshore wind industry, we are reaffirming our fair value estimates, economic moat ratings, and moat trend ratings for the U.S. utilities we cover.

Utilities under our coverage with the most offshore wind exposure include Avangrid AGR, Eversource Energy ES, Dominion Energy D, and Public Service Enterprise Group PEG. European utility Orsted’s U.S. projects in part support our estimated 21% compound annual growth rate for the company’s earnings per share through 2028.

The U.S. East Coast is the focus of activity with more than 10 gigawatts of projects due on line by 2023 and six states with legislative mandates. The East Coast’s long, shallow continental shelf allows wind turbines to be sited far from the coast, reducing “not in my backyard” opposition. But with only one small project on line, we remain skeptical that investments in the region will be value-accretive, given the high costs and execution risk.

Avangrid is the early leader with offshore wind leases at Vineyard Wind 1 and 2 (Massachusetts) and Kitty Hawk (North Carolina). Its 50% share of the 800-megawatt Vineyard Wind 1 should be on line by 2022. Beyond 2022, Avangrid sees nearly 17 gigawatts of offshore wind opportunities in the Northeast through 2035.

Eversource is pursuing projects that would help meet Massachusetts’ 3.2-gigawatt mandate and New York’s 2.4 GW mandate. Eversource’s three project partnerships could add $1 billion to its five-year investment plan and boost our EPS growth estimate to 8% from 6%. However, cost overruns would be an earnings drag.

Other utilities are more cautious. Dominion’s 12 MW project with Orsted in Virginia has legislation to guarantee project cost recovery, including overruns. PSEG has a nonbinding deal with Orsted to develop 1.1 GW of New Jersey’s 3.5 GW mandate, but management wants guaranteed regulatedlike returns before investing. Leading onshore wind developer NextEra Energy NEE is all but ignoring offshore wind with plans for $5 billion in annual investments in onshore wind and solar.

Maine holds some of the most potential, although early plans stalled out under its previous governor. This year the new governor has re-engaged under one of the older offshore mandates. This mandate requires 5,000 MW of general wind capacity by 2030 with at least 300 MW coming from offshore. The 12 MW New England Aqua Ventus project in Maine recently received a green light after being stalled by the previous governor.

However, the whole East Coast down through South Carolina has the ability to add offshore wind farms with greater than 40% capacity factors. The Block Island Wind Farm, located offshore Rhode Island, was the first to be built in 2017 and achieves around 47.6% capacity factor at 30 MW.

A number of major state mandates have come to pass in the last couple of years. Newcomers such as New Jersey (3.5 GW), Massachusetts (3.2 GW), and New York (2.4 GW) have all been big hitters. Massachusetts requires half by 2027 and the remainder by 2035. New York and New Jersey projects are due by 2030. New York may become the biggest of these with plans from the governor to increase the mandate to 9 GW by 2035. These states have already initiated requests for proposal or selected projects to start fulfilling their mandates.

Connecticut and Maryland also have passed offshore wind mandates. In Connecticut it isn’t a capacity requirement but a generation ask of 825,000 megawatt-hours per year. Maryland requires that 2.5% of generation come from offshore wind by 2022, which would be about 480 MW. These requirements total at least 10,180 MW of capacity online over the next decade.

The Bureau of Ocean Energy Management is the main agency that must review and sign off on offshore projects. While state and other federal permits are needed, the first step in siting these projects is a BOEM lease. Nearly 3,300 MW in projects already have approved site assessment plans, signed leases, and entered the construction and operation planning, or COP, phase. Several are still in the site assessment phase and subject to change.

The biggest permitting headwind for the COP-stage projects appears to be the National Oceanic and Atmospheric Administration’s National Marine Fisheries Service. Although the 3,300 MW currently awaiting completion of the COP phase could see further revisions during the permitting stages, the final timetable for COP is expected to be October. We believe these projects will make it to the finish line. Some of the other proposed projects among the 10,000 MW mandated are still subject to revision and change.

Orsted and Equinor EQNR are the major developers that have so far won contracts to operate these wind farms. Equinor landed the 1.8 GW Empire project in New York. Orsted’s portfolio includes the operating Block Island Wind Farm and proposed projects including Revolution Wind (400 MW), South Fork Wind Farm (130 MW), Ocean Wind (1,100 MW), Skipjack Wind Farm (120 MW), and Coastal Virginia Offshore Wind (12 MW). Orsted has begun development of the 2,000 MW Sunrise Wind and the 680 MW Garden State Offshore Energy farm.

Vineyard Wind and Bay State Wind are pushing some of the nearest online date schedules. Vineyard is still hoping to start construction by the end of the year on its 800 MW project for Massachusetts and be on line later next year. Bay State Wind in Massachusetts and U.S. Wind are shooting for 2021 online dates.

Thanks to offshore wind, the ISO New England, NYISO, and PJM power markets will all see a further fuel mix change in the coming years. Cheaper gas has been displacing coal and oil, but renewables will now extend coal displacement on the East Coast. New England and New York only tend to call on coal during some high-demand periods. In PJM, on the New Jersey side of transmission, coal is also stripped out. With coal generation already diminished, wind power will start cutting into natural gas demand in the region. We estimate the potential gas displacement from the initial 3,300 MW of offshore wind at a conservative 40% capacity factor would be as much as 0.76 billion cubic feet per week. If the more than 10,000 MW of proposed wind projects are all built, gas displacement could top 2.3 bcf/week. That could start causing some gas demand disruption.