December 28, 2011

Bluewater terminates Delmarva contract; Effort to find buyer runs out of time

Written by AARON NATHANS, The News Journal, 28 December 2011

A two-week scramble ended without a buyer for Bluewater Wind, and as promised, NRG Energy terminated its landmark offshore wind power contract with Delmarva Power on Tuesday.

The hard-won 2008 power purchase agreement, the first for offshore wind in the United States, was considered an essential ingredient in building a wind farm off the coast of Delaware. Tuesday was the final day under the contract for Bluewater to exercise an escape clause without forfeiting a $4 million security deposit.

Officials at NRG, which purchased Bluewater in 2009, notified Delmarva’s parent company, Pepco Holdings Inc., of the termination Tuesday afternoon, said Matt Likovich, a Delmarva spokesman. Delmarva reported it accepted the termination.

NRG spokesman David Gaier said Tuesday that NRG would “prudently maintain our offshore wind assets,” including pursuit of a federal lease to put turbines off Delaware. NRG will still look for a buyer or major investor for Bluewater, Gaier said, but the project is essentially defunct without a contracted buyer for the power.

Numerous prospective buyers had made inquiries in the days since Dec. 12, when NRG announced it would terminate the contract if it could not sell the venture by Tuesday’s deadline.

Bluewater President Peter Mandelstam traveled to Europe in search of a buyer as the days ticked down, but without success, Gaier said.

The interested companies included turbine manufacturers in Europe and Asia, manufacturers of other components of offshore wind farms, financial institutions and large construction firms, Gaier said.

“It’s just such a huge disappointment that this is going down,” said state Sen. Karen Peterson, D-Stanton, one of Bluewater’s early supporters more than four years ago

Major economic and political shifts in the intervening years doomed the project.

Collin O’Mara, Delaware’s natural resources secretary, said no one wanted to put any money at risk with critical federal subsidies for wind power uncertain in a bitterly divided Congress.

Some of the prospective buyers remain interested in Delaware as a future site for offshore wind, but, for now, “it is a setback,” O’Mara said.

Mandelstam said he was unable to provide comment, deferring to NRG.

NRG President and CEO David Crane said two weeks ago that uncertainty about federal tax credits and a loan guarantee program, combined with a difficult lending environment, led the company to its conclusion to exit the contract.

Gov. Jack Markell, another early Bluewater supporter, said the news was not a surprise, but “we still believe offshore wind and the manufacturing jobs associated with the industry could play an important role in Delaware’s future. To that end, if global market conditions improve, we stand ready to sit down with industry representatives to discuss ways to make the promise of offshore wind in Delaware a reality.”

Ironically, the Bluewater project was the unexpected child of electric utility deregulation – and a resulting electricity price spike. In a deregulation bill passed in the late 1990s, Delaware put rate caps on Delmarva Power customers until spring 2006. When the cap expired, prices rose 59 percent overnight.

In response to a consumer backlash, lawmakers passed a bill requiring Delmarva to buy electricity from homegrown sources of generation to combat expensive transmission fees. That created a motive for Delmarva to buy alternative power, which is more expensive than power generated by burning coal or natural gas.

A request for proposals went out, and Bluewater – then an independent startup – made a long-shot bid to satisfy the requirement with offshore wind turbines, a European technology new to these shores.

Mandelstam’s project caught the imagination of a public impressed by warnings such as those in Al Gore’s movie “An Inconvenient Truth,” which concluded climate change was doing heavy damage to the Earth’s environment.

Delmarva was initially resistant to the wind farm, which company officials argued would generate electricity that would be too expensive. Many legislators remained leery of another public backlash if cleaner energy pushed bills higher.

An emotional, nearly two-year regulatory and legislative battle ensued. Bluewater initially proposed a 600-megawatt wind farm, but a final compromise at Legislative Hall pegged the project at 200 megawatts. Delmarva and Bluewater signed the power purchase agreement on June 23, 2008, with the price kept relatively low for Delmarva.

In the meantime, Bluewater had been purchased by Babcock & Brown, an Australian investment holding company. Just months after the contract was signed, the first effects of the global economic meltdown were felt. Babcock, overly leveraged, put Bluewater up for sale.

NRG announced it would buy the company in late 2009.

The project lost momentum last spring, after Congress gutted a loan guarantee program for renewable energy projects, which NRG had argued was vital to making the project’s economics work.

Bluewater had already forfeited a $2 million security deposit to Delmarva, and the utility granted the developer multiple extensions on a deadline to forfeit another $4 million. The last of these deadlines was Tuesday.

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