(Reuters) -European energy firms Equinor and BP (LON:BP) terminated their agreement to sell power to New York state from their proposed Empire Wind 2 offshore wind farm, citing rising inflation, higher borrowing costs, and supply chain issues.
"This agreement reflects changed economic circumstances on an industry-wide scale and repositions an already mature project to continue development in anticipation of new offtake opportunities," Equinor said in a statement on Wednesday, in an apparent reference to a new offshore wind solicitation launched by New York in November.
The solicitation allows companies to exit old contracts and re-offer projects at higher prices. The winners of an expedited solicitation for offshore wind will be announced in February.
An Equinor spokesperson declined to comment on the bid strategy for the 1,260-megawatt (MW) Empire Wind 2 project, but said it was "carefully assessing" the solicitation and was "encouraged by the state's commitment to offshore wind."
The power sale agreement for the 816-MW Empire Wind 1 remains in place, the spokesperson added. One megawatt of offshore wind can power around 500 U.S. homes.
The offshore wind industry is expected to play a major role in helping U.S. President Joe Biden and several states, including New York, meet their goals to decarbonize the power grid and combat climate change.
But progress slowed in 2023 after offshore developers canceled contracts to sell power in Massachusetts, Connecticut and New Jersey, and threatened to cancel agreements in other states, as soaring inflation, interest rate hikes and supply chain problems increased project costs.
New York accelerated its solicitation in October after several developers, including Orsted, the world's biggest offshore wind company, BP and Equinor, threatened to cancel contracts to sell power that were awarded in 2019 and 2021 before the Federal Reserve started hiking interest rates in March 2022 to fight soaring inflation.
"Empire Wind 2 has been 'at risk' since the project developers made clear in their June 2023 petition that they would not move forward under the current contract," said Timothy Fox, managing director at ClearView Energy Partners.
New York's first offshore wind farm, Orsted's 132-MW South Fork, provided its first power in December.
In Massachusetts, Avangrid and Copenhagen Infrastructure Partners said on Wednesday their 806-MW Vineyard Wind 1 project produced first power for the New England grid.
Avangrid is majority-owned by Spanish energy company Iberdrola (BME:IBE).