East Coast States Race to Harness Offshore Wind

By Rona Cohen

ATLANTIC CITY — This gaming town on the southern tip of New Jersey might seem an unlikely place to launch a clean-energy revolution. But in 2005, Atlantic City became the site of the nation’s first coastal wind farm, whose five turbines are now as permanent a fixture on the shoreline as the casinos that suck electricity day and night to fuel their round-the-clock operations.

The turbines provide more than half of the annual power needs of the Atlantic County Utilities Authority Wastewater Treatment Facility (ACUA) and have generated $2 million in energy savings over four years. As far as wind farms go, it’s a small project – one that will be dwarfed in coming years by scores of turbines stretching far out to sea, if state officials can achieve their goals.

Here, as elsewhere along the East coast, officials are turning to ocean-based wind as a potential source of local, emission-free energy to help meet clean-energy mandates and provide stable jobs. Eastern states  are forming partnerships with one another, and forging incentives to lure the vast supply chain needed to serve a thriving industry, which is still in its infancy in this country but well-entrenched in Europe and increasingly, in Asia.

“The future of America lies in offshore winds right off the coast of New Jersey,” Lieutenant Gov. Kim Guadagno told hundreds of industry representatives and policymakers attending the American Wind Energy Association’s (AWEA) offshore wind conference here in early October. “The state of New Jersey wants to be ground zero of that thriving economy.”

Clean-Energy Mandates as Drivers

New Jersey has been taking increasingly aggressive steps to lure turbine manufacturers, transmission companies, shipbuilders and others that would need to locate in and near ports if the fledging sector is to blossom here.

Potentially the most far-reaching policy is an incentive program to support at least 1,100 megawatts (MW) of generation from ocean-based sources – enough electricity to power around one million homes.  A bill signed by Gov. Chris Christie in August requires utilities to buy offshore renewable energy credits (OREC) for approved wind farms, or pay alternative compliance payments. State regulators have been holding hearings to obtain input from stakeholders on the rules needed to set up the program.

The ORECs, plus tax credits and other financial incentives, are intended to defray the steep price tag of offshore wind, which can cost twice as much as onshore development. The policy is similar to a popular program for solar power that has made New Jersey second only to California in terms of per-capita photovoltaic installations.

Both the wind and solar incentives support New Jersey’s goal of deriving 22.5% of its electricity from renewables by 2021. Developers have planned at least three wind projects in coastal waters, totaling around 1,400 MW combined.

New Jersey is far from alone in its efforts to create a favorable investment climate for the industry. In Virginia, which enacted a measure earlier this year aimed at speeding the review process for ocean leases, utilities can triple count the offshore wind they purchase to meet the state’s clean-energy goals. Delaware offers incentives that more than quadruple in value for offshore wind derived from projects that use a certain percentage of components manufactured in the state or assembled by the local workforce.

Rhode Island has established an offshore wind “set-aside,” requiring that 15 percent of its clean-energy requirement be met by the resource by 2019. The state recently approved an ocean-mapping plan that identifies the best locations for wind turbines in state waters, and suggests a suitable site in areas under federal jurisdiction, beginning three miles from shore. The plan still needs final approval from the National Oceanic and Atmospheric Administration, according to The Providence Journal.

Driving these actions are state Renewable Portfolio Standards, which require that an increasing amount of energy production come from clean sources over time. Because ocean-based wind is abundant and close to major metropolitan centers, particularly along the Eastern seaboard, it offers the best opportunity for many states to fill those mandates without having to import clean power from outside their borders.

“Offshore wind is Delaware’s greatest renewable resource, and as we try to transition to a clean-energy economy, offshore wind will have to be a major part of that,” said Stephanie McClellan, clean energy economy policy advisor for the Delaware Department of Natural Resources and Environmental Control, during a panel discussion at the AWEA conference.

Her comments were echoed by sources in states up and down the coast, who estimate that a bustling offshore sector will produce a variety of economic gains, like long-term job growth and a source of power that is stable and secure, in addition to being emission free.

Mobilizing a Nation

Recently, the federal government has thrown new support behind these efforts, with a focus that industry sources say is unprecedented.

report released by the National Renewable Energy Laboratory in September set a goal of harnessing 54 gigawatts (GW) of wind power along the U.S. coastlines and the Great Lakes by 2030.

Production on that scale would produce $200 billion in new economic activity and create 43,000 new jobs, the study says. It pegs the nation’s total offshore wind resource at 4,000 GW, or roughly four times the current generating capacity of the entire U.S. electric grid.

During a series of panel discussions at the AWEA conference, state and federal officials spoke of the urgent need to work through some of the obstacles to making the Energy Department’s vision a reality — like high capital costs, a confusing permitting process that requires approvals from more than a dozen agencies, and technological and infrastructural challenges associated with deploying and maintaining untested deepwater technology.

“DOE can’t do it alone,” said Jacques Beaudry-Losique, program manager of the Energy Department’s Wind and Water Program, in a keynote address. “This is nothing less than a national mobilization that requires collaboration with states, federal agencies and industry.”

DOE anticipates spending around $50 million this year on the effort. That adds to more than $100 million in Recovery Act funding for wind-energy projects.

Lowering the Risks

If the federal government’s ambitious vision is to be realized, one of the main obstacles that will need to be surmounted is cost. The price tag of a typical ocean-based wind farm can easily top $1 billion. Capital costs are steep, and so is the cost of capital, due in part to the risk associated with building and maintaining massive turbines in uncertain ocean conditions.

“We have to remember that we’re building complex assets in very challenging construction climates where we are reliant on matters like weather, vessel availability and a very limited supply chain,” said Martin Lucas, a partner at Watson, Farley & Williams LLP, in a session on project economics. “Underpinning all of these challenges is the question of finance.”

Banks will finance offshore development in the “right environment,” and in Europe, they often consider them to be a good investment, said Lucas. Countries there have been building ocean-based wind farms since 1991, mostly in rough North Sea waters. But those arrays do not experience the hurricane-force winds that East Coast projects must be designed to withstand.

“Here in the United States, we are going to need to get a better understanding of how the investors are going to accept the risk, and how insurers are going to assess that risk,” said Jim Lanard, president of the Offshore Wind Development Coalition, in a panel discussion with other developers.

Industry and government sources say that steep borrowing costs could be mitigated in part by offering various financial incentives to projects. Costs are also contingent on resolving technological questions related to the long-term operability of ocean turbines in varying climactic conditions, and on devising a more streamlined, predictable regulatory-approvals process to replace the patchwork that developers criticize as unclear and confusing.

Currently, the timeline for obtaining all of the necessary permits is seven to nine years and requires developers to get approvals from more than a dozen agencies. That compares to a process that can be as short as 12 months to build a coal plant, said one industry source.

Such a lengthy tenure creates risks for investors unsure about if, and when, a project will be built. It also exposes developers to uncertainties stemming from changes in political administration during that period.

“The permits and leasing issue is in a way a finance issue,” said Erich Stephens, vice president of Offshore MW. “The timeline for developing these projects is very long. If there isn’t a light at the end of the tunnel, there is not going to be a lot of early pre-development investment.”

The poster child for this regulatory uncertainty is Cape Wind. During the AWEA conference, Interior Secretary Ken Salazar awarded Cape Wind the nation’s first lease to build in federal waters, after a prolonged, nine-year process, and the project is still  awaiting approval  from the state Department of Public Utilities on  its proposed  15-year power contract with National Grid. Salazar said Cape Wind’s lengthy wait was “unacceptable,” and vowed to streamline the process for future development.

Among other measures, Salazar called for coordination at all levels of government to conduct area-wide environmental reviews of portions of the Outer Continental Shelf deemed promising for wind development, and identifying potential conflicts ahead of time, to help provide more certainty for investors. Rhode Island’s ocean-mapping plan, and similar undertakings in other states, including Massachusetts and New Jersey, is expected to help speed the process along.

“I believe that we can cut the permitting time for offshore wind significantly if we are focused and proactive,” he said.

Earlier this year, Salazar organized an effort with governors of 11 states from Maine to North Carolina to accelerate permitting of offshore development in the region. Participants in the Atlantic Offshore Wind Energy Consortium have formed state-specific task forces that by year-end expect to identify “high priority” areas with bountiful wind and minimal environmental problems, Salazar told participants at the AWEA conference.

Google’s recent announcement that it would invest heavily in a $5 billion transmission “backbone” in Atlantic waters is expected to help speed those efforts. The company is partnering with financial and technology firms on the undersea project, which would stretch 350 miles from New Jersey to Virginia and be capable of connecting 6,000 MW of offshore wind – enough energy to power approximately 1.9 million households. The project, being led by transmission company Trans-Elect LLC, would remove a key hurdle to catalyzing Atlantic wind development.

Weighing Ratepayer Costs

Another issue that threatens to slow the pace of development is the high cost of electricity produced from offshore projects, which is particularly lopsided right now, given that prices for regular grid power have slid due to the sour economy. “In the short term, that has the potential to overshadow projects,” said Fara Courtney, executive director of the U.S. Offshore Wind Collaborative, a nonprofit.

Concern about steep prices for ratepayers threatened to derail a project proposed off the coast of Block Island, where Deepwater Wind plans to erect an eight-turbine pilot as a precursor to a larger, 100-turbine wind farm further off the coast in federal waters. But in August, the state public service commission approved a proposed 20-year power-purchase agreement that calls for National Grid to buy the energy generated from the project for 24.4 cents per kilowatt-hour (kWh). The commission had rejected a similar agreement earlier in the year.

In November, Massachusetts regulators are expected to decide on a controversial draft 15-year contract for Cape Wind to supply National Grid half of its power at a cost of 18.7 cents per kWh, with annual price increases of 3.5 percent. That rate is down from an initial proposal of 21 cents per kWh, but is still more than twice what National Grid pays for power from non-renewable power sources.

The Energy Department has set an ambitious goal of dramatically cutting the cost of offshore wind to 7-9 cents per kWh by 2030, with an interim target of 10 GW at 13 cents per kWh by 2020, to make it competitive with conventional sources of power.

Supporters point out that offshore wind offers economic and environmental advantages that cannot currently be measured in dollars, but will nevertheless have a positive impact on the region. For example, it offers a stable source of power whose input – the wind – is free, and will offer a hedge against future rises in fossil-fuel prices.

That is a message that has been taken to heart by officials in Maine, where 80 percent of residents rely on oil for heat. The record oil prices in the summer of 2008 were a hardship for the typical Maine homeowner, who earns $40,000 a year and was paying $10,000 for heating oil. That was added to an average of $50 a week in gas expenses, which would translate to close to $5,000 a year for two cars, said Habib Dagher, director of the AWEC Composites Center at the University of Maine. AWEC is leading an effort to develop and deploy massive, floating structures in waters more than 100 feet deep in the Gulf of Maine.

Switching over to wind-fueled electricity – to provide both heat and battery charging in a future filled with electric cars — would have the added benefit of pumping dollars spent on energy into Maine’s local economy. (Click here to read about CSG/ERC’s Electric Vehicles Infrastructure Project.)

“The state of Maine has an annual budget of less than $3 billion, but it sends away $5 billion each year in fossil fuel costs. The question is: can we keep some of that money in Maine?” said Dagher, during a presentation at the CSG/ERC Annual Meeting in Portland last August.

Maine has set a goal of producing five GW of electricity with ocean-based wind – an amount of power about equal to the output of five nuclear power plants — by 2030, with a network of floating turbines some 20 miles from shore.

At the ACUA plant in Atlantic City, the prospect of having a stable rate for electricity made the wind farm project a “no-brainer” when developers raised the idea six years ago, said Richard Dovey, ACUA’s president, to a group touring the site during the AWEA conference. Since the plant treats wastewater around the clock, its considerable energy use exceeds that of a typical casino, he said.

The facility was able to negotiate a flat, 20-year rate of 7.95 cents per kWh, compared with the average 13 to 14 cents per kWh that it was paying for power at the time. (Land-based wind currently costs far less than offshore projects.) That contract helped to win support among politicians and the public, who had not yet seen a wind farm erected in the state, and were uncertain about the benefits. The 7.5 MW project supplies about 60 percent of the electricity used by the plant on an annual basis. The rest is sold to the grid.

The project has paved the way for future wind power in the state – on land and at sea. At the time that it was proposed, the state had no regulations in place governing wind development, said Dovey. Certainly, a lot of progress has been made since then.

“This really turned out to be a giant educational project for everyone, because nobody knew anything about wind before,” said Dovey. “And there’s a lot to learn.”

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