Maryland Hearing Weighs Potential Costs, Benefits of Offshore Wind

By Rona Cohen

As state policymakers work to jump-start a vast offshore wind economy along the Eastern Seaboard, advocates are working hard to allay concerns among some lawmakers that a network of capital-intensive wind farms will raise prices for ratepayers already saddled with some of the highest power costs in the country.

In response to questions from legislators during a January 27 hearing of the Maryland House Economic Matters Committee, wind industry representatives said the cost of electricity from a string of wind farms in Atlantic waters will likely be only slightly higher than regular grid power in the near-term and relatively stable over time, providing important protection to ratepayers in the face of volatile fossil-fuel prices.

Panel participants at the Annapolis hearing added that any short-term increase in electricity costs would be balanced by economic and job benefits flowing from an ocean-energy sector, including the creation of a local shipbuilding industry and a new manufacturing base for turbines and other wind components. There would also be important environmental advantages over the region’s current reliance on fossil fuels.

Last year, a furor erupted over proposed power purchase agreements for offshore wind projects moving forward in Massachusetts and Rhode Island that will offer rates significantly higher than those for regular grid power.

But according to Jim Lanard, director of the Offshore Wind Development Coalition, over time, wind – which is free – offers a hedge against rising fossil fuel prices. The coalition includes seven offshore wind developers with support from the American Wind Energy Association.

“There is an argument to be made that even if in the early years the prices [from offshore wind] are higher, in the later years, you’ve hedged your bets, because the price is stable,” Lanard told state lawmakers. “Our fuel cost is zero.”

He added that such a near-term increase in electricity costs would likely be ”marginal,” given that it would only pertain to the portion of a ratepayer’s energy mix derived from wind — typically from four percent to six percent of total energy use– with the remainder coming from fossil fuel sources like coal and nuclear power.

At the same time, the industries needed to support a thriving ocean-wind sector would provide an important economic stimulus to the state and region. Every billion dollars invested in offshore wind leads to the creation of 3,350 jobs, in manufacturing, shipbuilding, transmission and other aspects of the supply chain needed to serve the sector, said Lanard.

On February 7, the Interior Department said it would speed the permitting of offshore wind by issuing leases for development in waters off the coast of Delaware, Maryland, New Jersey and Virginia by the end of this year. The federal government controls the ocean waters of the Outer Continental Shelf, which starts three miles from shore.  Some 5,000 megawatts (MW) of offshore wind have been proposed up and down the East coast.

Meeting Clean-Energy Targets

Like their counterparts in states to the north and south, Maryland officials are turning to ocean-based wind as a potential source of local, emission-free power to help meet clean-energy mandates and provide stable jobs.

Gov. Martin O’Malley has championed offshore wind as a critical tool for meeting the state’s renewable portfolio standard, which calls for solar, wind, biomass and other clean sources to comprise 20 percent of the electricity used in the state by 2022.

“The governor believes that offshore wind is the most effective way to meet the 20 percent goal,” said Kevin Hughes, deputy legislative officer for Gov. Martin O’Malley, speaking to a roomful of legislators and clean-energy professionals at a meeting of the Maryland Clean Energy Center across from the State House prior to the January 27 hearing.

The governor plans to introduce a bill this session requiring utilities to provide long-term contracts for electricity from offshore wind. Developers claim that such contracts are essential to assure an adequate rate of return for investment in an ocean-based wind farm, whose price averages $1.5 billion for a utility-scale, 350 MW project, capable of powering 100,000 homes.

A report released by researchers at the University of Delaware in February last year found that using existing, proven technology, offshore wind could supply 67 percent of Maryland’s electric power demand. Going forward, the development of deepwater technology – that is, turbines located further off the coast where winds are stronger and more sustained, at depths between 100 and 200 feet — would enable wind resources to supply nearly twice the state’s electric load, the report said.

That technology is currently being advanced by researchers at the University of Maine, which has received $45 million in funding from the U.S. Department of Energy to build the world’s first deepwater wind farm. By next year, researchers plan to deploy a test floating turbine in the Gulf of Maine, in waters more than 100 feet deep some 20 miles from the coast.  The goal is to produce 5 gigawatts (GW) of wind energy with a series of floating turbines by 2030.

Connecting to the Grid

Google’s announcement last fall that it would invest heavily in a $5 billion transmission “backbone” in Atlantic waters is expected to help speed the nascent efforts underway. The company is partnering with financial and technology firms on the undersea project, which would stretch 250 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.

The company has a ten-year plan to bury the high voltage, direct-current cable six feet below the seafloor in water 90 feet deep some 12 to 15 miles from shore.  The idea is for the cable to draw power from wind farms up and down the coast and deliver it to states along the way at five interconnection points in Delaware, Maryland, New Jersey and Virginia, said Bob Mitchell, Trans-Elect’s chief financial officer, at the January 27 hearing.

Mitchell cited research by University of Delaware professor Willett Kempton, whose analyses have shown that connecting offshore wind power up and down the coast along a transmission backbone could work to smooth the variability of wind and provide more consistent, reliable power.

When it is up and running, a network of ocean-based wind farms supported by the transmission backbone should enable the regional power provider, PJM Interconnection, Inc., to relieve grid bottlenecks in an area stretching from Washington, D.C. to New York City, which is one of the two most congested energy corridors in the U.S., said Mitchell.

Such relief would also lead to savings of around $17 billion, by lowering production costs associated with fossil-fuel energy, streamlining the permitting process, enabling more cost-effective construction for multiple wind farms, and cutting ratepayers’ electricity prices, according to a study released last December by the Brattle Group.

Reducing Costs

Despite these encouraging findings, over the last year, ratepayer anger over comparatively steep prices proposed for electricity from offshore wind projects moving forward in New England has raised questions about its feasibility, even among clean-energy supporters.

Last summer, such concerns threatened to sink a proposed power-purchase agreement for Cape Wind, the nation’s first federally approved wind farm. In November, Massachusetts regulators finally approved a controversial 15-year contract for Cape Wind to supply National Grid half of its power at a cost of 18.7 cents per kilowatt-hour (kWh), with annual price increases of 3.5 percent over 15 years. That rate was 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 sources. Construction on the project is slated to begin this year.

In neighboring Rhode Island, concern about high electricity rates nearly derailed 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 farther from land in federal waters. After rejecting a similar agreement earlier last year, 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, with increases of 3.5 percent each year.

The rate is about two and a half times what National Grid currently pays for wholesale power, but is only expected to increase a typical resident’s monthly power bill by $1.35, given that 99 percent of the state’s power comes from far cheaper fossil fuels. Under the version approved by state regulators, Deepwater agreed to pass on any cost savings achieved during construction of the wind farm to ratepayers in the form of lower power prices, according to information on the company’s Web site.

The high electricity rates stem from multiple factors connected with the emerging industry.  Capital costs are steep — roughly double those for land-based wind – because the technology is still developing, and the perception of project risk raises financing costs.  In addition, there are uncertainties about the expense of operating and maintaining a wind farm in challenging ocean conditions.

A study last year from the Virginia Coastal Energy Research Consortium estimated the current levelized, or life-cycle, cost of energy from a wind farm off the coast of Virginia at $105 to $130 per megawatt-hour (MWh), compared with $85 to $100 per MWh for a coal-fired plant and $80 to $100 per MWh for a combined-cycle gas turbine plant. But if a levelized cost of $50 per ton to capture and sequester carbon is factored in, power from an offshore wind farm would be cheaper than from a new coal-fired plant, and could be “marginally competitive” with electricity flowing from a new combined-cycle gas turbine plant, said the report from the consortium, which is composed of universities, state agencies and industry groups.

A February 2010 report released by researchers at the University of Delaware said the price of offshore wind is expected to “drop sharply as the industry develops technically, and as it establishes [a] supply chain and manufacturing in the region.”

Lowering costs is a top objective of a new, unprecedented push by the U.S. Energy Department to speed the development of the nation’s ocean-based energy resources. The department has set an ambitious goal of dramatically cutting the cost of offshore wind to 7 to 9 cents per kWh by 2030, with an interim target of bringing 10 GW of power online at 13 cents per kWh by 2020, to make it competitive with conventional sources of power.

A report released by the National Renewable Energy Laboratory in September set a target of harnessing 54 GW of wind power along the U.S. coastlines and the Great Lakes by 2030. Production on that scale would generate$200 billion in new economic activity and create 43,000 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.

Like other research that is bullish on the prospects for ocean-based energy, the report says that prices are expected to decline as the technology matures and as a manufacturing industry takes root here.

As an example, it notes that since turbines for ocean-based wind are usually larger than terrestrial ones, they tend to be more expensive to manufacture in existing facilities for projects on land. Building new, specialized manufacturing establishments could lower the cost of blades, turbines and other components in the long run, and create jobs, the report says. High transportation costs for the massive parts also favor building local plants, preferably ones close to ports that are capable of handling offshore construction and maintenance logistics, it says.

Another critical link in the supply chain is the availability of customized vessels capable of transporting the huge platforms, nacelles and other parts out to sea. Currently, there is a lack of such vessels here, and a high price tag estimated at more than $100 million per ship could be a severely limiting factor, because of uncertainties surrounding how the sector will develop, the report says. There has been discussion of repurposing vessels used for offshore oil and gas drilling, though many are reportedly too small to carry some of the largest offshore wind turbines and the cranes needed to install them.

Making use of ships that serve the already established European offshore wind industry is not an option, given that the Merchant Marine Act of 1920, also known as the Jones Act, requires that ships carrying cargo between U.S. ports be flagged, owned and operated by U.S. companies and carry crews who are U.S. citizens or permanent residents. As with the various other existing supply-chain challenges, advocates assert that over the long-term, the act’s restrictions could lead to a blossoming of the domestic ship-building sector.

Offshore wind developers are pushing for a range of supportive federal policies they say are critical for a new industry to thrive here.  They include a streamlined permitting process that currently takes seven to ten years; beneficial tax policies that are already granted to other forms of renewable and non-renewable energy; and committing to a robust federal research and development program to help this country catch up with Europe, which has been producing power from ocean-based wind since 1991.

But despite Europe’s current leadership in the sector, costs there have been on the rise.

In the United Kingdom, which reportedly has more than 1.3 GW of offshore wind, more than the rest of the world combined, costs for ocean-based wind projects more than doubled from 2003 to 2008, according to a September 2010 report from the UK Energy Research Centre.  The UK lacks a local manufacturing base to support the sector; as a result, as much as 80 percent of the equipment used in a typical offshore wind farm completed in UK waters over the last five years has been imported from abroad, the report said. Factors pushing up the price tag included currency movements, rising global commodities prices, climbing labor costs, escalating prices for turbines due to supply-chain constraints, plus planning delays and a trend toward building projects in deeper waters farther from the coast, which increases operation and maintenance costs.

Nevertheless, the report said there was evidence that costs remained unchanged from 2009 to 2010, suggesting that they may have peaked. As new manufacturers of turbines, vessels and other components enter the market they should drive down prices, it said – provided that policies are created to support the emerging UK supply chain. The report forecast that costs would likely drop 20 percent between now and 2025, to just over $115£ per MWh (roughly, $186/MWh in U.S. dollars), and continue to slide thereafter.

Europe is forging ahead with plans to dramatically expand its ocean-based resources, with a target of producing 40 GW of power offshore by 2020. China is striving to keep pace, with a goal of 30 GW by then, says a recent report from the National Wildlife Federation. The U.S., say wind advocates, is way behind in the race to the water.

“We’ve lost it to Europe, and we’re losing it very rapidly to China,” said Lanard.

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