Offshore Wind Industry Says Progress Hinges on State, Federal Policies

By Rona Cohen

Proponents of offshore wind development say the clean power source could transform the energy economy of the Atlantic Seaboard, although formidable cost and regulatory barriers continue to hamper progress here.

At an industry conference sponsored by the American Wind Energy Association (AWEA) on October 11 to13 in Baltimore, developers were cautiously optimistic that a string of utility-scale wind farms will eventually take shape in U.S. waters and send clean power to high-population centers up and down the Eastern Seaboard. But success, they say, hinges on having the types of consistent policies that have made the sector surge in Europe, and increasingly, in China.

In a series of panel discussions, developers noted that in countries like the United Kingdom, Denmark and Germany, certainty about the permitting process, a predictable revenue stream and grid connections that can serve large-scale wind farms have enabled them to attract capital at rates favorable enough to finance a fast-expanding number of offshore projects.

As a result, more than 3 gigawatts (GW) of installed offshore wind capacity already generate power from sites in European waters spanning nine countries, and an additional 150 GW are in various stages of planning, according to the European Wind Energy Association.

In contrast, the U.S. has yet to see a single turbine erected offshore, though the federal government has set a goal of harnessing 54 GW of wind power along the U.S. coastlines, in the Gulf of Mexico and Great Lakes by 2030.

What developers do not question is the strength of the resource here. A report last year from the U.S. Department of Energy’s National Renewable Energy Laboratory estimates that overall, this country has the potential to produce more than 4,000 GW of power from offshore wind, four times the nation’s total electric generating capacity from all sources, based on 2008 figures.

“We need two key things for this industry to take off: submerged land leases, and secure offtake,” such as long-term power purchase agreements (PPAs), which are critical if developers are to obtain financing for a project, said Tim Ryan, senior vice president of APEX Wind Energy, based in Charlottesville, Virginia. “At this point, we don’t really have either of those,” he said, during a panel discussion with other developers.

In a PPA, power producers and utilities agree to purchase or sell power at fixed prices over a specific term that can extend up to 25 years. Electricity generators whose plants use coal or natural gas are often reluctant to enter into such agreements, given that fossil-fuel prices tend to be volatile and can fluctuate considerably over time. But since the wind is free and operating costs are fairly fixed, wind power producers can offer long-term fixed-price contracts without fear of broad price fluctuations.

The agreements, with their guaranteed payments over a set number of years, enable developers to obtain critical financing for a project. And proponents argue that they protect utilities and ratepayers against the volatility of fossil fuels markets that, though below the price of offshore wind today, could conceivably exceed its cost in ten to 15 years, depending on a range of global demand factors.

Yet PPAs can be a hard sell for utilities and the public. A bill in Maryland last session that would have required four large utilities to enter into a long-term PPA for power produced from a 400 MW to 600 MW ocean-based wind farm was unpopular among utilities, whose power procurement process is based on far shorter, two-year state contracts. The measure drew criticism from business groups as well as power companies, who argued that the cost passed on to consumers would be too high, though it would have capped the increase at $2 a month for residential customers, and 2.5% for commercial ratepayers.

The three PPAs that have been signed thus far in the U.S. – for offshore wind projects in Rhode Island, Delaware and Massachusetts – will charge comparatively high power rates, which in some cases are more than double the cost of regular grid power.

Overcoming First-Mover Cost Barriers

Offshore wind proponents say that as larger projects get built, they will create economies of scale that will bring construction and capital costs down, and in turn, reduce power rates for consumers. But that creates a conundrum for developers of the earliest pilots who are trying to garner support from the public during a challenging economy.

As first movers in a nascent industry, they must charge high electricity prices to obtain financing for projects that have yet to test the weather- and infrastructure -related challenges particular to ocean construction here. If initial pilots function as anticipated, second-generation, utility-scale offshore wind farms coming online a decade or less from now will reap the benefits of proven performance and economies of scale, and provide power at lower rates than the early projects.

An example of this price inconsistency is playing out in Rhode Island, where electricity produced by a 30 MW pilot project planned by Deepwater Wind off the coast of Block Island is expected to be considerably more costly than power from a massive, 1,000 MW wind farm proposed by the developer that could come online in the area within the next few years.

Last year, Deepwater signed a 20-year power-purchase agreement with National Grid, which will buy power from the Block Island pilot at a rate of 24.4 cents per kilowatt-hour (kWh), with increases of 3.5 percent each year.

Two local businesses sued to get the deal overturned, complaining about the steep rate, which is about two and a half times what National Grid currently pays for wholesale power. But last July, the PPA was upheld by the state Supreme Court.

Deepwater provided details about its latest project in a press release last month, estimating that power would cost “in the mid-teens” from its next-generation 1,000 MW wind farm planned in federal waters off the coast of Massachusetts and Rhode Island. The company said the first turbines could be up and running by 2016.

As an alternative to PPAs, some states are taking a close look at a process underway in New Jersey to create Offshore Wind Renewable Energy Credits (ORECs). Renewable energy credits represent the environmental attributes of clean power, with one REC equivalent to one megawatt-hour of electricity produced. Unlike the stability of long-term contracts, the price of RECs fluctuates over time, based on supply and demand.

New Jersey’s OREC program is an incentive program to support at least 1,100 MW of generation from ocean-based sources – enough electricity to power around one million homes. A bill signed by Governor Chris Christie in August 2010 requires utilities to buy ORECs for approved wind farms, or pay alternative compliance payments.  The New Jersey Board of Public Utilities is currently formulating regulations to establish the OREC program.

In exchange for this support for initial projects, New Jersey’s legislation places the burden on developers to show that a project will create a net economic benefit for the state. For proponents of offshore wind, such a requirement is critical, given that the promise of needed jobs and other economic growth, along with clean energy, are the core reasons for accepting the higher initial cost of ocean-based power.

The U.S. Department of Energy’s National Renewable Energy Lab has estimated that every megawatt of offshore wind produced in the U.S. will create more than 20 direct jobs.

Federal Support in Limbo

Ocean-based wind construction is roughly twice as expensive as putting turbines on land, and given that reality, developers say that some form of federal assistance will be crucial to moving forward larger-scale projects.

Extending the Investment Tax Credit (ITC) and the U.S. Department of Energy’s Loan Guarantee Program for offshore wind projects are the two top priorities of the Offshore Wind Development Coalition, an industry group. The federal loan guarantee program for renewable energy was dramatically scaled back under the continuing Congressional resolution passed earlier this year that kept the federal government open.

The ITC is slated to expire on December 31, 2012 for terrestrial and ocean-based wind development, a date that does not take into account the lengthy permitting process required of offshore development, the industry argues. They claim that none of the current projects in the pipeline would be able to qualify for the ITC by that date.

Last month, New Jersey Representatives Bill Pascrell and Frank LoBiondo introduced a bill in the U.S. House of Representatives that would eliminate the ITC’s 2012 deadline for offshore wind and replace it with a 30 percent tax credit for the first 3,000 MW of offshore wind development.

While the financing question looms large, federal officials are moving to streamline the leasing and permitting process, which also affects the willingness of investors to finance offshore projects. A lengthy timeline to obtain the necessary approvals creates risks for investors unsure about if, and when, a project will be built. It also exposes developers to uncertainties stemming from changes in a political administration and in material and construction costs during that period.

At least 4,000 MW of offshore development have been proposed in the U.S., with the bulk planned for federal waters, which begin three miles from shore. But so far, only one federal lease has been granted, for the Cape Wind project off the coast of Massachusetts, a 420 MW wind farm planned for Nantucket Sound. That lease was signed by Interior Secretary Ken Salazar during last year’s AWEA event, in Atlantic City, New Jersey. The announcement followed a prolonged, nine-year permitting process that was beset by fierce opposition from a range of local groups.

In a keynote address at this year’s conference, Salazar said that federal officials were working to accelerate the permitting process, and could be issuing new leases during the next few months, a number of which would be for development in the Mid-Atlantic region. At least ten applications have been submitted to develop offshore projects in the Atlantic Ocean, Gulf of Mexico and Lake Erie.

While generally upbeat about the industry’s prospects here, Salazar implied that greater support was needed from Congress, calling for an extension of the ITC and establishment of a national clean energy standard, measures that he said would create “investment certainty” and send “a signal to investors to move money off the sidelines.”

Salazar contrasted the U.S.’s failure thus far to harness its ocean resources with its status as a global leader in cultivating land-based wind. With more than 40 GW of installed capacity, the U.S. is second only to China. “We should be proud of that achievement,” said Salazar. “But we should also say to ourselves, ‘why is it that Germany, Denmark and China have moved so far ahead, and we have so much offshore capacity, but have yet to develop one megawatt?’”

Europe’s Approach to Growing Offshore Wind Farms

Jens Eckhoff, president of the German Offshore Wind Foundation, said the lackluster support for offshore wind in this country reminds him of the situation in Germany a decade ago, before the sector started to take off there. “There is an unclear market, no national energy policy, no single point of contact within the states,” and the “unsolved question of finance,” he said, during a panel discussion.

Germany and other European countries have subsidized the growth of offshore wind and other sources of clean power through feed-in-tariffs (FIT), which are set rates that utilities must pay a renewable-energy provider over a certain number of years, and usually decline over time.

Germany’s FIT for onshore wind, in place since 1991, has been credited for making the country home to the largest installed onshore wind capacity in the European Union. That success led the government to introduce a FIT for offshore wind in 2001. It currently stands at €0.13 per kWh and will rise to €0.15 kWh in 2012. Those rates are scheduled to decrease starting in 2015, though draft legislation released by the Environment Ministry in August would push the date back to 2018.

Today, the German wind industry employs more than 125,000 people, and 80 percent of the turbines produced there are destined for export, said Eckhoff.

Currently, offshore wind projects representing 4 GW are in various stages of development, and the government now aims to get 25 GW of power from the sector by 2030. Germany hopes to close its nuclear plants in the next 10 years, and is pushing for renewable alternatives like offshore wind to replace that power source.

Nevertheless, wrangling among developers for more favorable subsidies has slowed the pace of offshore development there, according to an article earlier this year in The London Guardian.

Taiwan has also instituted a FIT for offshore wind, as part of a new policy to wean the country from nuclear power in the wake of Japan’s nuclear crisis.

U.S. Views about Price Supports for Offshore Wind

While FITs have been far less popular in the United States than in Europe, a recent report from the Institute for Local Self Reliance, a nonprofit, found that FITs can yield economic advantages for ratepayers compared with other financing options. The report found that average FIT prices for solar power in Germany have been cheaper over time than average solar REC prices in New Jersey or California.

In North America, the state of Vermont and several municipalities have enacted FITs for renewables, but the Canadian province of Ontario is the only jurisdiction that has promoted a FIT for offshore wind. Nevertheless, that policy was put on hold last February, when the provincial government placed a moratorium on offshore wind development, saying that further scientific research was needed.

In South Carolina, a report issued by a legislative task force last year called for the creation of policies to provide “revenue certainty for offshore wind production,” with one suggestion being a feed-in-tariff.

Other states have vowed to push ahead with policies to promote offshore wind. Staff in Maryland Governor Martin O’Malley’s office said the governor plans to introduce a new offshore wind bill at the start of the legislative session in January. Lawmakers have formed a “summer study” group focusing on the price impacts of offshore development, among other issues.

A recent poll conducted by a coalition of environmental groups in Maryland found that 62 percent of respondents would be willing to pay $2 per month more on their electric bills if their electricity mix included offshore wind power.

During a panel discussion, staff from the governor’s office noted that the intention of the bill is to jump-start the market – not to have government-subsidized PPAs indefinitely. They added that in order to meet Maryland’s mandate of deriving 20 percent of its electricity from renewable sources by 2022, utilities will need to be able to draw on 1.5 GW to 2 GW of offshore wind.

“We must come together to create a market on a large scale,” said Governor O’Malley, in an address at the AWEA conference to an audience made up largely of industry representatives from the U.S. and Europe. “I charge the industry to find a better price and a cheaper way to finance this.”

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