With an abundance of available sites, the benefits of lessons learned from more mature European markets and an operational project already under its belt, the scene should be set for US offshore wind to pick up the pace on development – but is it?
What’s the ‘state’ of play? The Northeast of the US in particular is readying itself for development. New York announced in January an unprecedented commitment to build 2.4 GW of offshore wind power by 2030, closely followed by the Long Island Power Authority (LIPA) signing a power purchase agreement (PPA) with Deepwater Wind for the 90 MW South Fork wind farm.
Massachusetts passed an energy bill requiring utilities to contract 1,600 MW of offshore wind power by 2027 and four areas designated for development in nearby federal waters have been leased to developers. The first offshore wind auction in North Carolina is expected next month, New Jersey’s first auction saw two leasing areas awarded and the first offshore freshwater wind farm is ready for construction on Lake Erie, Ohio, in 2018.
Does the US really need expensive offshore wind?
US onshore wind has achieved great cost and performance improvements such that offshore wind isn’t competitive in many wind and land-rich states like Texas, with onshore wind at around 1/5 of per MWh cost of offshore.
The offshore opportunity in the US lies predominantly in regions where onshore wind isn’t feasible due to land or grid constraints, where new transmission lines aren’t viable, and where the cost of energy is relatively high, such as the Northeast, California, and Hawaii.
The South Fork project in Long Island is a great example where public utility LIPA issued an RFP seeking an alternative to costly new transmission lines to service growing demand. Three solutions were identified in the RFP – energy storage, demand-side management and new wind generation – and Deepwater Wind’s bid to connect offshore wind to Long Island was accepted, exemplifying how offshore wind can happen initially in the US. Market growth will come from offshore projects meeting specific needs of states with policy objectives or transmission restrictions.
Interestingly, the LIPA Board’s resolution approving the PPA gives consideration to a lump-sum prepay purchase of wind energy to reduce financing costs, signalling a strong endorsement of offshore wind by policy makers. The lump-sum would be financed by LIPA through the issuance of tax-exempt debt and as the LCoE is highly sensitive to the cost of financing, employing tax-exempt debt financing will give owners access to low-cost capital, resulting in a lower LCoE.
Barriers to build-out
Broad policy is the missing piece of the puzzle that, if in place, would stimulate investment offshore and in the associated supply chain, but federal policy in the short-term is unlikely. Backing from big players won’t be forthcoming without an attractive PPA and expensive offshore PPA rates will fail to attract investors without state policies like Massachusetts and New York compelling utilities to invest.
The pro-growth tax policy, Investment Tax Credit (ITC) and Production Tax Credit (PTC), has provided support for the maturation of the onshore market but with the phase-out of tax credits, dropping 20% year-on-year until expiration in 2019, offshore wind won’t feel the benefit. Rumors of an offshore-specific ITC are also unlikely given the President’s very public focus on other energy sources.
Marine legislation, the Jones Act, restricts some activities in US waters to US-built, US-flagged, US manned vessels, providing one of the biggest barriers to LCoE reduction. The current proposed projects pipeline is considered inadequate to trigger investment in locally-supplied, purpose-built WTG installation vessels and foreign vessels cannot be used without a feeder vessel solution, so this hurdle must be overcome to access lower prices and development of a supply chain.
Using feeder vessels can work well on offshore projects to work around Jones Act restrictions. During Block Island’s construction, two US flag lift boats were employed to transport WTG components from the port to the installation site, where a foreign, purpose-built installation vessel was waiting to receive and install components. Although this method uses three vessels instead of one, it provided a solution to the restriction on foreign vessels transporting cargo from US port to US port.
Developing floating wind projects could avoid the need for purpose-built WTG installation vessels, eliminating the efficiency impediment currently created by the Jones Act, but this young concept may be a risk too far for developers in this emerging market and not all sites would be suitable.
There’s an opportunity to utilize the extensive marine experience in US offshore oil and gas, combining it with European offshore wind specialists on projects to bridge the skills and supply chain gap. The human element of lessons learned is important, and much could be learned from European offshore wind auction systems to accelerate the enhancement of US frameworks.
Denmark and The Netherlands are offering construction-ready projects for auction – complete with all necessary permits to commence build. The Dutch Borssele project attracted large number of bids and an impressively low tariff (72.70EUR/MWh) suggesting that construction-ready projects are popular with developers. This is an approach that if utilized in the US could reduce perceived risk to developers and lead to LCoE reduction.
State-specific energy bills provide much-needed support for offshore wind, but the fragmented nature of these bills highlights the need for greater regional cooperation. This higher-level cooperation would help regions to drive their efforts cohesively towards a sustainable local supply chain and in support of industry development at a national level.
Utilizing the latest technology in early projects can make US projects more profitable from the outset – taller towers, bigger machines, longer blades and innovative foundation designs all create opportunities to generate more energy and potentially increase margins, making projects more attractive for investment.
Rome wasn’t built in a day and the same applies to US offshore wind. Now that the first project is operational, industry needs to work together to overcome these progress-limiting hurdles and use the next projects in line as an opportunity to drive the industry forward beyond the needs of each single project.
By Carsten Ploug Jensen, US MD of K2 Management