How can the US step up offshore development post-Block Island?
OPINION | The pieces are slowly coming together, but can the hurdles be overcome to launch a new industry? asks Carsten Jensen
With an abundance of available sites, a completed project under its belt and a wealth of lessons to be learned from Europe, the US offshore wind industry should be ready to pick up the pace of development. But is it?
The state of play
The US Northeast, in particular, is readying itself for development. New York announced in January an unprecedented commitment to build 2.4GW 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 90MW South Fork wind farm.
Massachusetts passed an energy bill requiring utilities to contract 1.6GW of offshore wind by 2027, while four offshore zones in nearby federal waters have been leased to developers.
Also, 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 freshwater wind farm is ready for construction in Lake Erie, Ohio, in 2018.
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Does the US really need expensive offshore wind?
US onshore wind has achieved great cost and performance improvements in recent years, meaning that offshore wind isn’t competitive in many wind- and land-rich states such as Texas, where onshore wind is about one fifth of the 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 off Long Island is a great example. Public utility LIPA issued a Request for Proposals (RFP) seeking an alternative to costly new transmission lines to service growing power 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 take off 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 pre-pay purchase of wind energy to reduce financing costs, signalling a strong endorsement of offshore wind by policymakers. 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 levelised cost of energy (LCoE).
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Barriers to build-out
Broad policy is the missing piece of the puzzle that, if in place, would stimulate offshore-wind investment 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 the kind of state policies seen in Massachusetts and New York, which compel utilities to invest in offshore projects.
The pro-growth tax policy — namely, the Investment Tax Credit (ITC) and Production Tax Credit (PTC) — has provided support for the maturation of the onshore wind market. But with the phase-out of tax credits — which will drop 20% year-on-year until expiration in 2019 — offshore wind won’t feel the benefit. Rumours of an offshore-specific ITC are also unlikely, given President Donald Trump’s very public focus on other energy sources.
The Jones Act, which restricts some activities in US waters to US-built, US-flagged, US-manned vessels, is one of the biggest barriers to LCoE reduction. The current project pipeline is considered inadequate to trigger investment in locally supplied, purpose-built turbine installation vessels, and foreign vessels cannot be used without a feeder vessel solution. This hurdle must be overcome to access lower prices and allow the development of a supply chain.
The use of feeder vessels can work as a good solution to Jones Act restrictions. During the construction of America’s first offshore wind farm, Block Island, two US-flagged lift boats were employed to transport turbine 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 Jones Act restriction on foreign vessels transporting cargo from US port to US port.
Floating wind projects could avoid the need for purpose-built turbine installation vessels, and thus eliminate the impediments created by the Jones Act. But this relatively new concept may be a risk too far for developers in this emerging market, and not all sites would be suitable.
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There’s an opportunity to utilise the extensive marine experience in US offshore oil and gas, and combining it with European offshore wind specialists 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.
For instance, Denmark and the Netherlands offer construction-ready projects at auction — complete with grid connections and all necessary permits. The Dutch Borssele 3 & 4 project attracted a large number of bids and an impressively low tariff — €54.50 ($57.90) per MWh — suggesting that construction-ready projects are popular with developers. This is an approach that, if utilised 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 co-operation. A concerted regional push for more offshore wind would help create a sustainable local supply chain and support the establishment of a nationwide industry.
Using 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, the industry needs to work together to overcome the 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.
Carsten Jensen is US managing director of wind energy consultancy K2 Management