IN DEPTH: US offshore's big year

The fledgling US offshore wind industry may finally see its first projects enter construction this year.

After more than a decade of planning, debating and campaigning, putting steel in the water will provide a huge psychological boost for the sector, and could be the much-needed spark that gets the ball rolling on a host of other projects.

Yet the industry continues to battle with uncertainties due to a variety of reasons — high costs, siting and permitting issues, and a lack of clear and sustained policies that would encourage investment.

“The industry right now is very divided,” says Matt DaPrato, an analyst at IHS Emerging Energy Research. “There are pockets of hope at both the federal and state levels, and also a healthy scepticism and concern [about] where this is going to go.”

The main pockets of hope are three long-standing “first-generation” projects that could all begin construction this year — Cape Wind, Block Island and Atlantic City.

Developer Energy Management Inc (EMI) wants to begin construction of the 468MW Cape Wind in the fourth quarter, in federal waters off Massachusetts. If that occurs, it would be the culmination of a prominent 12-year struggle by the developer.

Japan’s Bank of Tokyo-Mitsubishi UFJ recently signed on as lead arranger of the debt financing for this $2.6bn project — the only one fully permitted by the federal government. This is seen as a major step forward, as US banks have so far declined to participate in this market. EMI is also seeking a loan guarantee for the project from the US Department of Energy (DOE). So far, 77.5% of the nameplate capacity has been contracted to buyers — equivalent to 101 of the 130 planned turbines.

Deepwater Wind also appears on track to get its 30MW Block Island demonstration project going this year, in Rhode Island state waters. It expects to wrap up project permits by early summer.

Brian Redmond, who serves on Deepwater’s board, does not anticipate problems financing the $200m-plus project. “It’s well-structured and small enough [to be manageable]. That’s the purpose of a demonstration project. You have the ability to pull it together. The financing resources are a lot more scaleable,” he says. It helps that Deepwater has nailed down a 20-year power offtake agreement with National Grid.

Analysts say the biggest reason the project will be successful is that Deepwater formed a close partnership with Rhode Island, which agreed to buy the power at above-market rates and provide political support — in exchange for new jobs and investment.

In New Jersey, developer Fishermen’s Energy has obtained all permits for its 25MW Atlantic City wind farm in state waters. However, Fishermen’s needs to prove the project will bring a “net economic benefit” to the state in order to qualify for ratepayer subsidies. Last year, two consultants retained by the state concluded that it did not. The New Jersey Board of Public Utilities is expected to decide in July if the revised project meets this criterion. If a positive ruling is given, the developer hopes it can begin construction this year.

But beyond those projects, the industry’s outlook is murky. So much depends on federal government support — financial, political and regulatory — which until now has been uneven and impossible to forecast.

“There is no clear vision moving forward. People are trying to read the tea leaves at this point,” comments DaPrato.

President Barack Obama’s administration continues to back the sector. Last December, the DOE announced it will provide $28m in initial funding to complete engineering site evaluation and planning for seven pilot projects demonstrating advanced offshore wind technologies. It will also select up to three of these projects for $47m in follow-on funding.

The White House says it will press Congress to extend tax credits for wind energy until 2014 or 2015. Obama favours a bill that provides a 30% investment tax credit (ITC) for the first 3GW of offshore wind projects and gives developers five years to complete installation.

“That would be an ideal solution for us,” says Deepwater chief executive Jeff Grybowski, but the industry doubts that it will pass the Republican-led House of Representatives.

It is more likely that lawmakers will extend the current ITC for another year. This provides developers with a credit equivalent to 30% of their project costs if they can begin construction before the legislation expires. This would not help the industry as much, given the long lead times for utility-scale projects and lengthy federal permitting delays.

Obama’s ability to increase support for the sector is also limited by the fiscal constraints on him due to large federal budget deficits.

Yet the president believes offshore wind has an important role to play in improving energy security. Power cables buried in the ocean floor are less vulnerable to cyber or physical attacks or weather events than local grids — no small issue given climate change may be causing storms to intensify.

He also touts the environmental, health and price benefits — as wind farms would displace higher-cost, dirty fossil-fuel plants over the long term.

The states are the other major driver of industry growth, through renewable-energy mandates or ratepayer subsidies.

Maryland recently adopted a law to support development of a 210MW wind farm off its coast.

In New York, utility Long Island Power Authority is expected to request proposals for 300MW of renewable power this summer.

But while governors have been generally supportive of the industry for economic, energy-supply and environmental reasons, they are sensitive to how future projects could increase ratepayers’ electricity bills in the short term.

The federal government’s focus has been on developing offshore areas along the east coast from Maine to Virginia. Electricity prices there are the highest on the US mainland; demand is greatest; and high population density makes fossil-fuel power plant and transmission line siting difficult and expensive. The option of importing wind power from the country’s heartland would require costly long-distance transmission lines.

The Atlantic coast has a gently sloping, shallow outer continental shelf that lends itself to offshore construction. That is not the case with the Pacific coast, while bottomlands in the larger Great Lakes are also too deep (the exception is Lake Erie, where developer LEEDCo wants to build a 27MW demonstration project).

The proposed Atlantic Wind Connection would also make east coast offshore wind farms more attractive.

This Google-backed project, to be built over ten years, would link offshore facilities along the coast to each other and to several states, effectively becoming the kind of secondary underwater grid that the White House and Pentagon would relish.

So there are reasons to be optimistic about the sector. When projects start entering the water, banks and politicians may soften their views towards offshore wind. And when the first BOEM auction takes place, there could be a scramble to win lease rights.

Things may look very different in a year’s time.