IN DEPTH: Liftoff for US offshore

The US offshore wind industry has finally turned the corner.

Construction on the first project is due to begin this year; supply contracts worth more than $1bn have been signed; swathes of the Atlantic Ocean are being opened up for commercial development; and foreign companies and banks have moved in to provide critical products and services.

If all goes to plan, President Barack Obama will leave office in January 2017 with at least 106 turbines spinning offshore, fulfilling his pledge to “stand up” the sector, while his administration will have laid the groundwork for dozens of gigawatts to be installed in waters stretching along the energy-hungry East Coast from Massachusetts to South Carolina. That year should also see funding for three offshore technology-demonstration projects, which will have Department of Energy (DOE) grants of up to $46.6m each.

The race is now on to get the first turbines in the water, with Energy Management Inc’s (EMI) 468MW Cape Wind, off Massachusetts, expected to beat  Deepwater Wind's five-turbine 30MW Block Island pilot off Rhode Island — both of which are due to be completed in the second half of 2016.

The two projects have all their permits and have qualified for the federal investment tax credit (ITC) by spending more than 5% of their total capital investment. Neither developer has begun construction, but manufacturing has started on turbine components.

It has been an extraordinarily long road for the US offshore wind sector, with EMI having first submitted permit applications for Cape Wind in November 2001. After such a prolonged wait, many residents of coastal states remain supportive but struggle to imagine turbines offshore; US banks have shown no public interest in lending to offshore projects; the country’s main turbine supplier GE has given the sector a wide berth; and the domestic supply chain is limited.

But erecting those first turbines will change everything.

“The biggest positive is that we can get a turbine in the water. Nothing else really compares,” says Deepwater chief executive Jeff Grybowski. “We as an industry need to show folks what this looks and feels like; that we can do this in the US.”

“Once these projects go in the water, we’ll see even more support from the public,” adds Christopher Long, offshore wind siting and policy manager at the American Wind Energy Association. “I think it’s going to have a tremendous impact in terms of accelerating project development and bringing down costs. By developing projects, putting projects in the water, that’s how you improve installation processes, how you achieve economies of scale and drive down costs.

“I think that US banks will see that offshore definitely represents a stable and long-term investment.”

While US companies and institutions have been wary of getting involved, experienced overseas organisations are eager to get in on the ground floor. Asian and European banks, foreign government agencies and a Danish pension fund have ploughed hundreds of millions of dollars into the sector, while European manufacturers Siemens and Alstom have already won orders.

The level of overseas involvement has led to complaints that the sector will not provide as much local investment and employment as initially promised — two of the industry’s main arguments for public support.

Yet state governors and legislatures along the East Coast continue to back the nascent industry. The state of Massachusetts is building a $100m terminal in the old whaling port of New Bedford, which will act as a staging area for Cape Wind and future projects, while in Maryland, legislation passed last year ensures that investor-owned utilities will have to source a still-to-be-determined proportion of their electricity from offshore wind by 2017.

East Coast waters have become the focus of the US offshore sector for several reasons. Strong winds are coupled with a gently sloping continental shelf, which will allow turbines to be erected with fixed foundations out of sight from the coast, reducing the chance of public opposition. There is also growing energy demand from East Coast cities, where power prices are among the highest on the US mainland, particularly during periods of temperature extremes such as last winter and last summer. With states in the region required by law to cut emissions, new coal plants are ruled out, natural gas remains expensive in the region, and there is little available land to build transmission lines. As Grybowski says: “Offshore wind is the only scaleable new generation source available.”

For this reason, the Bureau of Ocean Energy Management (BOEM) — a Department of the Interior agency — is opening up broad swathes of federal Atlantic waters to offshore development.

BOEM boss Tommy Beaudreau has accelerated implementation of the agency’s “Smart from the Start” programme, which identifies wind-rich offshore areas and works with interested parties — including federal, state, local and tribal officials — to eliminate potential future conflicts at specific sites around endangered species, fishing interests, military usage and vessel traffic.

After carrying out early environmental assessments and determining the level of industry interest in an area, the BOEM then begins the process to lease the site for commercial use. If only one developer registers its interest in a specific site, the agency can directly award it a lease, as it did with NRG Bluewater Wind for a 450MW project off Delaware in October 2012. Otherwise, a competitive auction is held.

Deepwater Wind won the lease for the so-called Rhode Island-Massachusetts location last July, where it plans to build the 1GW Deepwater ONE project — with construction on the 200-280MW first phase starting in 2017 if it wins a planned power-purchase agreement with the Long Island Power Authority. Dominion was awarded the lease for a 472.6sq km area off Virginia in September. Both auctions attracted two bids.

Further leases are expected to be awarded in the coming years, in locations off Maryland (this summer); Massachusetts (at the end of this year or Q1 2015); New Jersey (possibly 2015); North Carolina (probably 2015) and New York and South Carolina. Among those interested in the Maryland and Massachusetts leases are European developers EDF, RES and Orisol.

At the same time, a consortium led by Google and Japan’s Marubeni is working on building an offshore grid linking multiple wind lease areas from New Jersey to Virginia. The Atlantic Wind Connection is conducting preparatory work for the first stage off New Jersey, but a final investment decision seems to depend on the state finalising its announced offshore wind subsidy scheme.

There are one large-scale projects in the pipeline outside of the BOEM lease programme: Baryonyx’s 2GW+ Rio Grande North/South in Texas state waters.

Fishermen's Energy (330MW) and Garden State Offshore Energy (350MW first phase) have so-called five-year interim policy leases with BOEM that were awarded in November 2009, which allow them to conduct preliminary research within the agency’s proposed New Jersey lease area. 

While far from perfect, “Smart from the Start” has already proven its value. The BOEM reconfigured several offshore lease areas in response to concerns expressed by fishermen, marine biologists, shipping companies, the Coast Guard and the Navy. For example, by removing certain fishing grounds from the Rhode Island-Massachusetts zone, the lease auction went smoothly.

“There were a lot of naysayers going into our auctions as to who would show up and how successful this process would really be,” remarks Beaudreau. “The first auction off Rhode Island-Massachusetts went 11 rounds and garnered a high bid of almost $4m. The second off Virginia went six rounds and the take was $1.6m.”

After initial doubts, developers are now backing the BOEM’s approach — which still takes longer than comparable permitting procedures in Europe and Asia, but is certainly a lot faster than the ten years Cape Wind took to win all its approvals.

“There is no blueprint of how to build an offshore wind farm in the US. We are literally inventing the permitting process,” observes Grybowski.

Despite all the encouraging progress, however, there are still hurdles that must be overcome if the industry is to compete, particularly on price. Cape Wind and Block Island will be selling their power for $187 and $244 per MWh respectively, far higher than the average wholesale price in New England last year of $56/MWh.

“The high-cost problem is not going to go away soon,” says Bruce Hamilton, a director in Navigant Consulting’s energy practice. “What we need is policy support.” 

Congress later this year is likely to renew the ITC, which allows developers to take a tax credit equal to 30% of their investment, although for how long and under what criteria remain unclear. But the short-term measures that seem to be favoured by the current Congress are at odds with the long offshore project lead times. And as the sector only benefits a minority of states, this may weaken future support among the nation’s lawmakers.

Analysts believe coastal states will need to take the lead in driving policy and follow Maryland’s example in creating a funding mechanism. With their large populations, they can then spread costs more easily, especially if several states collaborate. Until now, however, each state has been going its own way, hoping to gain a first-mover advantage and create jobs and lure investment. Late starters may obtain little or none.

For many industry players, 2013 was a game-changing year. But the real breakthrough is yet to come.

“As I tell the BOEM staff, when you work in government you are always mindful of trying to make progress for the American people,” says Beaudreau. “We will have these facilities generating electricity on the eastern seaboard. It will be a physical manifestation of their effort and actually something to point to and say: ‘We actually did that and here are the benefits’.”