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Are U.S. Energy Ratepayers Ready For Offshore Wind?

image credit: Block Island wind farm

The U.S. wind energy industry has grown very fast to add much-needed energy to the U.S. energy supply mix. The U.S. is now the largest wind energy producer in the world, with Texas the largest wind producing state. In the U.S. today, wind power accounts for about five percent of all electricity generated. The total installed wind capacity in the U.S. through the end of 2016 is 82,183 megawatts (MW), as shown in Graph 1 below.

Graph 1 – U.S. Installed Wind Capacity in MW 2001-2016

 

Source: American Wind Energy Association website, http://www.awea.org/wind-energy-facts-at-a-glance

Not only has wind generation increased through technology advances, the price of wind energy has decreased to the $40-$50 per megawatt-hour (mWh) range (4-5 cents per kilowatt-hour kWh) which is very competitive with fossil fuel generation costs.

The National Renewable Energy Lab and AWS Truepower estimates that a capacity of 11,000,000 MW of potential onshore wind projects exists at 80 meters and a 30% capacity factor. The U.S. is fortunate to have a huge untapped onshore wind resource for economically-attractive future energy development that is 134 times the current installed onshore capacity.

Europe has developed its off-shore wind industry and per https://windeurope.org/about-wind/statistics/offshore/, has a current installed offshore wind capacity of 12,631 MW through the end of 2016.

Not only have the Europeans developed their offshore wind resources, but the most recent project by the Swedish firm Vattenfall made history was bid at only $55 per megawatt hour sold for an offshore wind development in Denmark, several times below costs 10 years ago and on a steady downward trend. Offshore wind can be developed in an economical and environmental manner.

The Deepwater Wind’s project near Block Island offshore Rhode Island just began commercial operations, making it the first operational offshore wind farm in America in November 2016.

Block Island Wind Farm is about 3 miles off the coast of its namesake island. Offshore wind developer Deepwater Wind spent roughly $300 million to build the project for 30 MW of capacity, or about $10 million per MW.

The company that’s buying and distributing the electricity, National Grid, will pay Deepwater Wind a price for the wind farm’s renewable energy that’s higher than today’s market prices from traditional sources.

All Rhode Island energy ratepayers are expected to pay an above-market price of $440 million for Deepwater Wind’s energy over the next two decades, according to a 2015 filing with the state Public Utilities Commission. Under the contract, Rhode Island ratepayers will pay National Grid for Deepwater’s wind energy who will in turn pay the Deepwater project a maximum of 24.4 cents per kilowatt-hour for the electricity in its first full year of operation. After that, the price will increase 3.5 percent per year to 46.91 cents per kilowatt-hour in 20 years. All Rhode Island ratepayers will see this increase in their energy bills, not just the 1,000 permanent residents of Block Island. Source: http://ripr.org/post/deepwater-winds-block-island-project-worth-cost-ratepayers

We should support renewable energy as its current price point is close to if not at parity with fossil fuels. I question the economics of the Deepwater Wind project when there are many other wind sites available in the US at a much lower price. Current wind projects are selling wind energy in the $40-50 per MWh range or about 1/6th the initial year cost of the Deepwater wind contract of $244 per MWh.

As wind energy prices continue to shift downward in the future with documented technological breakthroughs, Rhode Islanders in 20 years will be paying up to 12 times the current wind price of $40-$60 per MWh price. Is this economically smart for Rhode Island ratepayers when there are other renewable energy projects in the US that compete more favorably?

Current onshore wind energy in the $40-$60/mWh range is at or below natural gas generation cost. Is offshore wind energy in the form of the Deepwater project at $244/MWh going to $469/MWh in 20 years a reasonable value proposition for Rhode Island ratepayers?

The guaranteed 3.5% annual increase allowed for the Deepwater offshore wind farm is twice the US electricity rate inflation since 2009 of 1.7%. Source: https://www.greentechmedia.com/articles/read/electricity-rates-are-jumping-or-are-they

Going back to the Swedish firm Vattenfall’s $55 per megawatt hour bid for offshore wind development in Denmark, why is the Deepwater bid of initial energy of $244 per mWh 4.4 times the Vattenfall’s offer? With a guaranteed increase of energy prices from National Grid, wouldn’t that reduction in future financial attract a lower energy price from the developer?

More offshore wind projects are planned as shown in Figure 1 below.

Figure 1 – Atlantic Offshore Wind Energy Leases With Parent Companies

 

As wind developers propose these new offshore projects, I trust the electric ratepayers of New York contract with a company like Swedish firm Vattenfall which made history in November 2016 by bidding only $55 per megawatt-hour (MWh) or 5.5 cents per kilowatt-hour sold for an offshore wind development in Denmark. This compares with the Deepwater Wind’s starting energy price of $244/MWh going to $469/MWh in 20 years.

For Deepwater Wind, has the Rhode Island state government created advantaged conditions for off-shore wind farm operators by offering a “state financial guarantee’ to project investors to shield against commercial risk? If so, this puts any other project of on-shore wind farm in a disadvantaged position.

Copyright © March 2020 Ronald L. Miller All Rights Reserved                                                  

Ron Miller's picture

Thank Ron for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Mar 26, 2020 11:38 am GMT

I question the economics of the Deepwater Wind project when there are many other wind sites available in the US at a much lower price. Current wind projects are selling wind energy in the $40-50 per MWh range or about 1/6th the initial year cost of the Deepwater wind contract of $244 per MWh.

Is there a risk that this phenomenon persists though-- whenever a project is initiated and a contract signed, within a not-too-long time the learning curve continues to drop and with it so do prices. At what point is that acceptable and at what point is it more appropriate to hold off? And does holding off end up slowing down the movement of that whole learning curve?

Thanks for sharing, Ron!

Ron Miller's picture
Ron Miller on Mar 26, 2020 11:54 am GMT

The more wind capacity we build, the more we will find less costly, more efficient ways to produce wind energy. For each doubling of installed capacity, wind prices have fallen 14% historically. In the case of Deepwater, with a history of wind energy price reductions over time onshore, and the experience of the Swedish (and others) of much more cost-effective wind energy generation, Rhode Island ratepayers should have questioned is this the right time and right price to engage. Ultimately paying 5 times more for wind energy vs. Swedish bids in Europe has to be scrutinized, especially by the PUC.

David Gaier's picture
David Gaier on Mar 31, 2020 1:26 pm GMT

Ron, the Block Island project was relatively tiny and a demonstration project at that. Vast increases in the nameplate capability of OSW direct-drive turbines certainly has changed the game for new projects. Did the Danish project or the PPA receive any government subsidies?  

Ron Miller's picture
Ron Miller on Mar 31, 2020 4:49 pm GMT

Excellent point, David. Swedish off-shore wind project was 350 MW compared to Block Island is 30 MW, so economies of scale would favor the larger project with lower costs. My research did not identify any government subsidies but reality is they were probably included in the price just like the Production Tax Credit and accelerated depreciation subsidy in the US. In getting to an apples-to-apples comparison, I don’t know if there is really as much as the 5 times price reason for the Block Island wind energy price, but perhaps a bit smaller multiplier. Thanks for your comments.

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