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America's Offshore Wind Industry Is Booming: Which State Will Win A Race To The Top?

Offshore wind has always seemed just out of reach in America, but the offshore wind boom has officially arrived in Northeast Atlantic states – and consumers, local economies, and investors all stand to benefit.

2017 was the year of ambitious offshore wind target announcements, including a combined 4,000 megawatts (MW) from New York and Massachusetts, but 2018 is the year of action.

New York’s recently released offshore wind master plan calls for auctions to secure 800 MW of offshore wind contracts in 2018 and 2019 – more than doubling the amount of U.S. offshore wind deals in place.  Not to be outdone, New Jersey’s new governor injected new life into the state’s long-stalled offshore wind market with an executive order to finalize regulations and solicit bids for 1,100 MW of offshore wind contracts – the nation’s largest auction to date – as well as a 3,500 MW by 2030 goal.

These states may be responding to competition from their neighbors.  Maryland recently announced contracts for 386 MW of offshore wind that will come online in 2021, Massachusetts will announce the results of its 2017 request for bids for 400-800 MW of offshore wind in April, Connecticut just finalized a solicitation for up to 250 MW of offshore wind bids, and Rhode Island was America’s offshore wind trailblazer with the 30 MW Block Island wind project.

A race to the top is emerging from these announcements, with states competing to become economic hubs for the economic ecosystem of high-skill labor jobs created by an expected 50% compound annual growth rate, and to tap the rapidly falling costs of offshore wind to meet ambitious clean energy goals.

Following Europe’s Offshore Wind Model

These states should thank Europe for kick-starting the offshore wind growth engine.  Thanks to countries bordering the North Sea, we know offshore wind can generate cheap, reliable, clean energy at a massive scale, providing a model for the U.S.

Europe’s offshore wind market got off the ground by paying large premiums for projects.  But consistent, coordinated support from the United Kingdom, Denmark, Belgium, Netherlands, and Germany allowed prices to drop each year as deployment accelerated, culminating last year in subsidy-free project bids.

European annual offshore wind installed capacity 2000-2016 via WindEurope

 

In fact, America’s market in 2018 looks remarkably similar to Germany’s market in 2009. That year, Germany only had 40 MW of offshore wind and was paying a €150 per megawatt-hour (MWh) feed-in tariff on top of the wholesale energy price – similar to the $131.9/MWh Maryland will pay for its recent 386 MW contracts.

From 2009 to 2016 Germany’s offshore wind capacity grew 100x from 40 MW to 4,130 MW, and in 2016 Germany reduced its feed-in tariff to an auction-based system, which yielded contracts for offshore wind between $0-44/MWh.  These trends were replicated in other countries, particularly the U.K., Netherlands, and Denmark.

Bids in offshore wind reverse auctions Denmark, Netherlands, and Germany 2010-2018 via IEEFA

 

Europe now has more than 15,000 MW offshore wind capacity, and its economies are benefiting from unsubsidized projects while a new fast-growing industry has taken root.  From 2007 to 2014, European Union offshore wind sector employment increased from 6,370 to 75,000 jobs according to the International Renewable Energy Agency (IRENA), and the European Wind Energy Association predicts more than 129,000 offshore wind jobs by 2019.

Back To America’s Offshore Wind Boom

One undeniable lesson stands out from Europe’s offshore wind experiment: Consistent upfront policy support and market development drives down costs and stimulates local supply chain development.

Now the U.S. can take advantage of this lesson.  Combine New Jersey’s 3,500 MW goal, New York’s 2,400 MW goal, and Massachusetts’ 1,600 MW goal, and the Northeast market would reach at least 8,000 MW by 2030.  The Northeast Wind Center projects this would create 36,300 full-time jobs, while New York expects a $6 billion in-state industry by 2028.

The U.S. can leapfrog Europe in one respect: Our policymakers and developers already have confidence in auction-based bidding to prevent overpaying for offshore wind.  Maryland’s auction yielded prices about half of what Rhode Island paid for the Block Island wind project.  Deepwater Wind, Block Island’s developer, won a competitive bid to build America’s largest offshore wind farm off the South Fork of Long Island, as the cheapest solution (including fossil-fueled plants) for the Long Island Power Authority.  As domestic supply chains become established and experience building offshore wind in the U.S. increases, prices will continue dropping.

Defenders of the status quo will balk at near-term prices for offshore wind contracts – and they will be correct that new contracts will raise power prices in the short term, though likely with almost imperceptible bill impacts.

But offshore wind advocates correctly point to the near-term benefits as justification – offshore power is reliable and stable, reduces reliance on natural gas, improves air quality, cuts greenhouse gas emissions, and boosts economic development in ports and manufacturing hubs that have hemorrhaged jobs.

Consider the alternatives for land-scarce Northeast states with some of the country’s most ambitious renewable energy goals: Solar renewable energy credit (SREC) prices in New Jersey and Massachusetts currently sit above $200/MWh – almost certainly higher than offshore wind prices.

Northeast states also lack good solar and onshore wind resources, raising the cost of these options compared to the Southwest and Midwest.  Meanwhile, offshore wind provides a nearly limitless supply of low-conflict reliable power just off the coast from some of the country’s most populated areas.

Northeast U.S. renewable energy goals via Energy Innovation/DSIRE

 

But playing the long-game is key: Consistent offshore wind deployment will yield renewable energy price declines similar to the 85% drop in solar costs and the 50% decline in wind costs since 2009.

Two Policy Elements Still Matter: Transmission And Contracts

Good policy strikes a balance between developer-friendly market development and customer costs.  To ensure developers can get cheap financing for their projects, two elements matter – transmission access and long-term contracting.

North Sea offshore wind development was successful in part because transmission networks were already in place to give bidders marketplace access and reduce financing costs.  Northeast states would be wise to coordinate an interstate transmission backbone for offshore wind, similar to Texas’ Competitive Renewable Energy Zone transmission lines that provided access to market for cheap wind.

Coastal coal, natural gas, and nuclear plants slated to retire will also leave behind infrastructure to connect offshore wind to the grid.

Long-term contracts provide vital support to new industries by reducing financing risk.  New York’s master plan recommends 20-25 year contracts for offshore wind developers.  Fluctuating market prices introduce additional risk into cost recovery, which can be particularly fatal to new technologies.  A long-term, highly certain price from a reliable purchaser makes it far easier to both invest capital at lower discount rates and raise competitive project financing.

New York’s master plan recommends 20-25 year contracts for offshore wind developers, and when offering solicitations to independent companies to build a new power plant technology, regulators should offer at least 15-year contracts to bidders.

By Mike O’Boyle, Energy Innovation’s Electricity Policy Manager and America’s Power Plan Expert.

Original Post

Discussions

Bas Gresnigt's picture
Bas Gresnigt on Feb 14, 2018 9:18 pm GMT

The price guarantees stated in the second chart last only 15years for wind farms in the Dutch part of the North Sea. Thereafter the owners have to sell for the free market price which is expected (Dutch govt) to be then (~2035) about €28/MWh.

So the jump towards bids that ask no subsidy at all (as in present ongoing Dutch auction, which excludes bids that require any subsidy), is less radical than one would think at first glance…

Bob Meinetz's picture
Bob Meinetz on Feb 15, 2018 4:01 pm GMT

“Wind boom”? Mike, after Cape Wind disintegrated into 26 lawsuits and charges of breach of contract, reasonable people assumed it would be a nail in the coffin of offshore wind in North America.

Instead, renewables advocacy took it as a shot in the arm, with activists doubling down in frank denial of wind’s unsuitability for powering a carbon-free grid. Here, your own link contradicts your hyperbolic projections for the future. You write:

But offshore wind advocates correctly point to the near-term benefits as justification – offshore power is reliable and stable, reduces reliance on natural gas, improves air quality, cuts greenhouse gas emissions, and boosts economic development in ports and manufacturing hubs that have hemorrhaged jobs.

Wind reduces reliance on natural gas, does it? Energy utility professionals at PNM seems to think attempting to integrate “renewables” will raise natural gas’s share by a factor of five:

PNM’s best option for low-cost and reliable power was to start retiring coal in 2022, completely end coal generation by 2031, and replace it with natural gas…PNM estimates that by 2035 its most cost-effective portfolio would be composed of nearly 33% natural gas, up from 6% in 2017.

http://www.theenergycollective.com/energy-innovation-llc/2418633/utiliti...

Joe Deely's picture
Joe Deely on Feb 15, 2018 4:40 pm GMT

Here is data on PNM with no selective filters
From 2017 IRP

Current portfolio as shown in Fig 54

Coal – 58.7%
Nuclear – 24.0%
Wind/Solar – 11.2%
NG – 5.8 %

2035 portfolio as shown in Fig 56

Coal – 0.0%
Nuclear – 31.0%
Wind/Solar – 35.5%
NG – 33%

Not bad.

From 2035 on, any increase in renewable or nuclear share would be replacing NG.

Bob Meinetz's picture
Bob Meinetz on Feb 15, 2018 5:07 pm GMT

Joe, thanks for confirmation natural gas is projected to increase by a factor of 5 at PNM – and until the sun shines or wind blows in lock-step with consumer demand, renewables will be unsuitable for powering a carbon-free grid.

Willem Post's picture
Willem Post on Feb 15, 2018 5:36 pm GMT

http://www.windtaskforce.org/profiles/blogs/a-very-expensive-offshore-wi...

The Block Island Wind Farm, after many years of dithering, became operational in late 2016. It is located 3.8 miles east of Block Island, Rhode Island. It has five wind turbines, each with a capacity of 6 megawatt. Each turbine is about 589 feet tall.

The annual wind electricity production would be about 105,000 MWh/y, if the capacity factor were 0.40.
The estimated useful service life would be about 20 years, based on about 20 years of European offshore experience.
Project turnkey cost was about $290 million, or $9.67 million/MW, which at least 2 times higher than North Sea pricing.

Quick Estimate of Electricity Cost: If the major costs of 25-year financing, a return on investment, operation and maintenance, replacements, insurance, and property taxes were ignored, the cost of electricity production, just to return the capital, would be about $290 million/(20 y x 105,000 MWh/y) = 13.8 cents per kilowatt-hour.

If these costs were not ignored, the cost of electricity would be at least 20 c/kWh. That would be about the price charged to utilities under a long-term power purchase agreement, PPA. This electricity would be variable and intermittent, i.e., no wind, no electricity.
http://www.windtaskforce.org/profiles/blogs/the-reality-of-wind-energy-i...

Other generators, likely gas-fired, would be required to provide supplementary electricity, on a year-round basis, i.e., perform the peaking, filling-in and balancing, which reduces their efficient operation. This inefficiency increases as more wind electricity is added to the grid. See URL for more info.
http://www.windtaskforce.org/profiles/blogs/fuel-and-co2-reductions…

Offshore Supply and Installation Mostly by Foreign Companies: Factors affecting the capital cost are; 1) the manufacturing and shipping of turbine parts from Europe to the US, and 2) the specialized ships and cranes required to travel from Europa and back to install the turbines. German, French and Norwegian contractors mostly own that specialized and very expensive equipment. See “From Creditor Nation to Debtor Nation” in this URL.
http://www.windtaskforce.org/profiles/blogs/cop-21-world-renewable-energ...

Negotiated Electricity Cost: The negotiated PPA, calls for 24.4 c/kWh the first year, increasing at 3.5% per year for 20 years, i.e., 48.6 c/kWh in the 20th year. This absurdly expensive electricity gets averaged onto the utility’s contracted electricity mix.

NOTE: The negotiated Cape Wind PPA calls for 18.7 c/kWh the first year, increasing at 3.5% per year for 20 years, i.e., 37.2 c/kWh in the 20th year.

Generous Federal and State Subsidies: These high costs exist despite about 30% of the capital cost (0.3 x 290 = $87 million) being a federal ITC, an upfront, cash gift to owners, plus state ITC subsidies, plus rapid asset depreciation (5 years) to reduce owner federal and state income taxes. Typically, the cash gifts are used to offset any federal and state taxes due on the profits of other business activities. It looks like owners are “earning” an extremely high return on their investment at the expense of other ratepayers and taxpayers. See URL.
http://www.windtaskforce.org/profiles/blogs/vermont-speed-renewable-ener...

New England Wholesale Electricity Prices: New England wholesale prices have averaged about 5 c/kWh for steady, 24/7/365 electricity since about 2008, primarily due to:

1) Natural gas electricity; 50% of NE generation; low-cost (5 c/kWh), low-CO2 emitting, no particulates, domestic fuel
2) Nuclear electricity; 26% of NE generation; low-cost (5 c/kWh), minimal-CO2 emitting, no particulates, domestic fuel

Mark Heslep's picture
Mark Heslep on Feb 18, 2018 4:01 pm GMT

The author refers to a boom in plans, goals, and advocacy articles like his own. There is no new physical activity in offshore wind in US waters.

Also see a similarly reasoned article from this authors group declaring a “crash” in Indian coal, despite 43 GW of new coal power under construction in 2017.

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