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On July 31, Providence, R.I.-based Deepwater Wind won the first-ever competitive lease auction for renewable energy development in federal waters, bidding $3.8 million for both available sites located off the coasts of Rhode Island and Massachusetts.

The U.S. Department of the Interior’s Bureau of Ocean Energy Management (BOEM) held the auction for two parcels, totaling more than 164,000 acres, in a designated Wind Energy Area on the Outer Continental Shelf.

Deepwater Wind plans to develop the Deepwater Wind Energy Center (DWEC), a utility-scale wind farm with up to 1 GW of capacity. The developer says DWEC’s 200 or so wind turbines will be located 20 to 25 miles from the nearest landfall. In addition, the project will include a regional transmission system linking Long Island, N.Y., to southeastern New England. Deepwater says construction could begin as early as 2017, with commercial operations by 2018.

Winning the auction will also go a long way toward Deepwater’s ability to sell its power to a utility buyer via a long-term power purchase agreement (PPA).

Jeff Grybowski, CEO at Deepwater Wind, says the company is in a “great position” to secure PPAs because the project is within transmission distance of Massachusetts, Rhode Island, Connecticut and Long Island.

“Winning the lease auction was a big step. Having site security is critical to securing a PPA,” he explains. “The lease shows the utility that we can deliver what we promise.”

The so-called “utility model,” wherein a utility agrees to buy all – or a portion – of a project’s output, has been a common element in each of the three offshore wind PPAs signed to date in the U.S.

For example, Cape Wind Associates, the developer behind the proposed 468 MW offshore wind project located off the coast of Nantucket Island, has contracted with two utilities to sell 77.5% of the project’s output. In 2010, National Grid agreed to purchase 50% of the wind farm’s output, including electricity, renewable energy certificates (RECs) and other potential market attributes for $0.207/kWh. In 2012, NSTAR agreed to purchase 27.5% of the output of the Cape Wind project. That contract sets the base price (for electricity, capacity and renewable energy attributes) at $0.187/kWh, rising 3.5% annually.

National Grid, also in 2010, signed a PPA with Deepwater Wind for its 30 MW demonstration offshore project off the coast of Block Island. The starting price is $0.244/kWh, with an annual price escalator of 3.5%.

However, with the onset of deregulation amongst electric utilities, the traditional model used by the first generation of offshore wind projects is clearly changing.

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State-based models

Deregulation has prompted some states, such as New Jersey and Maryland, to come up with a state-based allocation system – through a mechanism using offshore renewable energy certificates (ORECs) – to spread the costs and benefits across all of the ratepayers in the state.

For example, New Jersey’s Offshore Wind Economic Development Act, passed in August 2010, directs the state’s Board of Public Utilities (BPU) to develop an OREC program to support at least 1,100 MW of offshore wind and establishes a Class I carve-out for offshore wind within the state’s renewable portfolio standard. The legislation obligates New Jersey electricity suppliers to procure ORECs based on their share of statewide load.

Atlantic City, N.J.-based Fishermen’s Energy is the first and only company to seek the BPU’s approval for offshore wind development. Dubbed the Atlantic City Offshore Wind Farm, the developer’s 25 MW demonstration project is planned to be located 2.8 miles off the coast of Atlantic City. For Fishermen’s – which already has the state permits necessary to build the project – the process to get the green light from the BPU has been arduous, explains company CEO Chris Wissemann.

However, talks with the BPU have stalled over the price of the project. Fishermen’s notes that once a U.S. Department of Energy (DOE) grant is factored in, along with the investment tax credit (ITC), the project will pencil out. Fishermen’s – and six other offshore wind projects – received a $4 million DOE loan aimed to help jump-start the industry. If the developer meets certain conditions, it will be among three projects eligible for a $47 million loan over four years.

Armed with this financial backing, Fishermen’s had reached a deal with the New Jersey Division of Rate Counsel (DRC) in July. The DRC, which represents ratepayers in the setting of electricity rates, initially opposed the Fishermen’s project, saying it was too costly. The July settlement featured a reduction in the wind farm’s projected rates, thus lowering costs and lessening potential impact to ratepayers.

However, the BPU rejected the settlement agreement, fearing that New Jersey ratepayers would be forced to shoulder too much risk if federal incentives, such as the ITC or DOE grants, do not materialize.

The BPU’s approval would not only prove that the legislation can work, Wissemann says, but also pave the way for a larger, commercial-scale project planned by the developer in federal waters.

“Bankers need to see that an OREC mechanism could work for our Atlantic City wind farm,” he says. Conversely, an ultimate rejection from the BPU would not only crater the project – but also affect future offshore wind projects. “If we don’t get [BPU] approval, I can’t see a path to make this work.”

Following in the footsteps of New Jersey, Maryland has enacted its own OREC-type program that is financeable, explains Abigail Hopper, energy advisor to Gov. Martin O’Malley and director at the Maryland Energy Administration.

Passed in April, the Maryland Offshore Wind Energy Act of 2013 created a mechanism to incentivize the development of up to 500 MW of offshore wind capacity at least 10 nautical miles off of Maryland’s coast. A target project size of 200 MW would require the installation of an estimated 40 turbines off the coast of Ocean City.

Although the act does not technically equate to a PPA, Hopper says the administration worked with offshore wind developers to ensure the legislation is financeable, one of the core goals in a PPA.

The mechanisms in New Jersey and Maryland are envisioned to get the basic financial and economic conditions in place to support the growing offshore wind sector and are thought of as the next best option to a traditional PPA.

However, both the New Jersey and Maryland programs have gotten off to rocky beginnings. The problem is in the financing of a project backed by RECs. Working with regulators and utilities, New Jersey has spent years trying to figure out how to structure the OREC program so that offshore wind developments are bankable.

“In a perfect world, you’d have a PPA,” explains Wissemann. “Everyone loves and understands a PPA. However, in a deregulated market like New Jersey, there is no natural buyer.”

And Maryland, thanks to a considerable amount of sweat equity and political capital put in by O’Malley, was finally successful in passing its legislation after years of stalled efforts.

Clearly, the embryonic U.S. offshore wind industry is not ready for prime time.

For starters, the costs of offshore wind projects can be four to 10 times more expensive than land-based wind farms. And because neither developers nor suppliers have a demonstrated track record in the U.S., the risk is that much greater – would-be lenders loathe nothing more than risk.

Deepwater’s Grybowski insists the challenges of U.S. offshore wind development can be resolved. “But they are tricky and require the agreement of regulators and multiple utilities, so it’s not an easy process,” he explains. “We are all working this out collectively for the first time now.”

 

One size fits all?

Looking to the future, what method is best for the development of an industry? Should there be two models (or more) that allow for variability among states or regions?

Because offshore wind projects come in all sizes, it is impossible to apply blanket statements.

“These development projects have an enormous number of moving parts and do not progress in a strictly linear way,” explains Jennifer Simon Lento, an associate at the law firm Nixon Peabody.

“A state’s choice to implement one model or the other is largely dependent on what model it has in place for regulating utilities’ purchase of power generally,” she says.

Jim Lanard, executive director
at the Offshore Wind Development
Coalition, says that since the revenue streams for offshore wind (and all renewable energy projects) originate through state policies, different approaches are to be expected.

“The bottom line for developers is the need for the adoption of state policies that ensure that developers can secure financing for their projects,” he explains. “Note that the policies in question relate to how developers are to be paid for the sale of electricity they generate and send to the grid in any particular state; the payment requirements for the purchase of electricity generated by offshore wind farms – whether through PPAs, ORECs or other means still to be identified – must be certain and enforceable.” w

Offshore Wind

Two Paths Taken For Procuring Offshore Revenue

By Mark Del Franco

New state-based models could provide an alternative to traditional power purchase agreements for offshore wind developers.

 

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