By Mike O’Boyle
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 already 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 capacity with 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 an 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 the European model
These states should thank Europe for kick-starting the offshore wind growth engine. Thanks to the countries around the North Sea, we know offshore wind can generate cheap, reliable, clean energy at a massive scale, providing a model for the Northeast U.S. and other states with great offshore wind resources.
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 bids in Germany.
Source: WindEurope, The European offshore wind industry – key trends and statistics 2016
In fact, today’s U.S. market looks remarkably similar to Germany’s 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 2009–2016 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.
Europe now has more than 15,000 MW of offshore wind capacity, and its economies are benefitting from new unsubsidized contracts while a new fast-growing industry has taken root. From 2007 to 2014, European Union offshore wind sector employment increased from 6,370 jobs to 75,000, according to the International Renewable Energy Agency (IRENA). The European Wind Energy Association predicts that offshore wind jobs will reach 129,000 by 2019.
Back in the U.S.A.
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. Combine just the 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 already yielded prices at about half of what Rhode Island paid for the Block Island wind project. Deepwater Wind, developer of Block Island, 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 are established and experience building offshore wind in the U.S. increases, we can expect prices to continue dropping.
Defenders of the status quo will point to near-term prices for offshore wind contracts and balk – and they will be correct that new contracts will raise prices further 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 are hemorrhaging 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.
Source: Database for State Incentive for Renewable Energy
But playing the long-game is key: Consistent offshore wind deployment is likely to yield price declines similar to the 85% drop in solar costs and the 50% decline in wind costs since 2009.
National Renewable Energy Lab’s groundbreaking Renewable Electricity Futures Study found that to reach 80 percent renewables in 2050, the U.S. would have to build at least 100 GW of offshore wind. This assumed few cost reductions from the 2013 status quo, and yet it was part of a portfolio of resources that resulted in costs similar to today’s. But knowing what we do now about the potential for rapid cost reductions, offshore wind could play a far larger role in helping to transform the U.S. grid.
Policy design still matters
Good policy strikes a balance between developer-friendly market development and customer costs. To ensure developers can get cheap financing for their projects, two kinds of risk can be addressed – project development risk and price certainty risk.
Long-term contracts provide vital price certainty for new industries, including offshore wind, by reducing financing risk. 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. When offering solicitations to independent companies to build a new power plant technology, regulators should offer at least 15-year contracts to bidders. New York’s master plan recommends 20-25 year contracts for offshore wind developers, while Maryland’s procurement of offshore wind renewable energy credits (ORECs) locked in prices with a 20-year contract.
To reduce development risk, there are two key factors, transmission access and siting requirements. 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. For example, two 1,000-1,200 MW transmission lines called Massachusetts Ocean Grid were recently approved by the Federal Energy Regulatory Commission. This could be expanded to a multi-state effort in the coming years to accommodate additional capacity. Coastal coal, natural gas, and nuclear plants slated to retire will also leave behind infrastructure to connect offshore wind to the grid.
Siting requirements for offshore wind involve interaction between several federal and state permitting processes, delineated by boundaries between state and federal waters. In the federal realm, the Bureau of Ocean and Energy Management, which leases federal offshore waters to developers, has used “Smart from the Start” criteria to create Wind Energy Areas (WEAs) where it has already found leasing would result in no significant environmental impacts, facilitating accelerated leasing and permitting. New such areas will be needed, for example, in New York, to accelerate leasing and meet the ambitious timelines outlined by its master plan.
Source: Energy Information Administration
Several projects such as Cape Wind have failed in the siting process; only one U.S. project has successfully navigated federal and state permitting requirements to the end. Department of Interior’s “Smart from the Start” initiative exemplifies the type of collaborative process needed to streamline state and local permitting for offshore wind facilities. Coastal communities are protective of their ocean resources, commercial fishing, and viewsheds. Knowing where the opposition can come from and getting ahead of it is crucial – and this can only come from engaging local communities and permitting authorities early on in the development process, while also pre-screening construction areas for environmental and commercial conflicts. Of course, state authorities can streamline this process by serving as liaisons between developers and local communities, facilitating meaningful collaboration.
Offshore wind is on the precipice of becoming a major player in the U.S. resource mix. 8,000 MW announced as of 2018 could be just the beginning – NREL has estimated the economic potential of just U.S. offshore wind is 20 times greater. Offshore wind can provide high-value power to the Northeast and beyond, due to its steady production, proximity to coastal cities, and relatively low siting conflicts. The key to realizing this potential will be consistent policy support – consumers, laborers, and the climate should benefit in the long-term.