With advance of tax credit and OCS leases, optimism builds in nascent U.S. industry

Source: Phil Taylor, E&E reporter • Posted: Monday, August 13, 2012

Officials in the offshore wind industry are cheering a series of moves by Congress and federal agencies that have raised hopes that wind farms could soon sprout in U.S. waters.

While construction of the first turbines off the Eastern Seaboard is likely years away, industry officials say the Senate Finance Committee’s decision this month to extend the investment tax credit, combined with continued approvals of projects and lease areas from federal agencies, has sent a strong signal to potential investors.

Significant steps include:

The Interior Department said it plans to offer its first competitive lease for offshore wind by the end of the year in the mid-Atlantic, a sale that could set a template for East Coast development.

The Army Corps of Engineers in mid-July issued final approval for Fishermen’s Energy to begin construction of a 25-megawatt facility in state waters off the New Jersey coast, making it the second commercial-scale facility to navigate the federal permit process (Greenwire, July 20).

Industry officials say the Energy Department by next month could announce the winner of up to $20 million to support the first of four innovative offshore wind installations.

That’s good, said Jim Lanard, president of the Washington, D.C.-based Offshore Wind Development Coalition, because the United States has a lot of catching up to do to match the 1,371 turbines and 53 offshore wind farms that have already been built in Europe.

“It’s time to put steel in the water,” said Lanard, praising the Finance Committee for extending the ITC. “We need the investment tax credit.”

The committee’s bipartisan 19-5 vote brightened prospects that the measure will pass the Senate when it returns from recess next month, though the outlook is dimmer in the House, Lanard said.

Under the Senate bill, the credit would be extended one year from its current expiration in December. But projects would also qualify as long as they have started construction, a significant break from current rules that require projects to be placed into service to qualify (E&E Daily, Aug. 3).

Effects of the credit

If passed, the extension could help firms like Fishermen’s Energy and Deepwater Wind LLC, which has proposed a separate 30 MW project in state waters off Rhode Island, Lanard said. It could also boost the long-delayed — and litigated — 420 MW Cape Wind project off the coast of Cape Cod, Mass.

While other proposals are likely too far off to qualify, keeping the ITC in the tax code will make future extensions easier to defend, Lanard said.

Although industry also cheered the committee’s decision to extend the production tax credit, experts note the PTC is harder to assess for offshore wind farms because they lack the operational history of onshore facilities. Whereas the PTC is based on power produced — it offers 2.2 cents per kilowatt-hour — the ITC allows developers to receive a 30 percent tax credit in lieu of the PTC.

“We could extend the PTC until the cows come home, but that’s not going to build one offshore wind farm,” said Sen. Tom Carper (D-Del.), who has authored a bill with Sen. Olympia Snowe (R-Maine) to extend the ITC to the first 3,000 MW of offshore wind facilities to go into service.

“You need an investment tax credit,” Carper said. “If you look at my top three priorities for taxes and legislation going forward, probably my number one would be that. Number two would be that. Even number three might be that.”

Extension of both incentives is less certain in the House, where many Republicans have opposed continued subsidies for green energy. In addition, GOP presidential hopeful Mitt Romney — who opposed the Cape Wind project while governor of Massachusetts — last month came out strongly against extending the PTC.

“Wind energy will thrive wherever it is economically competitive, and wherever private sector competitors with far more experience than the President believe the investment will produce results,” Romney’s campaign said in a statement at the time (E&E Daily, July 31).

But Mary Doswell, senior vice president of Alternative Energy Solutions at Dominion Resources Inc., said the ITC is critical for offshore wind, which the Energy Information Administration predicts will cost about 24 cents per kilowatt-hour generated in 2016, far higher than onshore wind farms or conventional fossil fuels.

“The costs are so much higher today that you need to provide some incentive to help get this going,” Doswell said.

For one, there is no established supply chain in the United States for offshore wind, and some equipment and ships must be imported from Europe, which creates potential complications with a law requiring use of U.S.-owned and -operated ships, Doswell said. In addition, offshore turbines and associated transmission represent steep upfront costs, and it is unclear how the facilities will operate, particularly during hurricane season, she said.

“From a supply chain perspective, once the industry becomes more established, we will see certain reductions as we move forward,” she said. “The challenge is how you get the first thousand megawatts — at least — installed where you are starting to attract players that will invest in the market here, and then also see a pipeline of projects so they would hang around.”

She added, “To Dominion, we don’t want to just sit down and say, ‘All right, call us when the cost comes down.’”

Virginia first in federal waters?

One of the first steps in developing a wind farm is installing meteorological towers to more accurately gauge the resource, Doswell said.

That process could happen quite soon, as Interior’s Bureau of Ocean Energy Management later this year plans to offer the first of a handful of leases covering roughly 2,400 square miles off Virginia, New Jersey, Maryland, Massachusetts and Rhode Island. It is also assessing noncompetitive leasing proposals off Delaware and Maine. Most areas are more than 10 miles off the coast, which will help minimize conflicts over coastal views that have dogged the Cape Wind project.

Dominion earlier this year told Interior it is interested in buying leases on the agency’s 176-square-mile wind energy area off Virginia Beach, Va., which it believes could potentially generate up to 2,000 MW.

That is a tiny sliver of the roughly 1 million MW of offshore wind power the Atlantic is believed to contain — about as much electricity as the entire country consumes. DOE estimates offshore wind investments could reach 54,000 MW by 2030.

Lanard predicted the first area to be leased will be Virginia, whose wind energy area about 25 miles off the coast attracted interest from eight companies earlier this year. The winning bidder obtains the exclusive right to assess the site and submit a project development plan.

If it wins, Dominion would install a wind data tower within the next year or two to help confirm the resource, Doswell said. Few meteorological towers have been installed in the United States.

BOEM this summer released draft auction rules and is expected to issue a proposed sale notice next month, Lanard said.

“It’s good news because it will really get some momentum going,” Lanard said of the first competitive lease. “It will get companies thinking about whether they want to bid in Virginia or at least understand what it’s going to take to bid somewhere else.”

Interior streamlining

Lanard said Interior also deserves praise for establishing an efficient template for approving lease sales in the Atlantic Ocean. The agency finalized its first handful of wind energy leasing areas using environmental assessments rather than environmental impact statements — which could have added years to the process.

“That is a huge success,” Lanard said. “BOEM is to be credited for making sure it didn’t set a precedent. … Environmental groups are comfortable, developers are comfortable.”

Indeed, environmental groups have rallied around offshore wind, even though some have opposed land-based projects amid concerns over their impacts to wildlife.

“There are steps the administration has taken to streamline the [offshore wind] process to make it quicker and not lose the integrity of the environmental review, and we support those efforts,” said Courtney Abrams, federal clean energy advocate for Environment America. “Conservation groups and advocates across the board are standing together in support of offshore wind — sometimes that’s not the perception in media around local project development.”

In a letter last month to the president, Environment America and more than 200 other environmental groups, businesses and local officials urged continued efforts to renew the ITC, review and approve wind energy areas and projects, and standardize a lease auction format.

Interior in the past week alone has announced it will begin reviewing a proposal by Statoil North America to build a 12 MW floating wind farm in deep water off Maine, a first-of-its-kind proposal in the United States, and a separate transmission proposal by Deepwater Wind to connect its Block Island wind project off Rhode Island to the mainland (Greenwire, Aug. 9; E&ENews PM, Aug. 7).

Still, skeptics of Interior’s offshore wind energy program, known as “smart from the start,” include the Institute for Energy Research, a think tank led by a former oil industry lobbyist, which last month criticized the cost of new projects.

“It is ‘dead in the water’ because offshore wind energy is 3.4 times more expensive than onshore wind energy,” the group said in a July 26 blog post, “making it not a prudent investment compared to other renewable alternatives for electricity generation.”

DOE grants

But Lanard said the industry also expects DOE to soon announce the winner of a $20 million grant to help jump-start construction of innovative wind projects.

The agency said it will eventually make $180 million available — subject to appropriations — to address challenges associated with installing utility-scale offshore wind turbines, building transmission and receiving federal permits.

The grants are “only to be used to put steel in the ground,” said Lanard, adding that he expects the first winner to be notified this month and announced publicly in September.

The $20 million represents about 10 percent of what a 25 to 30 MW pilot project would cost, he estimated. Larger wind farms are expected to achieve significant economies of scale.

Both Deepwater Wind’s Block Island project in Rhode Island and the Fishermen’s Energy project in New Jersey are considered contenders for the award. Each has advanced significantly in the development process — Fishermen’s project is fully permitted, while the Deepwater proposal has a power purchase agreement with National Grid, which could help it obtain permits.