Published on October 12th, 2016 | by Susan Kraemer0
Why US Offshore Wind Needs A 25-Year Investment Tax Credit
October 12th, 2016 by Susan Kraemer
State-of-the-art offshore wind is now on such a gigantic scale off the coasts of Germany, Denmark, and the UK that it will be difficult for the US to catch up: it has lagged decades behind. But the Obama Administration has tried, and the Clinton Administration can further overcome the obstacles.
Offshore wind is not like onshore wind. Because of the sheer physical size of the turbines, just a handful of highly specialized ships have evolved to serve the startup industry in the North Sea.
This handful of ships is shared by the entire industry in the EU. When anything goes down and needs repairing, delays in getting serviced is a serious cost of doing business. If the cable from your wind farm is accidentally cut by a straying tourist liner in the wrong path, you better hope no other wind farm has already booked the same repair this week. There is only one ship in the world able to take care of it.
In the US, obviously, because there is yet to be an offshore wind industry, we lack these specialized ships, so there is a supply chain deficit.
This ranges from the ship that lays the gigantic electrical cables, to the ship able to deliver the gigantic foundations for the towers holding the nacelle and blades, which go hundreds of meters under sea level to get anchored into the sea floor.
Chicken and egg problem:
The US can’t build enough offshore wind fast enough to create this supply chain. But it can’t build the supply chain unless there are enough offshore projects needing the supply chain. AND it can’t do ether with no policy certainty. And if there is one certainty in the US, it is that unlike for fossil fuels, (oil and gas leases on BLM lands have remained at $1.50 an acre since 1920) when it comes to clean energy there is no policy certainty.
Long term policy certainty is needed to grow offshore wind because offshore wind projects take longer to develop.
In the EU, support for the nascent offshore wind industry was reliable and long term. Tariffs were set and known and remained in place over predictable timescales. Only because legislators gave long term certainty to potential investors — along with aggressive nationwide climate and renewable energy targets as well as explicit price support mechanisms, such as feed-in tariffs — was the EU able to pioneer offshore wind.
EU offshore policy outlasts conservative rollbacks:
EU offshore wind support was not subject to change each time more conservative parties took power.
So the gigantic financial consortia needed were able to be assembled to finance this new and initially expensive industry, funding everything from project development to port infrastructure to ship building. Because of the size and distance, long leases are a prerequisite for offshore wind. One reason that the UK dominated offshore wind (with about 60%) was this certainty.
“The Crown Estate gives leases on the seabed for 40 or 50 years generally in Round 2 and 3 sites,” Taylor Roark, an experienced senior offshore wind consultant at TÜV SÜD PMSS told me.
“It’s an important step to regain investors’ confidence level in the market.”
The UK Contract for Difference (CfD) guarantees generators a fixed price for renewable electricity over a 15-year period — by subsidizing offshore wind’s initially higher price difference. The theory is that a fixed strike price over a long term boosts investor confidence ahead of financing decisions, making it possible to get financing.
Long term support enabled EU cost cuts:
European government support allowed the offshore wind industry to grow, which then enabled it to cut costs and thus, prices. North Sea offshore wind began at a — fully expected — very high price of 21 cents per kWh. But because of certainty in policy, financing became available to develop the industry, and it got built, and so cost came down with deployment (just as it has in solar and onshore wind).
This approach works. It brings down costs. DONG Energy just contracted for the lowest sale price ever at just 8 cents a kWh off the coast of Holland in the North Sea.
So the most serious obstacle to an offshore wind industry in the US (on a par with that of Europe) is the lack of policy certainty in the US.
(China may beat the US to offshore for this very reason. Five Year Plans are updated every five years and are at no risk of being filibustered or overturned by any “loyal opposition.” In 2015, China’s first nine offshore wind projects, including three at 300 MW, got financed at an estimated $5.6 billion.)
So what can we do about it? Is there a way around the broken legislative branch? To some extent, a proactive president can bypass congress: Under President Obama, by the end of 2015, the DOI had issued 11 commercial leases for a total of 15 GW of offshore wind.
But a lease solves only the first step. Getting a contract with a utility is the next problem, and at nascent industry prices, that’s a big hurdle. High prices initially have made it hard for a utility to justify.
And getting development financing is a bigger hurdle.
Putting together the financing of the 600 MW Gemini offshore wind farm took two years, to put together the largest consortium ever: of 22 parties including 12 commercial creditors, four public financial institutions, and one pension fund to raise the €2.8 billion in debt and equity it took.
Build it and they will come
Simultaneously developing — or bypassing — a supply chain is an even bigger hurdle. US-startup Principle Power got approval from the Bureau of Ocean Energy Management (BOEM) and $47 million from the Department of Energy to help finance a 30 MW wind farm off of Coos Bay in Oregon, marking the first US West Coast offshore wind farm, and the first floating platform, and overcame the issues with the lack of a supply chain.
Floating foundations solve a lot of the supply-chain problem related to weight.
Dominique Roddier who was then the technical head told me: “We don’t need the big offshore cranes to install turbines. We do everything at the site. What that means is there’s very little infrastructure that’s required.”
To lay the cable they had planned to use US-based oil-industry supplier Nextant. The offshore oil industry is the best bet for some aspects of a US supply chain.
“WindFloat eliminates all the issues with the Jones Act that exist in the United States,” then CEO Alla Weinstein told me.
“We can just use what there is.”
For example, Weinstein planned to deliver the huge 6 MW Siemens turbines shipped by sea, and then they would be installed on the WindFloat at the shipyard, using existing gantry hoists.
(The Jones Act is another deterrent, which forbids the use of foreign ships in US waters, so even if the EU’s purpose-built ships were willing to leave the North Sea to come help US, there are legal obstacles.)
But Principle Power was unable to get a PPA, because the projected cost of the first floating offshore wind was too expensive, and has since abandoned project development to focus on being a floating platform supplier (thus becoming an essential component of a US supply chain. Most of the US offshore wind potential is in deep water, which is only accessed economically using floating platforms)
Alla Weinstein moved on to found Trident Winds as the offshore wind developer and is trying again — on a more ambitious scale than the 30 MW Oregon proposal — this time looking for a federal lease to install 765 MW in a 100 turbine wind farm using state-of-the-art 7 or 8 MW turbines and supporting them on either Statoil’s Hywind or Principle Power’s Wind Float floating platform.
Both companies’ floating platforms have been tested in the EU. The Wind Float was just decommissioned after testing a 2 MW turbine since 2011 off the coast of Portugal.
This offshore wind farm would be anchored 30 miles out — and out of sight — from the coast at Morro Bay in Central California. The planned operation date is 2025, which is enough time to put together the large consortium of financiers needed and make it through the minefield of California permitting.
Rhode Island’s Block Island Wind Farm, now complete and expected to be delivering power by late 2016, is only 30 MW.
But this first US offshore wind project took eight years. And even that was only shortened by the Obama Administration’s determination to expand offshore wind by streamlining permitting through a complete overhaul of the agencies regulating offshore wind.
The work accomplished by Obama solved step one; researching and opening up offshore waters for wind leases.
Why a 25-year Investment Tax Credit for offshore wind
Encouraging investment, reducing the initial price, and developing a supply chain is needed to cut the cost of offshore wind.
We’ve done this before. An example is available from the solar industry. The eight-year extension of the solar Investment Tax Credit (ITC) is widely credited for the radical drop in US solar prices, by spurring solar deployment in the US from 14 MW in 2008 to 28,000 MW by 2016.
The solar ITC worked by de-risking the then-nascent solar industry for early bird investors.
An Investment Tax Credit for the first movers in financing offshore wind could have a similar effect and similarly grow offshore wind. But the policy has to be long term, as offshore wind projects and the supply chain to build them take longer to be developed and financed. So long term certainty — more than eight years — is needed.
A 25-year ITC would reduce the price of the first offshore wind per kWh, make investing in a supply chain attractive, and encourage project investment, by offering investors a similar incentive. While solar PV was able to make its steep price drop with an 8-year time frame, offshore wind will need longer. But it is the same principle.
Amit Ronen, who was an energy staffer to Maria Cantwell during the strategizing towards the eight-year solar ITC once suggested to me that (with some tradeoffs) a modified ITC like this could get bipartisan Senate approval.