The US offshore wind industry is on the verge of becoming a major national industry, according to the Business Network for Offshore Wind, but in a new report it has warned that immediate investment is needed in the US supply chain so as to offset the steady reduction of the Investment Tax Credit and to minimize reliance on the European supply industry.
In April, the US Business Network for Offshore Wind, in conjunction with Société Générale, a French multinational banking and financial services company headquartered in Paris, held a workshop with offshore wind experts focused on investigating the needs of the finance industry and thus improving investment into the US offshore wind sector. The findings of the report are many, but one important issue stands out. Specifically, despite the US federal government issuing offshore leases worth up to 17 gigawatts (GW) of offshore wind capacity, significant investment is needed to scale up the US offshore wind supply chain so as to avoid the high costs associated with shipping components from Europe.
This is specifically important as the Investment Tax Credit — more accurately, the Business Energy Investment Tax Credit, which in 2016 provided developers with a 30% tax credit — is scaling down 6% each year until it phases out in 2020. As the authors of the report explain, “The winding down of the US federal production tax credits (PTC) and investment tax credits (ITC) will change the medium term future balanced cost of capital for US offshore wind projects.
“However, again underscoring the importance of the US businesses, the expectation that the potential for the shortfall in savings from the low cost of tax equity is to be offset from a more robust, efficient domestic US supply chain. The next phase is ensuring adequate financing with the appropriate finance instruments to support development of the project pipeline.”
The tax credit for large-scale wind is down to 18% in 2018 and will be 12% in 2019, before fading out entirely, and reliance upon an overseas supply chain for the necessary components to develop offshore wind — larger and built for heavier weather conditions than the onshore supply chain that exists in North America — will only create an economically inefficient market just when the industry is on the verge of solidifying itself as a major player and provider of clean, reliable, and consistent power.
“The US is in the most enviable position” said Ross Tyler, Strategy and Development Director for the Business Network, “The US has scale, the Europeans have developed the technology, and we have lease areas while States are beginning to issue power purchase agreements. We have the major building blocks, but the most important is the financing which cements them all together.”
In fact, over the past year or so, the US government has offered up leases that cover 13 offshore wind energy areas and potential capacity of up to 17 GW. The US Bureau of Ocean Energy Management (BOEM) also recently approved four site assessment plans as well as beginning the review process for a Construction and Operation Plan. The BOEM is also slackening the regulations that exist for planning and development — “simplifying marine buoys approval; reducing the length of time for geotechnical surveying results; and, allowing developers to incorporate an element of flexibility in its applications with a voluntary option to use a project ‘design envelope’.”
In addition, there is the recent activity in the country’s north-east, specifically the development of the 800 megawatt (MW) Bay State Wind offshore wind farm, as well as the smaller 200 MW Constitution Wind project — the former of which will supply clean electricity to the state of Massachusetts, and the latter to Connecticut.
All in all, existing potential capacity which is already in early stages of development is more than enough to support a robust supply chain in North America, and the government is even now moving forward with future lease areas in an effort to avoid a potential slowdown in the industry.
As such, the Business Network for Offshore Wind is making the case that investment for a US supply chain needs an increase in investment. However, according to the findings from the workshop held last month, the US financial market is potentially more conservative with respect to the contracting structures, but there is nevertheless still an appetite for investment.
“The timing is good, and we might expect increasingly competitive banks and expansive lending limits for debt, suitable for the offshore wind industry as more projects are completed,” said Chris Moscardelli, Director, Energy Project Finance, Société Générale.
Specifically, the report details the findings from the workshop, which found:
- European lenders are now comfortable with offshore wind technology – even new technology and debt financing can amount to 70% of capital expenditure.
- Bonds are beginning to be introduced into some European offshore wind projects.
- The suite of 20-30 European lenders, experienced with offshore wind, are involved and knowledgeable with the U.S. offshore wind market but are less familiar with the U.S. Tax equity.
- Capital markets have not replaced debt in the refinancing of the European projects. In contrast, the U.S. might witness earlier entry of the capital markets through institutional financing.
- A significant appeal to financing the U.S. offshore wind projects is the long, usually 20-year power purchase agreements, strengthening the revenue side.
- Unlike European projects that may have 12 or more interfacing contractors, the . equity and lending will remain more conservative with the construction structures, ideally looking for wrapped formations or with few contracts but managed by experienced, strong, project construction staff.
“It is clear that the U.S. offshore wind market is poised to accelerate but the unknown is at what speed,” the authors of the report concluded. In a way, only time will tell, because the potential is there and there are numerous benefits both now, and post-ITC expiry. Risk has diminished considering the success across the Pond in Europe, and continued technology cost declines will only further the potential.