Author Archives: Carson Robers

U.S. Offshore Wind Current Progress and Cost Drivers

Though the offshore wind (OSW) industry in the United States has lagged behind Europe, given the   commitment by policymakers to support the development of the industry and allow the realization of economies achieved in Europe, future prospects for the industry appear bright. The purpose of this report is to summarize the short history of offshore wind in the United States, outline the current state of the industry, and then consider the cost drivers that will shape the industry in the future.

Figure 1: US Offshore Wind Value Proposition[1]

Industry History

One of the groundbreaking, albeit controversial landmarks in the U.S. offshore wind industry was the Cape Wind Project. Cape Wind submitted an application in 2001 to the US Army Corps of Engineers (USACE) to construct a met tower. Though the USACE gave Cape Wind permission to build a met tower, the Energy Policy Act of 2005 shifted Federal authority to the Department of the Interior, which slowed the project’s progress. For the next decade, Cape Wind faced numerous obstacles, including determinations that the planned site in the Nantucket Sound qualified as traditional cultural, historic and archaeological property. Cape Wind’s power purchase agreements provided a price of $187/MWh, escalating at 3.5% per annum for 15 years.  In January 2015, National Grid and Northeast Utilities notified Cape Wind that they were terminating their power purchase agreements (PPAs) given the project hadn’t achieved its financing and construction initiation milestones in the PPAs. Cape Wind was planned to total 468 MW, with these two PPAs covering about 75% of its capacity.

Avoiding many of the regulatory hurdles of its predecessor, but requiring legislative changes to the regulatory standard for approval of its PPA, Block Island Wind Farm (BIWF) began construction in 2015, and became the US’s first operational offshore wind farm in December 2016. It is located 3 miles off of Block Island, in Rhode Island state waters. The project includes 5 turbines, capable of producing 30 MW. BIWF signed a 20-year PPA with National Grid for its full output, set at $244/MWh for the first year of commercial operation with an annual escalation of 3.5 %. One factor contributing to the project’s support is that it connects Block Island to the New England grid, allowing it to avoid high cost diesel generation that the island otherwise relied upon.

Current Developments

Leases for OSW have been issued in Massachusetts, Delaware, Maryland, Virginia, New Jersey, North Carolina, and New York by the Bureau of Ocean Energy Management (BOEM).[2]These states are leaders in promoting the development of an OSW industry, with the greatest activity in Massachusetts, New York, and Maryland.  Activities in each are reviewed below.

Figure 2: US Atlantic Offshore Wind Projects and Lease Areas[3]

*National Grid area represents electric cable from Block Island Wind Farm

The Massachusetts investor-owned electric distribution companies issued a Request for Proposals (RFP), seeking long-term contracts for 400 MW and up to 800 MW of OSW generation. Proposals are due December 20, 2017. This RFP is open to the three-existing wind energy area leaseholders: Deepwater Wind; Bay State Wind LLC (Dong Energy and Eversource); and, Vineyard Wind (Copenhagen Infrastructure Partners and Avangrid Renewables). This will be the first procurement in response to the state’s legislated goal to reach 1,600 MW of OSW development by 2027.

Because more than one party expressed interest in securing leases for the two remaining Massachusetts lease areas within the Massachusetts Wind Energy Area (WEAs), BOEM will hold a lease sale auction in late 2017 or early 2018. BOEM has yet to announce the specific auction date. These lease areas are adjacent to those that are expected to bid in the first Massachusetts RFP, though they are further from shore and have the greatest average water depths. The two lease areas to be auctioned are 248,015 acres and 140,554 acres, which can support a maximum of approximately 4,717 MW of OSW generation. Winners of these leases will be eligible to bid into the second auction for long term contracts in Massachusetts.

BOEM has also issued two leases off New Jersey, whose legislature has authorized the sale of 1100 MW of OSW to be purchased by the state’s electric distribution companies through Offshore Renewable Energy Credits (ORECs).  The NJ Board of Public Utilities has been developing the rules for these Ocean Renewable Energy Credits for several years.

Off the coast of Maryland and Delaware, two projects have recently been awarded ORECs in response to the state’s 2013 RFP for offshore wind. US Wind LLC has outlined a proposed 62 turbine, 248 MW wind farm, to be connected to the Indian River Substation in Delaware and operational in 2020. Skipjack Offshore Wind, a subsidiary of Deepwater Wind, has proposed a 15 turbine, 120 MW wind farm to be connected to the Ocean City, Maryland substation and operational in 2022. Maryland has issued unbundled ORECs to US Wind LLC and Deepwater Wind Skipjack. US Wind bid a first year OREC price of $201.57/MWh or a levelized price of $177.64/MWh (2012$) and Skipjack an OREC price of $166.0/MWh or a levelized price of $134.36/MWh (2012$).  A 1% price escalator will be applied to these first-year prices for the next 20 years of each project’s operation.[4]  In addition to the revenues from these ORECs, the projects will realize production tax credits and energy and capacity market revenues.  These energy and capacity market revenues are likely to represent a value of about $50/MWh.

Figure 3 summarizes US OSW PPA pricing to date by project vintage. Recent European PPA prices are also reported for reference.

Figure 3: US Offshore Wind PPA Pricing[5]

* Cape Wind PPAs terminated do to a failure to achieve financing and construction milestones.

**Average adjusted strike price and average capacity for 2023-2025 projects in the Netherlands, Denmark and Germany from NREL 2017.

Already, there is some evidence of PPA price reductions in the US market.  However, trends are masked by varying competitiveness of RFP processes; in particular, the Maryland process where it appears that US Wind was able to capitalize on its position as the sole leaseholder in Maryland. Future reductions will be driven by the factors discussed in the next section.

Cost-Driver Analysis: 4 Main Drivers

  1. Site Evaluation and Characterization

While potential sites for offshore wind in the US share some characteristics with those of the more mature European market, there are major differences. Sites in the US lack critical data about geological, oceanographic, and meteorological conditions, which increases the initial development risks of OSW projects, and therefore the costs to finance them. With the development of additional projects and collection and verification of data the uncertainty associated with these variables and the impacts on project costs and performance would fall.

  1. Technological Advancement

Continuing research and development to produce larger, more cost-effective equipment (including wind turbine generators, which benefit from European experience, and foundations) will be necessary to further decrease costs. This applies to adapting and advancing existing technologies from Europe, developing new technologies, and creating new installation techniques.

Currently, 75% of the world’s deployed offshore wind resources use monopile fixed-bottom structures, which may not be feasible for water depths of greater than 60 meters. As more than 58% of the US’s technical resource capacity is located at water depths greater than 60 meters, many new projects will use lattice steel foundations installed at the Block Island Wind Farm and pioneered by the oil and gas industries and floating foundation technology anchored to the seabed with tension anchor chains. Floating foundation technology is just being constructed in Europe. Norwegian energy giant Statoil is scheduled to connect the first floating wind farm in late 2017 with their 30 MW Hywind farm[6], with 237 MW expected to be fully installed globally by 2020[7]. Currently, floating offshore wind accounts for 7% of the known global pipeline[8], making future developments in this area likely.

Higher capacity turbines offer significant reductions in OSW LCOEs. The Block Island Wind Farm utilized 6 MW WTGs, compared to current turbines produced in Europe that can produce upwards of 9 MW and 10 and 12 MW turbines in design. Capacity factors will also rise with larger rotor diameters and improved accessibility to turbines for maintenance, as this will decrease their downtime. Improved accessibility is an especially important consideration on the Pacific Coast, where ocean conditions are generally rougher than those on the Atlantic Coast.[9]

Technological developments will enable the integration of turbine and substructures to create a single system that will enable design optimization that will drive further cost reductions. Installation cost would also fall as more specialized vessels suited for installation are deployed in the US. Such vessels currently exist in Europe, but are not available in the US due to limited market that hasn’t justified the construction of such vessels. As turbines and rotors become larger, these vessels become more important.

As for operating expenses, cost reductions will occur with improvements in turbine reliability and monitoring technology that will allow operators to identify problems in real-time, keeping resources operating longer and at higher availabilities.

  1. Supply Chain Development

Not surprisingly, there are significant gaps in the current US OSW supply chain that prevent the realization of cost savings being achieved in Europe. Currently, the US supply chain is not well inventoried, and lacks necessary workforce, port facilities, and vessels needed to support a robust and efficient industry.

Geographic concentration of the supply chain would further reduce OSW costs, as proximity decreases transportation costs and fosters better communication between supply chain members. This “clustering” strategy also allows for more robust project management and top-to-bottom collaboration on wind energy projects[10].

Almost all of the OSW components, including rotors and turbines, are currently manufactured in Europe. Specialized equipment for installing offshore wind turbines, like installation vessels, are also often only available from European firms, resulting in high costs. Desired investments in the supply chain that will realize these cost savings will occur, if there is a visible, stable development pipeline.

4. Market Visibility

Market visibility is a commitment to the steady procurement of a pipeline of OSW projects over a defined period of time. Greater market visibility would reduce costs for OSW for two main reasons. First, more entrants will be attracted to the market, increasing competition and lowering their bargaining power. Second, as projects get relatively less risky, investors with a lower hurdle rate may be drawn to invest when they had not previously. A visible pipeline of projects can reduce capital, maintenance, and insurance costs and is critical to ensuring that these costs are minimized.  Construction of turbine manufacturing facilities on European coastlines have reduced the levelized cost of OSW below $100/MWh. The lack of certainty around the US PTC and how this frustrated the development of US onshore wind energy supply chain is a relevant warning. Per the 2015 extension of the PTC it is to be phased on it steps by 2020, so that the value in 2017 is 80% of the initial $0.023/kWh value, 60% in 2018 and 40% in 2019. Also, by generating repeated investments from equity investors with knowledge of the renewable energy sector, WACC could be lowered, reducing the cost of equity and debt.

Conclusion

Though the U.S. OSW market has taken longer to develop than its European counterpart, its future prospects are promising.  The comparatively high OSW costs in the U.S. reflect the immaturity of the industry; however, by adopting best practices from Europe and committing long-term to OSW development, the U.S. can drive costs down significantly. Coupled with future technological innovation, the U.S. OSW industry is well-positioned to represent a cost-effective source of clean energy.

Power Advisory would welcome the opportunity to assist clients in assessing opportunities in the US offshore wind market, especially the upcoming BOEM Massachusetts and NY lease sale auctions, submission of comments on the 83C RFP, and participation in subsequent solicitations.

A PDF version of this report is available here.

[1] US Department of Energy and Department of the Interior, National Offshore Wind Strategy, 2016

[2] Norton Rose Fulbright, US Offshore Wind, 2017

[3] BOEM 2016

[4] US Department of Energy: Offshore Wind Technologies Market Report, 2016

[5] Power Advisory analysis of various public orders and studies. Size of marker represents the relative nameplate capacity

[6] Statoil: Hywind Scotland

[7] Bloomberg: Race to Build Offshore Wind Farms That Float on Sea Gathers Pace, 2017

[8] NREL: Offshore Wind Energy Resource Assessment for the United States, 2016

[9] US Department of Energy and Department of the Interior, National Offshore Wind Strategy, 2016

[10] Clean Energy Pipeline, Offshore Wind Project Cost Outlook, 2014

European Offshore Wind Cost Reductions & Implications For North America

The cumulative capacity of global offshore wind (OSW) has grown at a dramatic rate in recent years, increasing by 25-40% annually since 2011. Due to increasing industry maturity and the development of a specialized supply chain to support the industry, realization of economies of scale, and other factors, the levelized cost of energy from OSW has decreased significantly, which is an encouraging sign for development of this industry in North America.

This report illustrates how European OSW projects have realized dramatic cost reductions, and how the emerging US OSW industry can benefit from this experience. The European OSW industry started over twenty years ago, and currently has over 12,000 MW in commercial operation, while the US only installed its first 30 MW project late last year. With an installed fleet of 3,589 OSW turbines and larger turbines being offered by OSW turbine manufacturers, European projects are offering prices, before consideration of transmission costs, that are competitive with forecast wholesale market prices, promising a market that is sustainable and not dependent on government policy support.

download energy report

Massachusetts 83C RFP For Long-Term Offshore Wind Energy Contracts Issued

John Dalton, President & Carson Robers, Consultant, Power Advisory LLC

With approval from the Department of Public Utilities earlier in the week through D.P.U Order 17-103, the Massachusetts electric distribution companies issued a Request for Proposals for Long-Term Contracts for Offshore Wind Energy Projects on June 29, 2017. This kicks off the first in a series of competitive solicitations under Section 83C of Chapter 169 of the Acts of 2008 for 1.6 GW of offshore wind (OSW) capacity by June 2027.

Three existing Bureau of Ocean Energy Management (BOEM) Massachusetts lease holders – Deepwater Wind, Bay State Wind LLC (DONG Energy and Eversource), and Vineyard Wind (Copenhagen Infrastructure Partners and Avangrid Renewables) – meet the definition of an eligible bidder and are expected to submit proposals by the December 20, 2017 deadline. Proposals are required for the target capacity of 400 MW, with both a project specific generator lead line and expandable transmission option. Additional proposals between 200 MW and 800 MW may also be submitted, but proposals with project capacities greater than 400 MW must be determined to be superior to other proposals, as well as to likely offer significantly more economic net benefits to Massachusetts ratepayers than procuring this capacity through subsequent solicitations.
TIMING OF SOLICITATION Although the DPU also reviewed the method for solicitation and execution, the timetable was the only component of the RFP where changes were directed. A one-month reduction in the evaluation period by and three-month reduction in the selection and contract negotiation periods by was directed by the DPU. This change reflects commenters (including Bay State Wind) and DPU contentions that acceleration will maximize ratepayer and environmental benefits.

The scheduled phaseout of the 2.3 ¢/kWh Production Tax Credit (PTC) primarily motivated this timing decision. Each year from now through 2019 the PTC is reduced by 20%, so that the amount for projects initiating construction in 2017 is 80%, 2018 60% and 2019 40% of the full amount, after which it is no longer available. Completing the solicitation in the middle of Q3 instead of Q4 2018 increases the chances that the successful proponent(s) will qualify for the PTC. Find the revised schedule below.

Overall the accelerated schedule is expected to result in lower development costs and increased project viability, with projects online sooner and offering more benefits than under the initially proposed RFP. The effect of the four-month schedule advancement is largely a greater likelihood of the successful proponent being able to capture the PTC available in 2018, but the change supports the development of US offshore wind industry. To realize cost reductions that have been achieved in Europe’s OSW industry, the supportive policy environment offered by policymakers and regulators in states like Massachusetts are essential.

Power Advisory would welcome the opportunit y to assist clie nts in assessing opportunities in the nascent US offsh ore wind market, especially the upcoming BOEM Massachusetts WEA lease sale auctions , participation in subsequent 83C solicitations, and submitting comments on this RFP.

A PDF version of this commentary is available here. 

NYSERDA Tier 1 REC RFP Review

New York State Energy Research and Development Authority (NYSERDA) issued a Request for Proposals to purchase approximately 1.5 million Tier 1 (Tier 1 is equivalent to Class I as the term is used in New England) Renewable Energy Credits (RECs), about 430 MW at a 40% capacity factor.

RFP Schedule: Key Dates

Read Power Advisory’s full review of the NYSERDA RFP here.

Massachusetts Offshore Wind Energy Area Lease Opportunities

On April 28, 2017 the Massachusetts Electric Distribution Companies (EDCs) jointly submitted a request for approval of the 83C Request for Proposals (RFP) for long-term contracts for 400 to 800 MW of offshore wind energy generation to the Massachusetts Department of Public Utilities (DPU). This draft RFP contains a schedule that calls for the final RFP to be released on June 30, 2017.

It is expected that the three existing Bureau of Ocean Energy Management (BOEM) Massachusetts lease holders, Deepwater Wind, Bay State Wind LLC (DONG Energy and Eversource), and Vineyard Wind (Copenhagen Infrastructure Partners and Avangrid Renewables) will submit bids, with one awarded a long-term contract. Given the additional capacity to be procured under the Massachusetts legislation of 800 to 1,200 MW and nascence of the U.S. offshore wind market, there is a significant opportunity for offshore wind development in the Rhode Island-Massachusetts and Massachusetts Wind Energy Areas (WEAs).

This client note discusses the upcoming MA lease auction, potential WEAs and past BOEM auctions.

Power Advisory would welcome the opportunity to assist clients in assessing offshore wind opportunities in RI-MA and other Atlantic markets, including the implications of such development on transmission and on-shore resources.

Read “Massachusetts Offshore Wind Energy Area Lease Opportunities” here.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Atlantic Link Begins Open Access Solicitation Process, Power Advisory to Serve as Independent Administrator

Power Advisory LLC has been engaged by Emera as independent administrator for the Atlantic Link project’s energy solicitation, which was issued yesterday (January 11, 2017). The intent of this call is to select energy resources to be bundled with transmission in response to the Commonwealth of Massachusetts’ anticipated 2017 clean energy RFP. As independent administrator, we will provide assurance to proponents and the Federal Energy Regulatory Commission (FERC), as to the fairness and transparency of activities related to the Atlantic Link energy solicitation.

To access complete solicitation information parties can register on the project’s website. A notice of intention to participate is due by January 20, 2017; after which Power Advisory and Emera will jointly host a participant conference in Nova Scotia and via WebEx. Qualified participants will have until April 12, 2017 to submit proposals. The tentative solicitation schedule can be found below.

Atlantic Link Energy Solicitation Issued January 11, 2017
Notice of Intention to Participate due January 20, 2017
Mutual Confidentiality Agreement Due January 20, 2017
Participant conference (Meeting in Halifax, NS + WebEx) January 25, 2017
Deadline for submitting written questions February 8, 2017
Responses to questions posted to web site February 20, 2017
Individual meetings with proponents Week of February 20, 2017
Deadline for Proposals, by 3:00 pm (EST) April 12, 2017
Proposal Evaluation Period (estimated) May 10, 2017
Notification to Proponents (estimated) May 10, 2017
PPAs executed June 9, 2017
Projects in-service by Q4, 2022

Per the solicitation notice proposals will be evaluated and ranked on : offered price for sale of energy; evaluated cost of energy to the Atlantic Link terminus in New Brunswick, cost to firm the energy offered, maximization of the utilization of the transmission capability of the Atlantic Link, firmness of energy, energy source and resource mix, the proponent’s capacity to deliver the energy offer, financial capability and relevant experience, the proponent’s plans for community engagement and environmental approval plan, and the likelihood of successful execution of an Indigenous People’s declaration and plan.

Q4 Market Report: Pendulum Swinging to Markets – Will Ontario Get it Right?

Power Advisory LLC Q4 Ontario Market Report now available.

Over the past few months, there has been much concern (and justifiably so) over rising electricity costs to Ontario’s customers. In part due to this concern, the Ontario Government suspended the Large Renewable Procurement and just announced cancellation of the last round of procurements under the Feed-in Tariff Program. Clearly, there is now heightened awareness to cut costs within Ontario’s electricity sector.

We believe these cost issues are pushing the Ontario Government to find avenues towards potential resolutions, and one of these avenues is the Independent Electricity System Operator’s (IESO’s) Market Renewal Initiative. This is evident based on the Ministry of Energy’s remarks at the Association of Power Producers of Ontario’s annual banquet on November 15, 2016 and then at the November 28, 2016 Empire Club of Canada luncheon.

While Ontario’s wholesale electricity market should evolve through the Market Renewal Initiative, many Ontario-specific conditions and factors must be taken into account. First, Ontario’s Climate Change Action Plan will serve as a foundation within the forthcoming Ontario Government’s revised Long- Term Energy Plan which will set electricity policy. Therefore, evolution of Ontario’s wholesale  electricity market must result in outcomes to meet policy objectives. Second, Ontario’s supply mix is heavily ‘baseloaded’ with a very high concentration of non-emitting resources with high fixed costs and low marginal costs. We believe this supply mix will pose unique challenges to evolve Ontario’s wholesale market design, and therefore somewhat limiting application of some components of the U.S. wholesale market designs. Because of these challenges, any wrong turns in the evolution of Ontario’s wholesale market could actually result in higher costs to Ontario’s electricity ratepayers – so let’s take the time to get it right!

Commentary on Alberta’s November Announcements of a Capacity Market and Coal Phaseout Now Available

On November 23, the Government of Alberta announced its intention to create a capacity market within Alberta’s wholesale electricity market, and released a detailed Alberta Electricity System Operator recommendation paper titled Alberta’s Wholesale Electricity Market Transition Recommendation that provides background and support for the changes being made.
The Electricity Market Transition Report can be found here.

Power Advisory’s summary and commentary on the Government of Alberta announcements is available below.

download energy report

The following day, the Government announced it had concluded agreements with the coal-fired generation facility owners to cease operation by 2030. These developments are part of fundamentally defining a different path going forward for Alberta’s electricity sector than the one it has been following for almost the past 20 years.
The Coal-Fired Generation Agreement Announcement can be found here.

Power Advisory’s summary and commentary on the Capacity Market Recommendation report is available below.

download energy report

Mass Clean Generation RFP Gathers Steam

Transmission developers are moving quickly to prepare to participate in the forthcoming Massachusetts Clean Generation RFP including Anbaric/National Grid (Vermont Green Line) and Emera (Atlantic Link), as the recently released working schedule indicates a proposal submission deadline of June 2, 2017.

For an update on these transmission projects and the full Mass. Clean Energy Generation RFP schedule view the client note here.