On October 29th Bureau of Ocean Energy Management conducted its Gulf of Maine (GoM) auction offering 8 lease areas for sale as shown in the graphic below. As you’ve no doubt heard, only four of these lease areas were sold to two bidders: Avangrid Renewables and Invenergy for $4.8 to $6.2 million. The fact that only half of these lease areas attracted bids is somewhat surprising. This appears to reflect concerns with political uncertainty and the perceived risk of a change in administration that’s openly opposed to offshore wind development. Under such a scenario, successful bidders would face the risk of not being able to mature their lease areas recognizing that Site Assessment Plans that must be approved by BOEM. As a result, the lease holder would have to carry the cost of its auction payment and annual rental payments (i.e., about $300,000 per year) conceivably for a minimum of an additional four years. From the perspective of an option payment, the auction payment is a relatively modest investment (0.05%) for projects that are likely to have total costs in excess of $10 billion. One would expect that well financed offshore wind developers would be willing to make such an “option payment” to have the right to develop an offshore wind lease area adjacent to a market that some have estimated has a need for upwards of 30 GW of offshore wind. Less than two years ago the five California offshore wind lease areas offered by BOEM were acquired at prices of about $150 million per lease and this was for a market where the route to market was at best uncertain and the Humboldt lease areas required major transmission upgrades. While interconnecting the GoM lease areas to the onshore electric grid won’t be easy or straight forward, it doesn’t offer the challenges that the Humboldt lease areas faced prior to the auction.
Clearly, there have been some important changes in the overall business climate for offshore wind including: (1) a much less favorable business environment for offshore wind as evidenced by contract cancellations; continued issues with contract performance evident in New Jersey; long lead times for critical project components (e.g., HVDC converter stations, which would be required for a number of the lease areas); and (2) heightened concern regarding the economic viability of floating offshore wind in spite of the relatively shallow water depths in the GoM or at a minimum the recognition that floating offshore wind lease areas are only likely to be developed after the full capability of the fixed foundation lease areas in Southern New England are developed.
