Cheap offshore wind offers hope for U.S. industry

Source: Benjamin Storrow, E&E News reporter • Posted: Tuesday, August 7, 2018

For Cape Wind, the much-maligned offshore wind farm once proposed for Massachusetts’ Nantucket Sound, the beginning of the end arrived in 2010, when the project’s developer signed a contract to sell its electricity.

The deal’s cost was valued over its lifetime at 24 cents per kilowatt-hour, a price so high even its supporters struggled to defend it.

That’s a stunning contrast from the price Massachusetts regulators revealed last week for the United States’ first major offshore development, an 800-megawatt project proposed by Vineyard Wind 15 miles south of Martha’s Vineyard, Mass.

Vineyard Wind will be built in two stages. The contract for the first 400 MW to go into commercial operation in 2022 starts at 7.4 cents per kWh; the second 400 MW, going into operation in 2023, starts at 6.5 cents per kWh. The price of each contract will rise by 2.5 percent annually over the contract’s 20 years, meaning that over their lifetime, the two deals will have an average price of 8.4 cents per kWh.

State officials reckon it will save Massachusetts consumers $1.4 billion over 20 years.

“Our mission and goal in Massachusetts is to have a clean and affordable and resilient energy future,” said Judith Judson, commissioner of the Massachusetts Department of Energy Resources. “These contracts certainly mean that offshore wind can be part of that future.”

The dramatic drop in price for the first major U.S. offshore wind development caught many industry observers by surprise. Europe, home to the bulk of the world’s offshore wind industry, has only recently dropped below the 10-cent-per-kWh threshold.

Many thought it would take years for the United States to catch up.

“It’s going to open a lot of eyes for politicians in states that have been considering whether to adopt offshore wind at scale but haven’t made the leap yet,” said Anthony Logan, an analyst who tracks the industry at MAKE Consulting, a division of the consulting firm Wood Mackenzie.

MAKE projects that the United States will install 6 gigawatts of offshore wind capacity in the Northeast and Mid-Atlantic over the next decade. But that number might rise, given the Vineyard Wind prices, as states farther south along the Eastern Seaboard begin to enter the offshore fray, Logan said.

“It starts to make some of the lease areas, even the North Carolina one, make more sense in the near term,” he said.

Indeed, Virginia Gov. Ralph Northam (D) announced Friday that Dominion Energy Inc. was filing plans with state regulators for two offshore turbines, part of a pilot project approved by lawmakers there earlier this year.

The steep decline in offshore wind pricing owes itself to several factors. The first is technology. Cape Wind’s proposed turbines had a listed capacity of 3 MW. Vineyard Wind plans on using turbines capable of generating at least 8 MW and maybe as much as 10 MW. In an industry where installation accounts for much of a project’s cost, that has helped offshore wind achieve an economy of scale.

The investment tax credit available to wind developers is also essential. While many onshore wind developers also avail themselves of the production tax credit, the costs of installing turbines in the ocean are so high that the investment tax credit (ITC) can significantly help cut the capital costs for developers like Vineyard Wind.

The role of the ITC hints at the downside for future projects. The ITC expires for developments that begin construction after 2019, meaning the cost of future projects is likely to climb in the short term, Logan said.

But there are mitigating factors that should buoy the industry, most notably its projected growth in the United States. New Jersey has a goal of building 3,500 MW of offshore wind by 2030. New York’s target is 2.4 GW.

And Massachusetts Gov. Charlie Baker (R) is now considering a bill that would double the Bay State’s target to 3.2 GW.

Connecticut, meanwhile, is proceeding with a solicitation for 200 MW of offshore wind capacity, while Rhode Island is focused on a 400-MW development.

The more offshore wind is built in the United States, the more European wind manufacturers are likely to locate facilities there, making the domestic supply chain more efficient and reducing the cost of future projects, said Paul Vigeant, managing director of New Bedford’s Wind Energy Center. The small Massachusetts port city has tried to position itself as the service hub for the nascent industry (Climatewire, June 19, 2017).

“It’s the right sign to the European developers to say the pipeline [of projects] is real,” Vigeant said. “I’m hoping that will bring us to a tipping point where suppliers decide to set up shop in the U.S.”

Massachusetts officials are keen to move quickly. By building out the industry in the state, they hope to capture the jobs in the sectors that will build and service the massive turbines. They have a jump on New York and New Jersey, which are still in the midst of setting up their respective programs.

“Massachusetts really appears to have set itself up well for this with that first-mover advantage. They’re kind of nailing down the north end. Maryland is getting the south end,” Logan said. “There is a ton of pressure on New York and New Jersey. They talk about economic development. Well, now they’re going to have to march double time to catch up.”

In some ways, Massachusetts has been aided by its past experience with Cape Wind. An extensive permitting process that pushed the turbines farther offshore and kept towers out of scallop boats’ prime fishing grounds means there are fewer legal hurdles this time.

The state’s strong innovation economy and an appetite to tap the considerable wind resource have also been key, said Judson of the Massachusetts Department of Energy Resources.

“Certainly we had the benefit of having the experience early with offshore wind,” she said.