Getting to ‘head-spinning’ low prices for U.S. offshore wind

Source: By Herman K. Trabish, Utility Dive • Posted: Wednesday, January 24, 2018

The newest numbers for U.S. offshore wind show an energy sector that is market-ready and likely on the verge of becoming a power system player.

Until now, the U.S. offshore wind industry has been slow to develop. There is only one operational project, with only 30 MW installed capacity and a power purchase agreement price of $0.244/kWh.

The just-locked-in price for two projects yet to be built in Maryland has come down drastically, to $0.132/kWh. But even that is nowhere near the high end of the levelized cost for energy reported by Lazard for onshore wind, at $0.06/kWh, or for natural gas, at $0.078/kWh.

Researchers and advocates in the U.S. say there are changes within reach that can bring offshore wind costs down. Wind builders are perfecting methods of identifying where the best winds are. The needed domestic supply chain will respond to the right market signals. And where the market goes, the money will eventually follow, they say.

Europe setting the bar

Europe has set the bar for low-price offshore wind so far, with almost 15 GW online. Global offshore wind leader Ørsted reported a 63% price drop between 2010 and 2016. In the UK, which has 36% of global installed capacity, the levelized cost dropped 32% from 2010 to 2016 and the current Europe-wide price is projected to drop 67% by 2025, according to the U.S. Department of Enegy’s National Renewable Energy Laboratory(NREL).

Prices for projects in Germany, which has 29% of global capacity, and Denmark, with 8.8%, fell to near $0.06/kWh in 2016. In April 2017, four winning bids in Germany’s annual government auction averaged $0.054/kWh. Last December, the Netherlands opened a 3.5 GW auction only to developers whose bids require no subsidy. Results will be announced in April.

Last May, Maryland offered two developers $0.132/kWh for 368 MW of offshore capacity. It blew away the only previous hard price for U.S. offshore wind — the $0.244/kWh paid by National Grid for the generation from the 30 MW Block Island project off Rhode Island.

The 45% price drop from Block Island to the Maryland projects came mainly from “efficiencies in technology and the larger turbines,” said Stephanie McClellan, director of the University of Delaware’s Special Initiative on Offshore Wind. The “next big data point” will be the late April announcement of the winners of Massachusetts’ offshore wind solicitation.

Analyst speculation is that the Massachusetts awards will come in at or below the prices paid in Maryland.

Between commitments announced by the governors of Massachusetts, New Jersey and New York, the U.S. could have 7.5 GW of new offshore wind capacity in the near future.

“That will be half the entire global capacity and a complete game changer,” McClellan told Utility Dive. The added volume will drive the emergence of the domestic support system the sector needs to get to “head-spinning low prices.”

Based on data from Block Island and Europe, NREL researchers have begun to define exactly what the key cost factors are and how much of a role each will play in spinning heads.

The three keys to cost cuts

There are three keys researchers have begun to identify that will bring U.S. offshore wind prices down. The first is picking the right site, the second is getting a local supply chain in place, and third, getting money to back the ambition.

McClellan’s 2016 Special Initiative on Offshore Wind study found a 2,000 MW buildout in Massachusetts over ten years would drive the price to $0.108/kWh by 2030.

The first tranche of projects were expected to be “around $160/MWh” because they would be built without cost-efficient “Jones Act-compliant” vessels or a U.S.-based supply chain, McClellan said.

The Jones Act of 1920 protects U.S. shipbuilders by prohibiting foreign vessels from operating in U.S. waters. But because the U.S. has no offshore wind industry, it has “Jones Act-compliant” vessels.

The research suggested the next projects were expected to drop to “around $130/MWh,” and a third round would “get to about $110,” as the domestic support system and supply chain emerged, she added. “The trajectory is clear, but it appears our price forecasts will be proven way high.”

NREL offshore wind program manager Walter Musial told Utility Dive his team is studying the factors that will drive that trajectory. “The question is what the falling prices for recent German projects say about the U.S. market.”

The data and insights are preliminary, he said. “It appears the prices in Germany can be achieved in U.S. markets without subsidies, and eventually they will, but it will take a lot more work.”

First, North Sea wind speeds “are generally a little higher” than wind speeds off the Atlantic Coast, Musial said. It is not “a show-stopper,” but U.S. projects in a lower wind regime would be less cost-effective.

NREL Energy Markets and Policy Analyst Philipp Beiter told a recent offshore wind conference there are important similarities and differences between German and U.S. ocean geographies.

They share large resource potential and good wind speeds in shallow waters, he reported. But they present “diverse spatial conditions and challenges.” The resulting cost factor is approximately 30% of the total price difference between U.S. and German projects.

The second factor creating a cost difference between U.S. and German offshore wind projects is logistics and infrastructure, Musial said. Early estimates suggest it is “not a big hit,” but importing turbines from Europe, which is where the best ocean-scale machines are now made, will cost more. And installing and interconnecting the first generation of projects without sufficient local support and a domestic supply chain will also cost more.

It will also add costs to either work around the Jones Act, as Deepwater Wind did in Rhode Island, or pay for a purpose-built U.S. vessel, he said.

U.S. interconnection costs are higher because developers pay for the transmission to onshore substations that the German system provides, he added. “That adds cost.”

Beiter said the U.S. will have to build the “robust” ports and domestic supply chain that Germany already has in place. Interconnection and infrastructure costs are approximately 26% of the total price difference and logistics are about 10%, he reported.

Musial said the third factor is the most difficult to estimate. “What is the impact of project risk in a new industry, in a new country, on the cost of financing?” he asked. “It will be a significant factor in determining the cost of energy of the first few U.S. projects as well as a barometer of industry maturity.”

It is also the biggest single contributor to the difference in German and U.S. project prices, according to Beiter.

Developers on both sides of the Atlantic have low debt cost and wide experience with finance. But backers see U.S. projects as having significantly higher risk from regulatory uncertainty.

They also see higher “risk and contingencies” in construction and market access because of the more varied ocean geographies and because of a lack of local development experience and supply chain support. This accounts for approximately 34% of the difference in project prices, analysts estimate.

There are mitigations for these factors, Musial said. Careful site selection, a domestic supply chain, and vessel solutions are possible, he acknowledged. And developers may have balance sheets that justify affordable financing or self-financing. “But there is still a lot of uncertainty.”

The major U.S. markets

As the U.S. offshore wind sector works to lower prices, it is developing off the coast of several Northeastern states.

Block Island awakened nascent attention to U.S. offshore wind. By the time it went into operation at the end of 2016, the U.S. project development pipeline had grown to 28 projects, representing 24,135 MW of potential capacity, according to the U.S. Department of Energy. That represented 10% of the world’s 231,000 MW pipeline.

While the U.S. has built only Block Island’s 30 MW, the world added 2,219 MW of new offshore wind capacity in 2016 alone, bringing total capacity to 14,384 MW, according to the Global Wind Energy Council. But the “big story” was the price drop, the council reported.

In the U.S. market, Maryland’s award of offshore wind renewable energy credits was a major step for offshore wind, McClellan said. With that $0.132/kWh price guaranteed by the state, U.S. Wind will bring its 62-turbine, 248 MW Maryland project online in 2020 and the Deepwater Wind 15 turbine, 120 MW project is expected online in 2022.

The Maryland price dropped more than 25% from the $0.18/kWh estimate used to frame the state’s 2013 offshore wind law. But that was without a developed U.S. port, a domestic supply chain or a sufficiently purpose-built installation vessel, which is “all about to change,” Business Network for Offshore Wind Executive Director Liz Burdock told Utility Dive.

Massachusetts’ offshore wind solicitation was mandated by 2016’s H. 4568, which ordered the state’s utilities to procure 1.6 GW of offshore wind by 2027. Deepwater Wind, Bay State Wind and Vineyard Wind submitted bids for projects that may be up to 800 MW. Katie Gronendyke, spokesperson for the Massachusetts Office of Energy and Environmental Affairs, declined Utility Dive’s interview request because evaluation of undisclosed bid content is ongoing.

Deepwater Wind spokesperson Meaghan Wims said its Revolution Wind project would be between 144 MW and 400 MW and “the largest offshore wind plus battery storage project in the world.” If it is selected, it could be “online in 2023,” Wims added.

Lauren Burm, spokesperson for Ørsted, emailed Utility Dive that its proposed Bay State Wind project also could be online “in the early 2020s.”

Utility CEOs should recognize offshore wind will meet consumer demand for clean energy and “shield utilities” from fossil fuel price volatility, she added.

New York Governor Cuomo recently confirmed his 2017 commitment to build 2.4 GW of offshore wind by 2030. He announced the state will procure at least 800 MW of new capacity through solicitations in 2018 and 2019.

The Business Network’s Burdock said New York’s 96 MW South Fork project, to be built by Deepwater Wind with 8 MW turbines off Long Island, will be the next utility-scale project in U.S. waters.

Wims said Deepwater Wind has completed oceanographic, engineering and scientific surveys and is preparing state and federal permit applications. “The project is on target to be in-service by the end of 2022,” she reported.

New Jersey will be the next important state effort, McClellan said. Under former Governor Chris Christie (R), its Board of Public Utilities failed to implement a 1.1 GW 2010 mandate. But just-inaugurated Democrat Phil Murphy promised to triple the commitment and follow through on implementation.

The New Jersey chapter of the Sierra Club, which endorsed Murphy, called on him to reform the governor-appointed Board of Public Utilities. “For eight years, the agency has been held back,” chapter Director Jeff Tittel emailed Utility Dive. It must now “move forward on offshore wind rules.”

Burm said Ørsted’s New Jersey project “is in the early stages of development.” The company expects the offshore wind price to become competitive as the industry matures over the next decade. “In offshore wind, bigger is better,” Burm said. The high fixed costs need to be “spread out” over large projects, “like buying in bulk.”

McClellan agreed. “Larger turbines and larger project sizes have brought the per-MWh cost down. Policy follow-through in New Jersey, matching the actions taken in New York, Massachusetts and Maryland to turn aspiration into development will bring it down farther,” she said. “The price might not get down to $100/MWh in the Massachusetts solicitation, but we’re already at $130 so it’s probably going to be lower than that.”

How low can the price go?

The Business Network’s Burdock expects the Massachusetts price to be in the $0.10/kWh to $0.11/kWh range. This would be a huge drop from Block Island’s $0.244/kWh in just two years. It is also a significant next step down from Maryland’s $0.132/kW and toward the $0.06/kWh to $0.078/kWh range for onshore wind and natural gas. “It is definitely not going to be higher than the Maryland offshore wind renewable energy credits price and can only go lower,” she said.

One of the key reasons the Massachusetts price may be so low is that the state has invested $100 million to repurpose the New Bedford port for offshore wind, she said. In addition, “the European supply chain is watching and waiting for enough market activity to move to the U.S.” and “developers’ bids show they expect to have Jones Act-compliant vessels available.”

Ocean lift-vessel design firm A. K. Suda has provided all three Massachusetts solicitation bidders with guarantees it can provide purpose-built offshore wind installation vessels, CEO Ajay Suda told Utility Dive. Shipbuilder All Coast is prepared to deliver competitively priced Suda-designed, U.S.-built vessels “that can handle the newest generation of 8 MW to 10 MW turbines.”

McClellan said a range of drivers is now raising the offshore wind market’s visibility. One is policymakers’ perception that offshore wind offers environmental benefits. Other drivers are that it can meet system operators’ need for peak period generation, it’s located near enough load centers to minimize new transmission needs, and it can meet the growing need to replace shuttered power plants.

That market visibility is changing the game, she said. “Market-leading Danish developer-manufacturer Vestas just announced it will invest millions of dollars to test its 9.5 MW wind turbines at South Carolina’s Clemson University testing facility, signaling it believes there is about to be a U.S. industry. That is what will ultimately bring prices down.”