High values are blowing in offshore winds; policymakers may need more

Source: By Herman K. Trabish, Utility Dive • Posted: Wednesday, May 16, 2018

Offshore wind attracted as much attention at the just-completed national wind energy conference as a Kardashian at a trendy Hollywood night spot. New numbers show its value warrants the attention.

Building wind turbines to operate in harsh ocean conditions costs more and takes longer than building on land. The permitting process can be rigorous and lengthy. Construction requires special vessels and equipment and interconnection requires subsea engineering.

Those are the kinds of reasons that caused NextEra Energy CEO Jim Robo to call offshore wind (OSW) “terrible energy policy” in an April 21 earnings call. But new research from Lawrence Berkeley National Laboratory (LBNL) suggests the value of OSW makes it, in many locations adjacent to energy-hungry cities along the East Coast, a better bet than the onshore wind Robo builds.

Considering an energy resource’s full economic value along with its cost is common. Nuclear, coal and rooftop solar advocates all insist those resources’ values justify policy supports and incentives. This is the first time OSW’s values have been rigorously quantified, and the LBNL researchers found they can be substantial. However, these values may not be the ones necessary to get policy support.

LBNL provides the first rigorous assessment of OSW’s economic value on the eastern seaboard. The data shows how the value varied by location, by season, and by time of day between 2007 and 2016. It also discusses the drivers in that caused the energy, capacity and renewable energy credit (REC) values to vary.

The analysis “provides important insights” for energy policymakers considering offshore-specific incentive programs and mandates,” LBNL reports. But it does not “estimate the economic value or cost of other community, economic development, and environmental effects,” LBNL acknowledges. Which is why one offshore wind developer told Utility Dive more is needed “to stand up a new industry.”


Prices are dropping in the OSW market, but in the U.S. they are not yet market competitive. That means policymakers who want to take advantage of the resource need a more complete accounting of its value.

The lowest official price to date for U.S. OSW is Maryland’s $132/MWh. That is not competitive with prices from onshore wind’s Lazard-reported $60/MWh levelized cost of energy (LCOE) or natural gas generation’s $78/MWh LCOE.

LBNL’s “Estimating the Value of Offshore Wind Along the United States’ Eastern Coast” offers a perspective apart from LCOE. It combines the values of the energy sales into wholesale markets, capacity sales into system operators’ capacity markets, and renewable energy credits (RECs) sales to offset renewables mandate obligations of hypothetical east coast OSW projects over the ten years from 2007 to 2016.

It concludes the total value would have averaged from $40/MWh to $110/MWh, depending on location.

OSW’s value can even “exceed that of onshore wind” for two reasons, the LBNL data shows.

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First, it can be built off the coasts of New England cities. That defers the cost of the new transmission that would be necessary to deliver onshore wind from the distant locations where it can be built in the land-constrained region.

Second, OSW is strong during those cities’ peak demand periods when the price of electricity is highest. Onshore wind often is typically strongest in the off-peak night and early morning hours.

There are other ways “to enhance the value proposition for offshore wind,” LBNL adds. Two strategies are interconnecting at higher-priced locations or adding battery energy storage. But it is not certain either will make OSW “economically attractive,” the researchers conclude. That depends “on tradeoffs between value and cost.”

OSW prices in Germany and Denmark fell to near $60/MWh in 2016. In April 2017, four winning bids in Germany’s annual government auction averaged $54/MWh. It’s prices like these that will make U.S. OSW more widely competitive, the paper reports.

The UK has 36%, or 6,836 MW, of the world’s 18,814 MW of OSW capacity, according to the Global Wind Energy Council (GWEC) April 2018 report. Germany’s 28.5%, or 5,355 MW, is second among the world’s 17 markets. China, with a 15% market share, is third. A record 4,334 MW of new OSW capacity went online in 2017, with none in U.S. waters.

Record global growth, which was the talk of the annual U.S. WINDPOWER conference, held in Chicago, May 7-10, will continue through 2020 as costs, which drive the market, continue to drop, according to GWEC.

Projects scheduled to go online in the early 2020s are expected to have an average LCOE below $83.02/MWh, including the interconnection cost. By 2030, LCOEs are expected to be below $71.16/MWh.

Global OSW leader Ørsted reported a 63% price drop between 2010 and 2016. The U.K. LCOE dropped 32% from 2010 to 2016. 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).

Drivers include a maturing industry, better technology, turbine nameplate capacities reaching 10 MW to 12 MW and growing investor confidence, GWEC reports.

U.S. prices have also fallen significantly. Last May, two developers accepted $132/MWh for 368 MW of OSW capacity in Maryland. That was a 45% drop from the only previous hard price for U.S. OSW, the $244/MWh paid by National Grid for the generation from the 30 MW Block Island project that went online off Rhode Island in 2016.

The “next big data point” will be from winners of Massachusetts’ OSW solicitation. Analyst speculation is that the Massachusetts awards, due any day, will come in at or below the Maryland prices.

Beyond prices

In the wake of the pioneering U.S. offshore activity, there were 14 OSW projects in development by 2017, representing more than 12,500 MW of capacity, GWEC reports. But that is just a fraction of the 2,000 GW of U.S. technical potential referenced by GWEC.

One factor limiting U.S. OSW growth is “an unclear understanding of the economic value that offshore wind provides,” LBNL reports. The study is intended to rectify that. It incorporates “historical weather data” and “historical wholesale market outcomes and REC prices” to derive “marginal economic value” using energy, capacity and REC market prices.

The study’s first takeaway is that it confirms the substantial variation in value along the Eastern seaboard, LBNL senior research scientist and report lead author Ryan Wiser told Utility Dive. It is highest for sites off New York, Connecticut, Rhode Island and Massachusetts, and lowest for projects that are south of the New England region or in Maine.

For sites interconnecting to ISO-NE, the value came out at roughly $110/MWh. For sites interconnecting to NYISO, it was $100/MWh. For sites in the PJM region, it was $70/MWh. And for sites in the non-ISO region south of PJM, it came out at $55/MWh.

Those values were significantly lower in 2016, the last year studied, LBNL acknowledges. That is probably due to rising renewables penetrations, lower renewables LCOEs, and increased transmission capacity over the ten-year study period.

By combining LCOE estimates plus value estimates, LBNL found “the most attractive sites are near Southeastern Massachusetts and Rhode Island, while the least attractive are far offshore of Florida and Georgia.”

The second important takeaway is that OSW can have a higher value than onshore wind, Wiser said. That is in part because the study captures the transmission savings of relieving congestion by serving constrained load pockets.

States in New England with high renewables goals will need large scale wind or solar and they have two options,” Wiser said. “One is to build new transmission to land-based resources and the other is to pursue offshore wind. This study allows a comparison of the values and costs of each.”

The researchers found OSW’s value could be increased by as much as $25/MWh by interconnecting with a higher-priced market. That could be as high as $40/MWh if a project had more than one interconnection, allowing the owner to arbitrage energy between markets. A $20/MWh increase in value could come from moving RECs to a higher-priced state.

Those transmission values were significantly higher than the $3/MWh value from adding storage in a 1 MW of storage to 4 MW of generation ratio. The value increases as battery capacity increases, but geographic dispersion of wind will likely be of greater value until battery prices fall significantly, Wiser said.

The third key takeaway is that capacity value is significantly smaller than energy and REC values and varies significantly more. “Flat loads and excess generation make it a buyer’s market for capacity,” Wiser said.

Much of the talk of capacity value is the result of wind’s value in providing resilience during 2014’s polar vortex and this past winter’s bomb cyclone, he said. “But increased revenues during those events came from the energy markets.”

OSW’s value in avoiding emissions is embedded in energy value since market prices include the cost of emissions, the paper reported. Natural gas and wholesale electricity price suppression “can be substantial,” but do not create value because they are “a transfer of wealth from natural gas producers and electricity generators to gas and electricity consumers.”

The study only considered values for avoided emissions and natural gas and electricity price suppression in a cursory way, Wiser stressed.

But developers told Utility Dive those values need attention if U.S. offshore wind is to fulfill its promise.

Uncounted values

Magellan Wind CEO Jim Lanard, who has worked in OSW since the U.S. began preparing for project development, called LBNL’s work an important “what-if” study.

“But they acknowledged those values are not the ones needed to get policymakers to create mandates and incentives that drive utility procurements,” Lanard told Utility Dive.

The OSW values that guide policy include “economic benefits, jobs, manufacturing and port redevelopment,” he said.

New Jersey’s landmark 2010 Offshore Wind Economic Development Act and Maryland’s 2013 Offshore Wind Energy Act, which borrowed from and improved on the New Jersey law, did that, Lanard said. “The Maryland law requires project developers who want to qualify for the state’s offshore wind renewable energy credits (ORECs) to meet a net economic benefits test.”

Central to the test is a comprehensive Maryland Public Service Commission analysis of applicant projects’ job creation and economic development values, Lanard said. ORECs are above-market payments from utilities, funded by ratepayers, to purchase OSW project output and “the return to the community in economic benefits has to justify that.”

The Maryland procurements at $132/MWh were the result of that OREC process, Lanard said. “To start an industry, policy support like that is necessary. That’s why the LBNL study is important but doesn’t answer the question policymakers need answered.”

Joe Martens is executive director of the New York Offshore Wind Alliance, which represents developers, supply chain companies, environmentalists and policy advocates. He agreed with Lanard, both about the importance of the LBNL study and about the importance of economic benefit values.

The New York State Energy Research and Development Authority (NYSERDA) included economic benefits in its blueprint for the development of 4 GW or more of OSW through 2030 in New York, Martens said. “It could add $6 billion dollars of economic activity and about 5,000 jobs.”

To further document potential OSW values, the Alliance commissioned an independent study, due next month, to identify OSW’s impact on utility rates and its indirect economic benefits, Martens said.

“These studies are part of the public education process,” he added. “Offshore wind is a new industry in the U.S. and the more good research, the better its costs, benefits and potential can be understood.”

Values in an uncertain future

Søren Høffer, general manager for sales with GE Offshore Wind, said the LBNL study “is one more reason to be optimistic about the future of U.S. offshore wind.”

The cost trajectories documented by GWEC and the values quantified by LBNL validate Høffer’s optimism. But LBNL found some significant future uncertainties.

“Energy value — the largest value component within our analysis — will partly depend on the future direction of natural gas prices, which is highly uncertain,” it reports. And if wind penetrations rise too high, the value could drop “as the market becomes saturated with low marginal-cost wind power during windy times,” LBNL reported.

REC price, the other significant OSW value factor, could fall if wind and solar prices continue to decline, LBNL reports. Or that could be offset by new renewables mandates, that increase the demand for RECs.

Capacity prices, the least significant value factor, are expected to increase, LBNL reports. “But proposed or pending market reforms may make it more difficult for offshore wind to participate in capacity markets.”

The price trajectory of battery storage adds to the uncertainty. “Five years ago, the assumption was that the cost of battery storage would make it a non-viable option for the foreseeable future,” Wiser said. “That assumption now requires rethinking.”

OSW’s environmental value will be “every bit as important” as other values, said Martens of New York Offshore Wind Alliance. “It is the right time to pursue offshore wind, even at a premium price, because that premium is offset by many values, including environmental and economic benefits, that will make OSW an important piece of the transition to a renewable energy economy.”

It will take both the values in the LBNL report and the values policymakers are interested in “to stand up a new industry,” Magellan Wind’s Lanard said.