Interior fetches $3.8M in first-ever competitive lease sale

Source: Phil Taylor, E&E reporter • Posted: Friday, August 2, 2013

The Interior Department raised $3.8 million in its first competitive auction for offshore wind development yesterday off the coasts of Rhode Island and Massachusetts, an encouraging sign for the nascent energy source, officials said.

The agency’s Bureau of Ocean Energy Management preliminarily awarded Deepwater Wind New England LLC a 25-year lease to build wind farms in a 257-square-mile wind energy area about 10 miles south of the Rhode Island shore.

It was the first of a handful of offshore wind auctions the agency is planning from Virginia to Massachusetts in the coming years. Efforts to plan yesterday’s sale began nearly three years ago.

“This is a very exciting and gratifying day for us,” BOEM Director Tommy Beaudreau told reporters yesterday on a conference call.

Deepwater plans to build a 1,000-megawatt wind farm on the federal lease — the largest ever planned in the United States — that will supply electricity to Long Island and New England states including Rhode Island, Massachusetts and Connecticut.

Deepwater beat out two other bidders, Sea Breeze Energy LLC and U.S. Wind Inc., in an Internet auction that lasted 11 rounds yesterday. Nine companies had qualified to participate in the sale. The winning bid was higher than expected, Beaudreau said.

Deepwater had an advantage going into yesterday’s bidding after BOEM awarded it a 20 percent credit for a joint development agreement the Providence, R.I.-based company signed with the state three years ago.

Under that agreement, Deepwater agreed to fund part of Rhode Island’s ocean zoning plan and to stage its project from a state-owned business park in North Kingstown, R.I. Beaudreau said the credit was designed to recognize the interests of states and to award leases to companies best positioned to develop federal waters.

A separate 25 percent credit was available to any company with a power purchase agreement, but none of the nine qualified bidders had signed one.

Deepwater Wind CEO Jeffrey Grybowski called yesterday’s sale “an enormous step forward for the industry.”

“This is the best site for offshore wind in the United States, bar none,” he said yesterday in a statement. “Our Deepwater Wind Energy Center Project will produce clean power and jobs for an entire region. It’s very exciting.”

In addition to the $3.8 million winning bid, Deepwater will pay an annual $500,000 rental fee for the two lease areas until a project is completed. It will also be charged a 2 percent operating fee applied to the cost of electricity when production begins.

Although that is far less than the 18.75 percent royalty that offshore oil and gas developers typically pay, Beaudreau said it is “an appropriate operating fee for an industry that is providing a clean energy resource.”

“We’re talking about an operating fee for a resource that is not depletable,” he said.

A BOEM official said it is too early to tell how much revenue the project will generate over its life.

Deepwater has six months to submit a site assessment plan for installation of meteorological towers and other surveying work. After that is approved, it will have four and a half years to submit a construction and operation plan, which will trigger a separate National Environmental Policy Act review

Construction could begin as early as 2017, with commercial operations by 2018, it said.

Rhode Island’s senators praised Deepwater and the state for proactively screening the federal waters to ensure there would be minimal impacts to the environment, fishermen and boaters.

“Rhode Island is poised to be a leader in the development of wind energy because of a state planning process that engaged all stakeholders, and federal funding for infrastructure upgrades to Quonset and ProvPort,” said Sen. Sheldon Whitehouse (D).

Early planning to avoid potential conflicts with wildlife and other ocean users has been key to BOEM’s offshore wind program, Beaudreau said. The next offshore wind lease will be Sept. 4 in Virginia, with additional sales to follow in Massachusetts, Maryland and New Jersey later this year and in 2014, he said.

“In the long run, it will pay off and help the industry stand up,” he said.

Deepwater is also developing a 30 MW wind project in state waters off Block Island, R.I., that it plans to begin constructing later this year, which could make it the nation’s first offshore wind farm.

Block Island is competing with the 468 MW Cape Wind project off the coast of Cape Cod, Mass., for that title. Both are also racing to qualify for a lucrative 30 percent investment tax credit (ITC) that expires at the end of December.

Although nearly 4,000 MW of offshore wind has been installed in Europe in the past decade, the industry has yet to break ground in the United States, where it faces unsettled federal energy policy, high capital costs and the threat of lawsuits.

Democrats, industry officials and environmentalists are lobbying hard for Congress to extend the ITC, an incentive they say is critical to helping the industry scale up.

Jim Lanard, president of the Washington, D.C.-based Offshore Wind Development Coalition, said yesterday’s $3.8 million winning bid “is indicative of the value offshore wind developers place on this new-to-the-U.S. clean energy industry.”

“We offer our congratulations to the winning bidder, Deepwater Wind, and to the Bureau of Ocean Energy Management for running a successful auction for the first competitively bid offshore wind lease in federal waters,” he said in an email.

For the most part, environmental groups have enthusiastically supported offshore wind in the Atlantic, where preliminary research suggests turbines could have a lesser impact on bird species.

Deepwater in February also signed an agreement with the Conservation Law Foundation to protect the critically endangered north Atlantic right whale (E&ENews PM, Feb. 4).

Environment America and Oceana both issued statements in support of yesterday’s auction.

“For more than 20 years, we have watched as Europe developed and benefited from offshore wind power,” said Jacqueline Savitz, Oceana’s deputy vice president for U.S. campaigns. “It is high time for the U.S. to take advantage of this unlimited resource that can help solve our climate and energy challenges.”