U.S. offshore wind industry may need incentives modeled after Germany’s
Securing funding for projects has long been a principal stumbling block for the U.S. offshore wind sector, particularly because no projects currently exist to prove the technology’s cost-competitiveness. Two critical tax credits — the investment and production tax credits for wind energy — were recently extended to the end of 2013, but investors will need more long-term assurance against risk.
“The ITC and PTC are necessary but not sufficient,” said Doug Sims, an energy project finance specialist with the Natural Resources Defense Council. “These projects are going to succeed in places where there is [additional] state policy to support them.”
To understand what kind of state or federal policies could support the industry, it is useful to look to countries that have already worked through their own regulatory knots, he said. In the case of Germany, he said, “the policy regime is designed to finance investors” and provide a measure of long-term revenue certainty.
Germany implemented a feed-in tariff in 2000, but it generated only 200 megawatts of wind power, he said. When the country revisited its financing regime in 2008, it made a number of important changes, including an option to let companies earn a higher fixed rate for a shorter period of time.
“In the compression model, companies can earn higher payments over a shorter period of time” than they would under the regular feed-in tariff, Sims said. “So, rather than a guaranteed rate of $150 per kilowatt-hour for a 12-year period, they can earn $190 per kilowatt-hour for an eight-year period.”
In the years since, the market has proved that this shorter, eight-year tail is sufficient to carry projects into cost-competitiveness.
Reducing risks for long-term financing
The wind power industry has made significant strides over the past decade, particularly as it has gained momentum in recent years. Wind power made up nearly 42 percent of all new installed electric generation capacity in 2012, a greater share than even booming natural gas.
The growth has come in fits and starts, however, as tax credits expire and are reinstated. The background presence of an always-looming expiration date causes companies to rush projects forward, said Paul Zarnowiecki, a partner at Orrick.
“The picture is more serious for offshore wind developers” than for onshore, he said. “The cost numbers can be eye-popping. The industry needs a lot of contingency on its unknowns.”
Options like the German compression model are useful because they offer a degree of flexibility in power purchasing agreements with regional grid operators, he said.
A number of Northeastern states — most prominently Maryland and New Jersey — have enacted laws to guarantee a revenue stream for offshore wind. Rhode Island’s Deepwater Wind pilot project has a power purchase agreement with its local grid operator and is set to begin construction this year.
Meanwhile, Japan and China have both been aggressive in pursuing offshore wind and have set hard targets for the next several decades. The European Union is even further along and is on course to meet its goal of 40 gigawatts of offshore wind power by 2020.