Recalibrating functional claiming: A way forward
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
The trade press has been running stories lately that offshore wind is finally coming of age in the United States. Several big players are now moving into the sector. Offshore wind is becoming a discussion topic again at wind industry conferences, and at least three US conferences are expected this year to be devoted entirely to US offshore wind.
Four CEOs of offshore wind developers talked at a conference in Boston in May about whether the renewed attention to the sector is justified. The panelists are Jim Gordon, CEO of Cape Wind, Chris Wissemann, CEO of Fishermen’s Energy, Alla Weinstein, CEO of Trident Winds, and Kirby Mercer, CEO of Beothuk Energy, a Canadian offshore wind developer. The moderator is Keith Martin with the Chadbourne office in Washington.
MR. MARTIN: Jim Gordon, are news reports that offshore wind is finally coming of age in the United States for real and, if so, what has changed recently?
MR. GORDON: There is no question that there is a huge wind resource off of our shores. The question is whether we will put together the development expertise and capital to exploit it. We now have a regulatory framework in place for such projects.
I am thrilled that there are more market entrants coming in here, because it validates what everybody is trying to do. The key will be to have contracted revenue streams that can attract the development capital to build these projects.
Look at what the governors are doing in some northeastern states and around the country where they are finally starting to take climate change seriously. They are putting policies in place that will make very significant reductions in CO2 emissions. If the Clean Power Plan gets through the Supreme Court, then all the better.
The right elements are coming into place. What kick started construction of new combined-cycle gas-fired power plants was power purchase agreements where investors knew they would get some kind of return if they put in capital. That is what we need to kick start the offshore wind market.
MR. MARTIN: You waged a lonely battle for 14 years. Now you have an army forming behind you. Chris Wissemann?
MR. WISSEMANN: One of the things that has scared regulators is the price of offshore wind. The electricity costs more than $200 a megawatt hour.
That fear was reinforced to a great extent by the pricing coming out of Europe. What has happened in the last year or two is the price for electricity from offshore wind has dropped to €100 a megawatt hour in Europe. This gives us hope that we will be in a position soon to deliver electricity at similar prices in places like New York City, Long Island, downstate New York, Massachusetts and California. That is how offshore wind will finally start to get traction.
MR. MARTIN: Did I hear you right that you expect to see bids in the US that are close to $110 to $120 a megawatt hour?
MR. WISSEMANN: Not so much here because we are not in this bidding arena yet. But what you see in Europe is the most recent price for the Horns Rev 3 project is €110. The Dutch auction that is due tomorrow should set a new price hurdle somewhere in that range. You have all the vessels, ports and other infrastructure in place already in Europe to support offshore wind.
The first projects in the US do not stand a chance of coming near that price, but the fact that it is being done in Europe shows the kind of cost curve that is feasible with larger turbines.
MR. MARTIN: So what is new is we starting to benefit from economies of scale. The regulatory regime is falling into place. The Clean Power Plan is providing some impetus. Has anything else has changed?
MS. WEINSTEIN: We now have US states requiring that utilities deliver 50% or more of electricity from renewable energy. That creates a market that was not there when Jim Gordon started work on Cape Wind.
MR. MERCER: We now have a regime in place in Canada to support offshore wind. In Canada, we have to deal only with the federal government. We don’t also have to worry about the politics at the provincial level.
We also have a lot of the infrastructure in place already to support offshore wind. We have some world-class ports. We have good sites in shallow waters close to transmission lines. We don’t have the Jones Act to push up transport costs. It is all about design and getting the levelized cost of energy down to reasonable levels. All we have to do now is to get one big project going.
MR. GORDON: I think one of the worst things that this industry can do is to create false expectations on pricing. Chris Wissemann pointed out, rightly so, that the infrastructure is not in place yet in the United States. We have the Jones Act that puts us at a significant disadvantage.
There are new developers coming into the market who have not done the feasibility studies to find out what the challenges are for specific projects. One mistake the industry can make is to extrapolate €100 per MWh prices from a European market where the industry has been flourishing for 25 years to a US market where we are just getting started and many challenges
MR. MARTIN: How important is it that the oil and gas industry has fallen on hard times, freeing up people with knowledge about building things offshore?
MS. WEINSTEIN: It is very important, especially for deep water installations. Floating offshore wind technology has developed on the backs of offshore oil platforms. All the skills are transferable. Having people with those skills will certainly help because that is labor that you do not have to train.
MR. MARTIN: Let’s move past the big picture to some of the details. Jim Gordon, the Massachusetts legislature is expected to unveil a bill soon that would create demand for up to 2,000 megawatts of offshore wind. What do you expect this bill to say, and how important is it?
MR. GORDON: It is critically important to attract the capital to build these projects. It will probably require competitive bidding. It is not clear yet whether the support for offshore wind will be in the form of ORECs or feed-in tariffs. The projects with the best prices will get the contracts.
MR. MARTIN: The expectation is that it will require the Massachusetts utilities to hold an auction and buy up to 2,000 megawatts?
MR. GORDON: Various proposals are still under discussion. We don’t know yet what the final bill will require, but we assume it will be similar to the Green Communities Act where there is a regional utility purchase to spread the cost over a greater number of customers, and the contracting will be done through the Department of Public Utilities. The DPU will confirm that the utilities can pass through the contract prices in their rates.
MR. MARTIN: Jim Lanard, CEO of Magellan Wind, who spoke just before this panel, gave an excellent survey, particularly for Europeans looking for the first time at the US market, about which states have the greatest promise. He put Massachusetts on that list. What is your assessment -- you live here -- about the politics of that bill? Will it pass? Will the governor sign it?
MR. GORDON: I think it will pass. I think that there are enough interests who will have a stake in seeing the bill signed. The bill will cover a number of subjects, including authorizing hydroelectricity to be imported from Canada, and there will be a solar component. Massachusetts wants to move to more distributed generation and renewables. The days of the big, large gas-fired power plants in New England are numbered.
MR. MARTIN: The US government has set aside new areas for offshore wind development farther off the Massachusetts coast than you were looking for Cape Wind. Will those or any other offshore wind projects be able to move forward in Massachusetts if the bill does not pass?
MR. GORDON: I do not see any projects moving forward unless there is some type of state support in the form of a framework from which people can be compensated for the development, construction and operating risk to build these projects.
People say offshore wind requires paying an above-market price for electricity. What does that really mean? You are comparing offshore wind to dirty brown power? Once you start calculating the costs of dirty brown power from the societal standpoint, it may come at a higher price than offshore wind.
[Editor’s note: A draft bill was released in the Massachusetts House in late May that would require Massachusetts utilities to procure 1,200 megawatts of offshore wind electricity by 2025, but bar Cape Wind from bidding for the contracts. Cape Wind said in a statement that “We were extremely surprised and disappointed” to see Cape Wind excluded from bidding. “We will talk to the appropriate people in the legislature and we will ask them to rectify this language so that we can be part of the competitive process.” The bill is expected to be heavily amended and debated in the House in June. The state Senate is not expected to release its version of the bill until after the House acts.]
MR. MARTIN: You have put 14 years of effort into Cape Wind. You came very close in late 2014 to closing on the financing. The financing failed due to inability to fill a very small gap in the capital structure. Since then, the project lost its power contracts, and the state siting board decided in April not to extend, for the time being, permits to build the underwater transmission line to bring the electricity to shore. How do you see that project getting back on its feet? Is it your goal to get the project back on its feet?
MR. GORDON: It is our goal to build Cape Wind. Every project has challenges, and Cape Wind has certainly had its share. The project has faced strong political headwinds. It has navigated through five different state administrations. We have had to deal with more than 26 lawsuits coming from an organization that gets its primary funding from a coal billionaire and some very wealthy trophy home owners.
We have done the geotechnical work for every single foundation. We have done the surveys for every inch of cable that will cross through Nantucket Sound. We are the only project in the United States that has an approved construction and operating plan from the Bureau of Ocean Energy Management.
We have a 28-year lease on the site. We have two appeals that we are still battling, and just as we have prevailed in all of the other legal challenges, we think we will prevail on this. It is just a matter of time. We are very patient people. We are excited that the market looks poised to take off. We should be well positioned with the best site in the United States from which to build a very good project.
MR. MARTIN: You answered my next question, which is, will the project remain in Nantucket Sound? The answer is yes. My last question is, what lessons have you taken away from the 14 years you have invested in this project?
MR. GORDON: Jim Lanard mentioned all the constituencies that you have to deal with, and we have dealt with every one of them. We have had enormous public meetings. The people in this room may not understand that public opinion surveys show that 86% of the public wanted this project to be built. Fourteen percent were against it.
What I have learned is this. Jim Lanard pointed out that environmental groups have organized around the protection of specific endangered species. I didn’t know that billionaires are an endangered species around whom one must navigate carefully. [Laughter]
MR. MARTIN: Let’s move to Chris Wissemann. You have had notable struggles with the New Jersey Board of Public Utilities over your pilot project. It is a 25-megawatt project off the New Jersey shore. The BPU was supposed to have worked out a financing mechanism for offshore wind in 2010. It has not done so. What is the status of that effort?
MR. WISSEMANN: The BPU legitimately worked on a financing mechanism in 2010, but got derailed shortly after that when the governor decided to run for president and raided the renewable energy fund to help balance the state budget.
That derailed creation of a financing mechanism and, frankly, nothing has happened in more than three or four years. Just to give you a sense of how topical this is, here is a headline from today’s paper: “BPU boss grilled by Senate committee about $1 billion in diverted funds.”
MR. MARTIN: Do the diverted funds have anything to do with offshore wind?
MR. WISSEMANN: The defunding affected not only the offshore wind financing mechanism, but also support for solar and several other things.
MR. MARTIN: Why is it important for New Jersey to have a funding mechanism when other states do not? Massachusetts went a different direction.
MR. WISSEMANN: The phrase “funding mechanism” is a misnomer. Rhode Island, with which I am also familiar, passed legislation in 2008 to allow a power purchase agreement to be put in place. That created a pathway for an RFP and an auction and a PPA. The United Kingdom had an OROC mechanism. All of these steps are simply payment mechanisms to ensure offshore wind projects can be built on economic terms.
New Jersey put in place a mechanism to make offshore projects financeable. It is not a PPA where you have a single creditworthy utility buying all the output. We need in New Jersey to rely on a regulatory mechanism, and it needs to be robust enough that an incoming governor, for instance, cannot undo it.
MR. MARTIN: Your project would have sent its power to whom?
MR. WISSEMANN: New Jersey is a deregulated market, so at any given time there are 70-odd wholesalers selling power in the state. The funding mechanism has the effect of causing each wholesaler to purchase its pro rata share of the output from our project. If you serve 20% of New Jersey, then you have to buy 20% of our output.
The wholesalers are reshuffled every three years. None of them has a 20-year contract. Whoever is selling power, whoever is doing business that particular month in New Jersey, has to buy a pro rata share of our output at a price that we bid.
MR. MARTIN: The Board of Public Utilities rejected your proposed project. It said the cost is too high. The state legislature voted in March to give you more time to go back and present an alternative proposal. Where does that effort stand?
MR. WISSEMANN: Let me start with the too high first. Too high was sort of amusing once we got used to it, because the board essentially declared that our electricity price was too high, but by looking at a price that was 30% higher than we proposed. At the price that we proposed, the project passed all of the statutory requirements, which are that the project must create more benefits than it costs.
The process going forward is that the BPU has to open a window to accept an application, and it has been unwilling to open a window to reevaluate the project. The legislature in New Jersey is pro-offshore wind. The legislators like the jobs. They like everything to do with the project.
The legislature has gone multiple rounds – in January and most recently in March -- sponsoring legislation and passing it to reopen the window. A bill landed on the governor’s desk about seven weeks ago, and he vetoed it about a week-and-a-half ago.
MR. MARTIN: Then what is the future of the 25-megawatt project?
MR. WISSEMANN: It comes down to politics. The Republicans, not to mention the Democrats of course, but even the Republicans are upset with the governor for following Donald Trump around. The quickest route for offshore wind to flourish in New Jersey is to vote for Donald Trump. [Laughter]
MR. MARTIN: For Trump to get elected --
MR. WISSEMANN: . . . and then Christy will be gone.
MR. MARTIN: Oh great, speaking as someone who lives in Washington. [Laughter]
MR. WISSEMANN: That’s the future. Yes.
MR. MARTIN: For how many years have you been working on the project?
MR. WISSEMANN: I have been working on it for four years since I joined Fisherman’s, but the company was founded in 2007 and has had a single-minded focus on this project.
MR. MARTIN: Let me ask you the same question I asked Jim Gordon. What lessons have you taken away from the experience with this project?
MR. WISSEMANN: Lots and lots of lessons. Our two projects and many others, frankly, are ground zero for political risk. While you have an administration that is in favor of your project, you need to do everything possible to convert that into a commercial arrangement while you have its support. Do not squander a day of time.
MR. MARTIN: Move quickly. The politics change. Let’s move to Alla Weinstein. Your project is near Morro Bay in California about 33 nautical miles offshore. Morro Bay is midway between Los Angeles and San Francisco.
MS. WEINSTEIN: The proposed project is 650 megawatts. The electricity will be delivered to the California grid. The turbines will be in deep water with a depth of 800 to 1,000 meters. We chose Morro Bay because the project will fit into the existing infrastructure that is onshore left from a now non-operational thermal plant. It was a cooling plant. That provides all the tunneling and water flow infrastructure that we can reuse for bringing our power to shore.
MR. MARTIN: Let’s provide some perspective. Jim Gordon, how far offshore is Cape Wind?
MR. GORDON: We are approximately six miles offshore. Six miles from Senator Kennedy’s veranda, 13 miles from Nantucket, and nine miles from Martha’s Vineyard.
MR. MARTIN: And Bill Koch?
MR. GORDON: Bill Koch is about six miles.
MR. MARTIN: Chris Wissemann, how far offshore is your project?
MR. WISSEMANN: It is 2.8 miles off the Atlantic City beach.
MR. MARTIN: So Alla Weinstein, 33 miles is a good deal farther than any of these other projects.
MS. WEINSTEIN: There is a reason why it is where it is. First, we wanted to avoid visual pollution. We are looking to put eight-megawatt turbines on floating structures far out to sea. The structures will be over 120 meters or 394 feet in height, so it is important to be far enough offshore so that they are not visible from shore. The only place the turbines could potentially be seen is from the Hearst castle.
The castle is pretty high up, but this is the Pacific coast, and there is a lot of fog.
MR. MARTIN: You sent an unsolicited proposal to the Bureau of Ocean Energy Management for a lease, and you cleared the initial hurdle. When do you expect to hear whether you have the lease?
MS. WEINSTEIN: Probably sometime during the summer. My guess is about July or August. BOEM said on its website, when it announced acceptance of our lease, that it will take four months or so to do a full evaluation.
MR. MARTIN: What overall timeline do you expect for the project?
MS. WEINSTEIN: Let’s talk first about what will happen during the summer. There will be a request for interest, or an RFI, where BOEM will be looking for anyone else who may be interested in the same site. If others are interested in the site, then that site would go for auction. If there is no interest, then we will get an initial lease and we will start the National Environmental Policy Act process.
MR. MARTIN: How much do you expect to pay for the lease? I know the rent for leases off the east coast was established by auction.
MS. WEINSTEIN: The annual rent for an unsolicited lease is $3 per acre until the project starts generating electricity, and then the rent becomes a percentage of the electricity revenues. If there are other interested parties for the identical location, then the rent will be set by auction.
MR. MARTIN: What timetable do you expect overall for the project?
MS. WEINSTEIN: It is California. California is very different from any other state in the United States. The last time Californians permitted any new offshore development was in 1969. Californians don’t like offshore oil rigs. Our challenge is to persuade Californians that this is different.
BOEM gives you five years to get through the permitting. We probably will take all of that and then some more time. California has two state agencies whose missions are to protect the shoreline.
MR. MARTIN: So 2021 for permits at the earliest and then how long actually to put the project . . . .
MS. WEINSTEIN: About three years. We are planning to start delivering power in 2025.
MR. MARTIN: To whom will you deliver the power?
MS. WEINSTEIN: California is a deregulated market, so you can sell it to just about anybody. Utilities cannot own generation. They buy energy from independent power producers and then resell it to consumers. The California independent system operator – CAISO – is the entity that operates the transmission grid and, therefore, would move the energy.
We do not expect to have a long-term power contract in hand until sometime after 2020. It is way too early to start that dialog with utilities. You have to do it at the right time, and now is not the right time.
MR. MARTIN: You need capital with a lot of staying power. Where is the capital to develop this project coming from?
MS. WEINSTEIN: The capital is available. I don’t think that will be an issue.
MR. MARTIN: Two more questions. We have heard from both Jim Gordon and Chris Wissemann that state support is very important. Is there support from California for offshore wind?
MS. WEINSTEIN: Until we submitted the application, nobody seriously talked about offshore wind in California. People are starting to understand what it can provide to the state. Last October, the state passed a law that requires utilities to obtain 50% of their generation from renewable energy sources. Today it is solar, but solar alone would not provide for 50% renewables because it is not available all the time and, when you add storage, it becomes pretty expensive.
California is a deregulated state, so we are not really expecting a lot of support from the state. We will have to compete on market rates and that is how the project is structured. The technology is developing at a pace that, by the time we get through the NEPA process and permitting, at least two floating support structure technologies should be commercially available.
MR. MARTIN: Last question. You have bitten off a lot here. You have potentially a merchant project with prices that float with the market. You have an unproven technology. You are trying to build in a notoriously difficult state where it is very hard to build. Why not do something easier?
MS. WEINSTEIN: I guess I am not one who does the easy stuff. I am a little like Jim Gordon; I don’t shy from a challenge. Let’s look at those three things that you said. You need three basic elements to make a project viable. You need a market, technology maturity and a defined permitting regime.
By the time we get to 2025, California will need to add – and I underline add – 30,000 megawatts of renewable energy just to comply with its 50% target. Thirty thousand megawatts means that the state must add approximately 150 300-megawatt power plants between now and then. That’s a lot of energy, and that basically says the market is there.
Technology maturity: the technology is there, and it will be commercially viable and available. The technology is already being deployed in Europe. By the time we need to build, the banks will already have financed it elsewhere.
Californians are a different breed. I don’t know how they compare to the billionaires with whom Jim Gordon has had to contend, but they are very, very protective of their environment and the coastline. So far in our public outreach, we have been able to get people to accept that floating offshore wind could be one of the most benign types of renewable energy generation out of all the sources.
The use of floating offshore wind eliminates the Jones Act limitations because structures are built on shore, and they are towed fully assembled. This reduces the cost of construction as compared to fixed-foundation projects on the east coast.
The Energy Policy Act of 2005 designated BOEM as the lead federal agency for offshore wind.
MR. MARTIN: The project will have a long gestation period, so we should see a lot of you at future offshore wind conferences.
Kirby Mercer, turning to you and Beothuk Energy, I looked at your website. I couldn’t tell whether you are an equipment vendor, a construction contractor, or a developer.
MR. MERCER: We are a developer, but we thought it was smart strategically to put all the key facilities in place to implement our plan. That is why the website may be a little confusing. But we are a developer and our project that we have come to talk about today is in southwest Nova Scotia. It is designed as an export project. We are more than 200 miles away from the Canada geese, so we are not going to upset them there.
We are in shallow water. We have the issues with fishing with which we will have to deal. We are using gravity-based structures as our substructure. We have been building gravity structures on the east coast of Canada for the last 25 years. We are in the gas space, so we have been using that technology there. We are taking advantage of skill sets that are already in our backyard. We have a lot of the ports and other parts of the necessary infrastructure already in place.
We are thinking about mating the gravity-based structure with the topside as one unit and floating it out. We will do a lot of stuff at dockside.
MR. MARTIN: Let me unpack this a bit. How far offshore will you put your project?
MR. MERCER: From Nova Scotia, about 18 kilometers. From Massachusetts, about 220. [Laughter]
MR. MARTIN: What capacity?
MR. MERCER: A thousand megawatts.
MR. MARTIN: How large will the turbines be?
MR. MERCER: We are looking at seven-megawatt turbines.
MR. MARTIN: Explain what a gravity-based structure is.
MR. MERCER: It is a concrete foundation. It is pretty benign for the environment. We can amortize our project over a much longer life expectancy than if we drive a monopole into the ocean floor. One of the other reasons for a gravity base for us is we have had pack ice in the Gulf of Saint Lawrence farther north, so we are designing a substructure to deal with that.
There is also no disposal at sea. When the project reaches the end of its useful life, we can pull out the foundations. The environmentalists like that.
MR. MARTIN: How far advanced is the project?
MR. MERCER: That project is still in planning, although we do have a map route with a bathometric survey on it, getting it to a grounding site in New Hampshire, but we are still going through the environmental process. Our western Newfoundland project is a lot farther ahead. That project will be about 18 kilometers offshore, next to a major transmission route, where we have a world-class port and an international airport.
That project is moving very quickly. We are negotiating for offtake agreements right now and talking to major utilities about coming in as partners on that project.
MR. MARTIN: How many projects are you trying to develop?
MR. MERCER: We have six projects for about 4,500 megawatts of potential capacity.
MR. MARTIN: All in Canada?
MR. MERCER: All in Canada.
MR. MARTIN: What support are you getting from the Canadian government?
MR. MERCER: The new prime minister, Justin Trudeau, is keen to promote green technologies. This is a new space for Canada, and the federal government feels it can have national significance. The new government has put in place a couple billion dollars of infrastructure funding to support green energy development. Some of it should be available to help offshore wind development.
It is not just federal support, but there is also provincial government support for this new sector. With the downturn in the oil and gas space in Canada, just like in Europe, people who were working in offshore oil and gas have moved to offshore wind. A number of Atlantic Canadian companies think there is a huge opportunity.
The developers of the Deepwater project had to go to the Gulf of Mexico to get a lot of things made. We have that capacity right next door in Atlantic Canada.
MR. MARTIN: Let’s move to a general question, and then we have to wrap up. Jim Lanard said in his opening speech at this conference that for offshore wind to succeed, there has to be competition on price for the utility PPAs on offer. You do not get such competition when the bidding is over who gets the offshore lease, and then there is only one leasehold owner to whom the PPA can be awarded. Did you agree with that part of his speech? Chris Wissemann?
MR. WISSEMANN: Absolutely. Competition is needed to give agencies that are awarding these contracts the political cover to say that the prices are as competitive as they can be. Competition is also one of the biggest drivers to get costs down.
MR. GORDON: I take a different view. Competition is critically important and it is great that it is coming, but we are at a point where we need to kick start this industry. Let me give you an illustration. The solar industry is flourishing in Massachusetts and New Jersey. What happened was that many, many people within the industry -- panel manufacturers, installers, developers -- got together, built up a stakeholder group and started lobbying. They talked to regulators. They lobbied legislators. It was not just a couple pioneers or lone voices in the wilderness. It was a crowd.
The price of installed solar capacity has come down by 60% to 70% in the last 10 years. When it first started, in Massachusetts, you had solar renewable energy credits trading for 40¢ a kilowatt hour. Cape Wind’s price back when we had our contracts was 18.7¢. Solar was getting 40¢ for the SRECs plus 10¢ for the energy.
The first movers in solar got rewarded with the higher prices because the equipment and installations were going to cost more and the first mover always takes more risk.
Here is something else. You can’t fly here from Europe once a year to come to a conference and go back thinking this industry is going to progress as quickly as you want it to. What you need to do is think about getting involved in Offshore Wind Massachusetts, Matt Morrissey’s group, by contributing toward the funding, the expertise, to start really building a stakeholder group that will be listened to by the legislators, the regulators, and the public. One of the fastest ways we can kick start this industry is by putting our money and knowledge together to make it happen.
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
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