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United States

United States

Europe offers lessons in offshore innovation and finance

UNITED STATES: A number of offshore wind energy projects are under development in the US, around the coast and in the Great Lakes.

(Illustration:James Fryer)
(Illustration:James Fryer)

The US Department of Energy (DOE) allocated over $43 million in 2011 to research projects, under the broad umbrella of technology development and market-barrier removal. A further $168 million of advanced-technology development and demonstration funding was awarded last year as part of president Barack Obama's commitment to developing domestic energy resources. The work being funded by the DOE is a great step in developing a new US industry.

Industry expectation is that this latest round of funding will make great strides towards kick-starting a sector that has encountered many challenges in the US, largely due to a lack of coherent national energy policy. Offshore wind can be a strong growth catalyst as economies move out of recession, injecting supply-chain development and job creation while increasing energy security and helping to stabilise climate change.

The ultimate goal is for the offshore wind sector to be self-supporting. To achieve this, its levelised cost of energy must become more competitive with other low-carbon forms of energy, and here the US can learn from other offshore wind markets.

During the early stages of the UK offshore sector, the turbine makers and utilities undertook most research in-house. Only more recently has significant research and funding been dedicated to cost reduction through innovation. The US government should be applauded for its forward thinking and significant up-front investment, without a single turbine yet being installed in US waters.

Financing

While most European projects have been constructed off balance sheet by major utilities and consortia, there has been an increase in recent years for non-recourse project financing, which broadens development opportunities to outside of the energy utilities.

It is widely anticipated that the US offshore sector will be driven principally by the ability to attract project finance. This should accelerate the pace of development in the US, where utilities have largely been inactive. Even during the insecurity of an extended production tax credit, offshore projects were securing power purchase agreements and moving towards financial close.

Funding will continue to be key for US offshore sector growth. With US banks unfamiliar with offshore wind risk, it is likely that European and Asian banks will be the first to become involved, perhaps in syndication with US banks. I believe that the experience of these banks will help to increase the rate of acceptance among US investors. To this end, understanding and eliminating risk should be a primary area of focus for business leaders, right from the early stages of development in order to unlock capital later down the line.

Technical risks can be offset through robust planning and project management but, in our experience, this must be a holistic process, requiring up-front investment to ensure the project is sufficiently attractive at the financing stage. Construction and operation risks can range from adverse weather to cost escalation and project delay, all of which can be major causes of concern for potential investors.

In addition to ensuring projects are attractive to investors through understanding risk, stability of policy and financial incentives are also fundamental to ensuring real market growth. The US has laid the groundwork for the offshore wind industry to begin to establish itself, but a long-term national energy policy and incentives will be necessary to help sustain it.

Sebastian Chivers is senior vice-president at PMSS, the renewable energy division of consulting and certification firm TUV SUD, where he leads its North America business unit from New York City

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