United States

United States

Analysis - post-auction uncertainty for US offshore

UNITED STATES: After eight years in the making, the recent first-ever competitive auction for offshore wind leases in US federal waters was a welcome step forward for the nascent industry.

The two parcels won by Deepwater
The two parcels won by Deepwater

But many hurdles remain before turbines actually start spinning above the 164,750 acres of ocean floor off the coast of Rhode Island that went up for grabs in the auction.

"This is a necessary starting point but there is so much more to check off," said Luke Lewandowski, lead analyst for North America at Make Consulting.

The lease sale, held on July 31, was the first of a handful the Bureau of Ocean Energy Management (BOEM) is planning to help spur offshore wind development along the US Atlantic coast. Two separate parcels were on this auction block and Deepwater Wind, based in Rhode Island, beat Philadelphia-based Sea Breeze Energy LLC and US Wind, a subsidiary of the Italian renewable energy company Renexia, to win both in 11 rounds of online bidding.

The company bid just over $3.7 million for the 97,500-acre north lease area, which has a potential capacity of 1955MW, and just $94,153 for the 67,250-acre south lease, which has 1440MW of potential.

The big price difference comes down to the characteristics of the two parcels, according to Deepwater Wind CEO Jeff Grybowski. The two have similar wind regimes, but the south area is in deeper water and further from shore, making for a costlier build, and Grybowski believes the north site will be developed first.

Deepwater plans to install around 200 turbines with a combined capacity of 1 to 1.2GW in the lease areas, with the project built in stages. The size and timing of the build, however, depends on finding a buyer for the power.

"That is the driving factor on when the phases are built," said Grybowski. "The earliest some turbines could be operational would be 2017."

The company has been actively marketing the power from its planned project, known as the Deepwater Wind Energy Center, throughout the region and Grybowski is confident it will ultimately sign a number of power purchase agreements.

"We wouldn't have bought the lease if we weren't optimistic," he said.

But finding a market for higher-cost offshore wind in the US has proven to be a challenge, says Lewandowski, and he points to the 468 MW Cape Wind project, which after more than a decade of development, still needs a buyer for a portion of its output and has yet to complete financing.

Unsettled federal energy policy is also an issue, Lewandowski said. The US has a 30% investment tax credit in place now, but that will expire at the end of the year with no guarantee it will be renewed.

The lack of a clear market opportunity was probably a factor in why only three of nine companies pre-qualified to participate in the auction actually turned up to bid, according to Jim Lanard, president of the Offshore Wind Development Coalition.

"Even some of those companies that might be willing to take that risk might be looking to do it where the efforts at creating a market are further along," he said.

Cost may also have caused the lack of interest in the auction. On top of the bid price, Deepwater must pay an annual rental fee of $500,000 a year to the federal government until a wind farm is built. "They are putting down a lot of money for this," Lewandowski said.

In fact, Lanard said, coalition staff were surprised to see the bidding going as high as it did, in what was an inaugural auction in a market that is still not mature. But he sees it as an indication of how developers view the offshore opportunity.

"We're delighted that they value the lease as highly as they do," he said.

One thing to bear in mind when considering the future of such auctions is that Deepwater did have both a market and a cost advantage going into the competition. It was selected as Rhode Island state's preferred developer for offshore wind in a 2008 request for proposals, which earned it a 20% credit on the cost of the more expensive north site lease, for its work in helping identify offshore areas for wind development.

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