The low cost of European offshore wind energy is the result of several factors, including advanced turbine technology, the availability of specialty construction vessels, concentrated supply chain expertise and consistent policy support.
Europe Blows Away the Competition
Richard Streeter, Joshua Belcher and Jim Thompson | Eversheds Sutherland LLP
What key lessons can US energy developers take away from major European players?
US energy developers can learn three key lessons from the successes of European offshore wind projects. The first is to find an established partner and collaborate in the development, construction and operation of an offshore wind project. Experience in the European sector has shown that these arrangements can be mutually beneficial. Second, US developers should use a veteran first tier supply chain, but subcontract locally. Not only will this help build long-term capacity in the local engineering and fabrication sectors, but it will also help secure critical stakeholders as political allies in the development process. Third, developers should use consultants and advisers highly knowledgeable in the offshore and wind energy sectors. The first wave of successful offshore wind projects in the US will be constructed using a sophisticated supply chain. US companies should engage these vendors using seasoned advisers familiar with market legal and commercial contractual positions, as well as federal and state regulatory requirements. Deep experience in infrastructure development also will be important for designing and implementing a critical path analysis to support commercial objectives.
Is there as much natural opportunity (i.e., windy places) to be developed in the US?
Offshore wind is plentiful in the US, with estimates of roughly 4,200 GW of gross resource potential. Despite the abundance of natural opportunity, the ability to harness this wind economically will depend on a number of factors, including geography, weather patterns, load growth and location, advances in turbine technology and onshore/offshore transmission infrastructure, to name just a few. For example, about 60% of US offshore potential is over waters deeper than 60 meters, inaccessible by currently deployed commercial technologies. To further illustrate the challenge, though the federal government has predicted that upwards of 22,000 MW will be installed within the next 12 years, commercial capacity installed to-date stands at just under 30 MW. However, the lag in US development has less to do with technical feasibility than US developers’ historic pursuit of less expensive land-based renewable alternatives.
What do major European players need to consider when developing projects in the US?
European developers face their own learning curve when it comes to developing projects in the United States and would be well-advised to find domestic partners that are familiar with the commercial and regulatory landscape. The federal government has jurisdiction over the activities on the Outer Continental Shelf starting at three nautical miles off the coast. Within that boundary, the coastal states drive land leasing and project approvals. Despite efforts to streamline both federal and state permitting programs, the regulatory environment remains highly complex, not to mention politically charged.
What are the challenges to the low cost of offshore wind in Europe being achieved in the US?
The low cost of European offshore wind energy is the result of several factors, including advanced turbine technology, the availability of specialty construction vessels, concentrated supply chain expertise and consistent policy support. All of these factors can be achieved in the US, some more readily than others. While European developers and their supply chains have already begun to engage with potential US opportunities, homegrown engineering and fabrication capacity needs to be increased, along with revitalization of dormant coastal port infrastructure. The regulatory and policy landscape at the state and federal levels could use further streamlining.
How do regulatory hurdles compare in the US as against the European experience?
In Europe, the offshore wind market is still policy-driven, depending largely on the reliability of regulation and the stability of political support in the region. The industry has only moved forward in Europe where there has been ambitious national pledges secured by a clear governance, and strong incentives that signal long-term commitment to offshore wind. The industry has not thrived in periods where clear policy and political direction were absent. Coastal European countries have individual policies in place and varying regulatory regimes. Going forward, more can be achieved with the development of a fully integrated European electricity network to transmit power generated offshore where it is needed most. While this objective is still a way off, it is seen as a critical step towards widespread offshore wind energy deployment.
Coastal and offshore development in the US is subject to a unique overlay of local, state and federal requirements. Relatively few projects will be constructed exclusively in state waters. As noted above, offshore leases and the permitting of activities on the Outer Continental Shelf are subject to federal jurisdiction. The lead agency for the purposes of offshore wind energy will be the Bureau of Ocean Energy Management, but there will be roles for a host of other federal agencies, including the Coast Guard, the Army Corps of Engineers, the National Oceanic and Atmospheric Administration, the Fish and Wildlife Service and the Environmental Protection Agency, all of whom will exert some influence on the permitting process. Transmission cables, substations and other infrastructure bringing the power to shore will necessarily require additional state and even local land use approvals.
After identifying all of the jurisdictional authorities, the multiple permits and approvals must be charted against each agency’s unique process and timeline, accounting for stakeholder participation. Opportunities to coordinate overlapping activities should be analyzed to eliminate duplication and maximize efficiency when conducting required environmental inventories and impact studies.
Projects located in federal waters have the added complexity of the Coastal Zone Management Act, which requires that states confirm that federally permitted activities are consistent with their federally approved coastal zone management programs, giving states a virtual “veto” over undesirable federal projects. Navigating this approval process will require early and active engagement with local stakeholders and careful coordination with state and local regulators.
Already, federal regulators appear to be learning from the European experience. The Bureau of Ocean Energy Management recently proposed draft guidelines that would give offshore wind energy project developers a degree of flexibility to defer making certain design decisions until later in the project development process. This signals a US recognition of the need for aligning its development policies with principles that have been proven successful in the UK’s renewables initiatives (i.e., the Rochdale Envelope approach).
How does the US energy market compare against other international markets?
With some exceptions, markets for delivering power in the US fall roughly into two systems: state regulated energy markets and market-regulated markets run by regional transmission organizations (RTOs) or independent system operators (ISOs). Regulated energy markets typically involve sales of electricity directly among electric utilities and electricity traders in the wholesale markets before it is eventually sold in the retail markets to consumers. They exist primarily where vertically integrated utilities own the generation, transmission and distribution systems. The utilities, which are monopolies in their particular service territories, are typically regulated by state agencies. Power trading occurs through bilateral transactions in the wholesale markets, in which independent power producers (IPPs) have the opportunity to make sales to utilities through power purchase agreements (PPAs). Except in the few instances where a utility has adopted a “green tariff” to allow customer access to large-scale renewable power, IPPs do not have the ability to sell directly to customers in the retail markets.
The RTOs and ISOs run the electricity markets in their respective regions by operating the transmission grid. They manage transmission congestion, coordinate the maintenance of generation and transmission systems, and oversee the transmission planning process to identify needed upgrades. The RTOs and ISOs are independent of the utilities that make up their membership. They do not own nor maintain transmission or generation assets, and they do not directly serve retail customers. The RTOs and ISOs usually trade energy between their members through day-ahead and real-time markets. Bilateral transactions are still possible and may exist. In large part, it is the RTO/ISO markets in the US with which most European developers will be familiar.
What needs to happen to keep the US wind market open for expansion in the near and distant future?
One key to Europe’s success has been the setting of ambitious binding targets for EU countries to increase their share of energy from renewable sources. In 2009, the Renewables Directive set binding targets for all EU member states, so that the EU will reach a 20% share of energy from renewable sources by 2020. Recently the European Union voted to increase its binding targets on both energy efficiency and renewable energy, sending a signal to member states to scale-up clean energy policies. Offshore wind has the scale to allow EU countries to achieve these targets within a relatively short period of time. The combination of the falling costs of offshore wind energy and these ambitious targets will continue to drive the expansion of the offshore wind market for the foreseeable future.
Likewise, strong political support in the US at the state and federal levels will be key. Technology improvements continue to drive down costs, but a robust market environment helps maintain investment in research and development at a level necessary to spur further innovation. At the moment, the US continues to struggle to create consistent policies regarding energy and climate change that might help to bolster the transition to more renewable energy resources like offshore wind. Coastal states can take the lead here by specifically incorporating offshore wind into their own ambitious renewable energy portfolio standards. Consensus also has begun to coalesce around the need for massive investment and streamlined permitting review for critical energy infrastructure. This infrastructure would include upgraded transmission, grid enhancement and new generation capacity and could have significant benefits for US energy development well beyond the offshore wind sector.
About Richard Streeter
Richard Streeter, Partner in the London office of Eversheds Sutherland (International) LLP, has extensive experience in financing, constructing, operating and divesting large European infrastructure projects. He has deep first-hand knowledge of the offshore wind industry and the specific issues arising in construction and O&M contracts. He can be reached at email@example.com.
About Joshua Belcher
Joshua Belcher, Counsel in Eversheds Sutherland (US) LLP’s Houston office, has a national, multidisciplinary practice advising clients in the utility, power and pipeline sectors. He has experience in both the development and acquisition of utility-scale renewable energy facilities in the US, including wind and offshore leases. He can be reached at firstname.lastname@example.org.
About Jim Thompson
Jim Thompson, Counsel in Eversheds Sutherland (US) LLP’s Washington DC office, counsels large industries and utilities on a wide range of complex energy and environmental permitting, compliance and project development issues throughout the US, including the siting of land-based and offshore renewable energy generation and transmission facilities. He can be reached at email@example.com
The content & opinions in this article are the author’s and do not necessarily represent the views of AltEnergyMag
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