THE COST OF OFFSHORE WIND

Study outlines Virginia offshore energy prospects
Steve Szkotak, May 3, 2010 (AP via Bloomberg BusinessWeek)

THE POINT
It is no mere coincidence that Virginia Offshore Wind Studies, July 2007 to March 2010; Final Report begins with a discussion of power prices and the impact that putting a price on greenhouse gas emissions (GhGs) will have on power prices. The Virginia Coastal Energy Research Consortium (VCERC), which oversaw the long and authoritative study and produced the report, knows only too well what the rest of the nation is about to learn: The future of offshore wind energy depends on how much electricity costs ratepayers.

Right now, much of the price of fossil fuel-generated electricity is paid by taxpayers in the form of healthcare costs, transportation system costs and many other costs that are external to the price for electricity on ratepayers’ utility bills and are therefore called externalities.

Electricity generated from fossil fuels seems "cheap" in the same way that the price of vehicle gas refined from oil seems "cheap." The "cheap" gas does not include the REAL costs carried by taxpayers for cleaning up messes the oil industry makes like the current Gulf Coast oil spill just as "cheap" electricity does not include REAL costs carried by communities and taxpayers for coal mine cave-ins and coal mining's environmental devastation.

Those who understand the importance of shifting to a New Energy economy want to see such externalities become internal to the price of fossil fuels. Those who don’t want a New Energy economy describe the cost imposed by making externalities a part of the price of gas and electricity as a subversive tax. Actually, shifting REAL costs to the price at the pump and the price on the utility bill is a shift from one form of tax to another. Such a shift would more accurately price the cost of burning for transportation and spewing to generate electricity and thereby make the use of sun and wind and water power more equitable.

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Virginia is uniquely positioned to both understand and be burdened by the falsely "cheap" price of fossil fuel-generated electricity. Its Atlantic winds are abundant. Yet the cost of reaping those winds is nowhere near competitive with the cheap coal-fired power its profligate citizens now consume unconcerned by consequences and unburdened by REAL costs.

The VCERC paper runs the numbers and demonstrates that offshore wind is on its way to becoming cost competitive but will not likely be so before 2018. Shifting to the fossil fuel industries the costs for the pollutions they generate will hasten that parity. The responsibility can be imposed in the form of a price for GhGs or a requirement to install GhG-capturing equipment or any combination of those and other means.

The paper identifies 25 leasing sectors off Virginia's coast with a 3,200-megawatt offshore wind potential that could be developed without creating any conflicts with other offshore activities (Naval, Aeronautic, recreational, fishing, shipping, oil and gas drilling, etc.) in the region. The offshore projects would be 12 miles offshore where they would raise no aesthetic objections.

Development of offshore wind can benefit Virginia in several ways. The high cost of offshore wind can be diminished if there is a domestic turbine manufacturing industry and supply chain. This offers economic opportunity especially appropriate to the shipbuilding industry along Virginia’s Hampton Roads Naval coast. Such an industry, designed to reap the fullest benefits of Virginia's readily available offshore assets, could generate 9,700 to 11,600 jobs within 20 years, add an estimated $403 million to the local economy and cut electricity costs an estimated 1.5 cents per kilowatt hour.

An observation from VCERC on the environmental impacts of offshore wind: A utility (PJM) study found that 15,000 MW of wind capacity would displace 26,300 gigawatt-hours (GWh) of coal and 13,000 GWh of natual gas, cutting 34-to-37 million short tons of CO2 per year even without a price on emissions. This could lower electricity prices $4.50 to $6.00 per MWh. Assuming a yearly demand of ~789,000 GWh in 2013, this is customer savings of $3.55-to-$4.74 billion per year. More importantly, it saves innumerable shellfish and other ocean life by preventing more severe ocean acidification.

One final point: The paper points out that the affordability of offshore projects hinges on the use of economic best practices because the subsidies so effectively used in Europe to drive offshore wind’s growth are unlikely to be legislated into practice in Virginia.

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THE DETAILS
Based on new generation projects of 600 megawatts going into service in 2012, LCOE in March 2008 dollars are $105-to-$130 per megawatt-hour (MWh) for an offshore wind farm using 3 MW turbines with 90m diameter rotors, $85-to-$100 per MWh for a coal-fired plant, and $80-to-$100 per MWh for a combined-cycle natural gas turbine (CCGT) plant.

Assumptions, based on utility forecasts and market futures: (1) coal at $65-to-$70 per short ton in 2012 and going up 0%-to-2% per year and (2) natural gas at $7.00-to-$7.50 per million BTU in 2012, going up 2%-to-4% per year.

Not included: (1) CO2 costs, (2) sales of renewable energy certificates, and (3) the cost of carbon capture and sequestration (CCS).

It is reasonable, based on the best recent studies, to assume for CCS: (1) a $50 per ton of carbon dioxide (tCO2) cost, (2) 1.0 tons of CO2 per MWh for coal plants and (2) 0.4 tons of CO2 per MWh for a natural gas CCGT plant.

CCS would make the cost of a coal plant $135-to-$150 per MWh and the cost of a natural gas plant $100-to-$120 per MWh.

CCS would make offshore wind cost competitive and likely cheaper than fossil fuels.

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Without CCS, fossil fuel plants will no doubt have to pay for their greenhouse gas emissions through a Cap&Trade system, a carbon tax or some combination of those and other means, adding comparable costs to fossil fuel-generated electricity.

The sale of RECs is likely to offset the costs for offshore wind.

VCERC's estimates of offshore wind costs are based on the Vestas V-90 3MW turbine with a hub height of 80 meters above sea level. Wind speed data from the Chesapeake Light tower (CHLV2) confirms the productivity assumptions used.

The best utility and market forecast predictions show fossil fuel price volatility and escalation. It is expected to double by 2018 and triple by 2028. The rigorous VCERC modeling showed offshore wind becoming competitive as soon as 2017.

Dominion Virginia Power’s reliance on fossil fuels makes Virginia electricity price increases likely. Offshore wind would serve as a hedge against the price volatility until it becomes price competitive.

The 3 major costs for an offshore wind project (80% to 85%) are (1) the turbine-and-tower packages, (2) the foundations, and (3) the deep sea transmission cables.

Offshore wind turbines similar to the Vestas V90 3 MW design manufactured in the U.S. and ordered in quantity would cost $2,160 per kW for the turbine-and-tower package.

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This is based on the 630 MW turbine supply contract for Phase I of the London Array: €1 billion ($1.36 per €) to Siemens in May 2009 for 175 3.6 MW turbines.

The cost of foundations to meet Virginia’s offshore wind and wave conditions (monopiles averaging a weight of 362 metric tons) was estimated by VCERC at $410 per kilowatt. The costs were based on Britain’s 300 MW Thanet offshore wind project and the Vestas V90 3MW turbine in comparable water depths.

Foundations require 110 metric ton transition pieces of steel. They also require secondary steel (access ladders, boat landings, platforms, railings and stanchions, J-tubes, mountings for sacrificial anodes). Estimates were made for the cost of steel and the manufacture of the secondary parts. For foundations, VCERC estimated a $431 per kW cost.

The high-voltage, armored submarine power cables, for which there are no manufacturing facilities in North America, would be purchased from Italy (Prysmian), Germany (NKT), Norway (Nexans), or Sweden (ABB).

Cable cost estimates were based on the 630 MW Phase I London Array project. Each cable core has three copper conductors. Delivered in 2011 and 2012, the cost is estimated at $2.67 million per kilometer or ~$5.48per km per kW. Cable prices will fluctuate with copper prices.

Between 2007 and 2008, average turbine prices varied 7% to 13.5%. In the same time period natural gas prices fluctuated by a factor of 2.5-to-2.6 times.

In March 2009 in Europe, offshore wind project costs averaged €2.1 million per MW and onshore project costs averaged €1.2 million per MW, a ratio of 1.75. The cost for U.S. land-based projects in 2008 was $1,915/kW. Multiplying this by the European offshore-to-land-based cost ratio of 1.75 suggests U.S. offshore project costs would be $3,350/kW, or 3% more than the $3,260/kW estimate in the VCERC model. Other modeling methods reinforce the general accuracy of the VCERC calculations.

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The risk that the VCERC estimates are inaccurate hinge largely on the accuracy of estimated wind data, especially the projected project location, wind speed and resource height.

The single most important way to control costs is to bring turbine manufacturing to Virginia or, in essence, near to where the turbines will be installed. Virginia’s Hampton Roads is the ideal type of assembly plant location because it has large, open areas where deep-water wharves have unconstrained access to open ocean.

Bringing manufacturing to Virginia means building a chain of first- and second-tier suppliers locally that would utilize Virginia’s steel fabricators to supply components (yaw bearings, gears, shafts, nacelle base plates, etc.).

Costs for both turbines made in Europe and turbines made domestically are dominated by the cost of the turbine but domestic manufacturing, if the right turbines are chosen, control costs significantly more effectively.

Domestically manufacturing turbines would likely lower project costs $480 per kilowatt, lowering the cost of offshore wind-generated electricity by ~$15 per MWh to $90 to $115 per MWh.

The savings from the installation of 2 ~600 megawatt projects would pay the ~$500 million cost of building a turbine manufacturing complex.

It also minimizes shipping costs and shipping delays.

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These considerations are crucial because the financing advantages created for offshore wind by European incentives are unlikely to be available for U.S. offshore wind. This makes it vital that U.S. offshore wind projects be as cost competitive as possible.

Specific environmental issues that will affect the siting of offshore projects in the Mid-Atlantic Bight:

(1) Surveys requiring further study suggest resident seabird activity diminishes with distance from shore and beyond 12 nautical miles may be minimal, though it increases near the Gulf Stream, beyond the continental shelf.

(2) Little is known about north-south bird migration over the open Atlantic, even less is known about bats and migration routes are unmapped but it is known that some federally-listed threatened and endangered species of shorebirds (Roseate Tern, Piping Plover, Red Knot) fly from the Delmarva Peninsula to the West Indies and South America, which takes them over possible offshore wind project sites.

(3) Varying species fly at varying heights – pertaining to turbine height selection – at varying times, seasons, weather and other conditions and more information is needed.

(4) Some bird species, in some conditions, may avoid turbines and some (gliders like petrels and shearwaters) can less avoid collisions, especially in high winds and storms.

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(5) Turbines can act as artificial reefs and increase the hazard for some species (cormorants, gannets, gulls, pelicans) that look for more frequent landings.

(6) Sea ducks and gannets use the shoals that are lower-cost foundation sites but further study could identify shoals outside their routes.

(7) Visual study and avian radar monitoring must be correlated.

(8) FAA requirements dictate proper lighting for turbines and met towers.

(9) Best-practice guidelines for onshore projects point the way to effective lighting.

(10) Mimimum structural factors at turbine bases will prevent avian roosting and nesting. Blade colors can minimize bird collision risk.

(11) Interstate coordination of offshore wind project construction up and down the Atlantic Coast can minimize the impact on North Atlantic Right Whale seasonal
migration.

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(12) Minimizing the noise from high-energy hammers driving monopile foundations will protect some marine mammals (Bottlenose Dolphins, sea turtles) during construction and acoustic pingers can drive some (seals, Harbor Porpoises) away.

(13) Because at least 2 of the 5 Atlantic Ocean sea turtles federally listed as threatened or endangered will probably forage around offshore turbine bases for crabs and mussels that will be abundant on foundation structures, trawling there must be prevented.

(14) Building turbine foundations and laying cables will kill and dislocate some shellfish and related invertebrates but populations should recover within months.

(15) The U.S. Navy may have the best environmental data available.

(16) There will be air and water harm from construction and other equipment.

(17) Environmental risk assessment studies should be rigorously designed and include post-construction monitoring and mitigation plans.

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The VCERC paper also includes sections on mapping and the economic development potential for the region.

In a detailed commercial development roadmap, VCERC makes it clear the decision to proceed will not come sooner than the first half of 2010, it will take 2-to-3 years for a non-competitive or competitive leasing process so that construction could not start before 2016-to-2017 and generation would not likely come before 2019-to-2020. It could come a year earlier if the leasing process is the less time-consuming non-competitive one.

The only way offshore wind in the Mid-Atlantic Bight will be price competitive is with the best designed equipment and a price on GhGs.

A government policy roadmap begins with policies that streamline approvals and leasing. Policies that put a price on GhGs are also essential. Equally important are policies that facilitate transmission system approvals and upgrades, including backbone systems that make project development less expensive. Finally, policies that spawn improved R&D and better cheaper technology will make offshore wind more price competitive sooner.

Also needed:
(1) More meteorological, oceanographic, avian, and marine environmental data;
(2) Public-private partnerships to build better ports and logistical equipment (barges, cranes, etc.); and
(3) Make commercial development of offshore wind compatible with other ocean
uses (naval facilities and operations, government and commercial space flight operations, shipping lanes, recreational and commercial fisheries, and avian and marine species and habitats).

From elaborate mapping of the offshore wind resource and the other offshore activities in the region, the VCERC study identified the 25 most likely areas where development can move ahead without conflict.

The paper also identifies where offshore oil and gas development is possible and how wind projects can avoid or be compatible with them.

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QUOTES
- From the VCERC study: “If our region simply replicates the European model, we run the risk of developing and building offshore wind projects that cannot be commercially viable without government policy incentives and financial subsidies comparable to those available in Europe. This report describes an alternative path of commercial development, applied research, and government policy-making that VCERC believes is more likely to yield offshore projects with sustainably profitable financial returns, creating an entirely new energy economy.”

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- From the VCERC study: “Given the large offshore wind resource that exists in shallow waters beyond the visual horizon off Virginia and the center of shipbuilding and military-trained workforce candidates that exist in Hampton Roads, the Commonwealth has every reason to become a national leader in this development.”