TODAY’S STUDY: WHERE OFFSHORE WIND IS IN THE WORLD

Offshore Wind Market and Economic Analysis 2014 Annual Market Assessment

Michael Hahn, Patrick Gilman, August 27, 2014 (Navigant Research for the U.S. Department of Energy)

Executive Summary

The U.S. offshore wind industry is transitioning from early development to demonstration of commercial viability. While there are no commercial-scale projects in operation, there are 14 U.S. projects in advanced development, defined as having either been awarded a lease, conducted baseline or geophysical studies, or obtained a power purchase agreement (PPA). There are panels or task forces in place in at least 14 states to engage stakeholders to identify constraints and sites for offshore wind. U.S. policymakers are beginning to follow the examples in Europe that have proven successful in stimulating offshore wind technological advancement, project deployment, and job creation.

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This report is the third annual assessment of the U.S. offshore wind market. It includes the following major sections:

• Section 1: key data on developments in the offshore wind technology sector and the global development of offshore wind projects, with a particular focus on progress in the United States

• Section 2: analysis of policy developments at the federal and state levels that have been effective in advancing offshore wind deployment in the United States

• Section 3: analysis of actual and projected economic impact, including regional development and job creation

• Section 4: analysis of developments in relevant sectors of the economy with the potential to affect offshore wind deployment in the United States

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Section 1. Global Offshore Wind Development Trends

There are approximately 7 gigawatts (GW) of offshore wind installed worldwide. The majority of this activity continues to center on northwestern Europe, but development in China is progressing as well. In 2013, more than 1,700 megawatts (MW) of wind power capacity was added globally, with the United Kingdom alone accounting for 812 MW (47%) of new capacity. In total, capacity additions in 2013 showed a roughly 50 percent increase over 2012, finally surpassing the pace of installations achieved in 2010. It appears that near-term growth will continue, with more than 6,600 MW of offshore wind under construction in 29 projects globally, including 1,000 MW in China. While this upward trend is encouraging, uncertain political support for offshore wind in European nations and the challenges of bringing down costs means that the pace of capacity growth may level off in the next two years.

Since the last edition of this report, the U.S. offshore wind market has made incremental but notable progress toward the completion of its first commercial-scale projects. Two of the United States’ most advanced projects – Cape Wind and Deepwater’s Block Island project – have moved into their initial stages of construction. In addition, continued progress with the Bureau of Ocean Energy Management (BOEM) commercial lease auctions for federal Wind Energy Areas (WEAs) has contributed to more projects moving into advanced stages of development. In total, 14 U.S. projects, representing approximately 4.9 GW of potential capacity, can now be considered in advanced stages. 1 A map showing the announced locations and capacities of these advanced-stage projects appears in Figure ES-1.

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On the demonstration project front, the DOE announced continued funding for Offshore Wind Advanced Technology Demonstration (ATD) to three projects in May 2014. Fishermen’s Energy, Dominion, and Principle Power were each selected for up to $46.7 million in federal funds for final design and construction of pilot projects off New Jersey, Virginia and Oregon, respectively, from an original group of seven projects that were selected in 2012. Two of the other original seven, the University of Maine and the Lake Erie Economic Development Company of Ohio, will receive a few million each, under separate awards, to continue the engineering designs of their proposed pilot projects.

Overall, offshore wind power project costs may be stabilizing somewhat compared to their recent upward trend. Notably, for those projects installed in 2013 for which data were available, the average reported capital cost was $5,187/kW, compared to $5,385/kW for projects completed in 2012. While it appears that the stabilizing trend may continue for projects completed in 2014, a lack of data for projects anticipated to reach completion in 2015 and 2016 makes it difficult to assess whether the trend will continue. Note that all such capital cost data are self-reported by project developers and are not available for all projects globally; therefore, it may not be fully representative of market trends.

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Globally, offshore wind projects continue to trend farther from shore into increasingly deeper waters; parallel increases in turbine sizes and hub heights are contributing to higher reported capacity factors. While the trend toward greater distances helps reduce visual impacts and public opposition to offshore wind, it also requires advancements in foundation technologies and affects the logistics and costs of installation and maintenance. On the positive side, the trend toward higher-capacity machines combines with increasing hub heights and rotor diameters to allow projects to improve energy capture by taking better advantage of higher wind speeds.

The average nameplate capacity of offshore wind turbines jumped substantially from 2010 to 2011 as projects increasingly deployed 3.6 MW and 5 MW turbines. Since then, however, average turbine size has plateaued around 4 MW. This leveling off of average turbine size will likely continue over the next two years as previously ordered 3.6 MW machines are deployed and Asian manufacturers work to catch up with their European counterparts. The upward trend in average turbine sizes will likely resume toward 2018 as developers begin deploying more 5.0 MW and larger turbines. The average turbine size for advanced-stage projects in the United States is expected to range between 5.0 and 5.3 MW, indicating that U.S. projects will likely utilize larger offshore turbines rather than smaller turbines that have previously been installed in European waters.

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The shift to more distant locations and larger capacity turbines, along with a desire to minimize tower top mass, has driven continued innovation in drivetrain configurations; however, the majority of installed turbines continue to use conventional drivetrain designs. Other configurations, such as direct-drive and medium-speed drivetrains, have been limited to a combined 3 percent market share of cumulative installed capacity. Deployment of turbines with alternative drivetrain configurations will likely increase significantly over the next several years, as the new 5 to 8 MW class turbine models from Siemens, Vestas, Areva, Alstom, and Mitsubishi are installed at commercial projects.

The past year has seen a continued trend for substructure design innovations, as the challenges of installing larger turbines, siting projects in deeper waters, and the need to reduce installed costs persist. While much of the focus in recent years has been on alternatives to the conventional monopile approach (due to various limitations), the advent of the extra-large (XL) monopile (suitable to a 45 m water depth) may have somewhat lessened the impetus for significant change. Regardless, the optimal type of substructure (and the potential for innovation) is largely driven by site-specific factors, and plenty of opportunity remains for new designs that can address developers’ unique combinations of needs. In the near-term, monopiles will continue to comprise the majority of new installations, with multi-pile (jacket and tripod) designs showing notable increases. In addition, the industry continues to explore the potential for floating foundations, with several demonstration-scale projects currently operating and additional installations planned.

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Section 2. Analysis of Policy Developments

U.S. offshore wind development faces significant challenges: (1) the cost competitiveness of offshore wind energy;2 (2) a lack of infrastructure such as offshore transmission and purpose-built ports and vessels; and (3) uncertain and lengthy regulatory processes. Various U.S. states, the U.S. federal government, and European countries have used a variety of policies to address each of these barriers with varying success.

For the U.S. to maximize offshore wind development, the most critical need continues to be stimulation of demand through addressing cost competitiveness and providing policy certainty. Key federal policies expired for projects that did not start construction by year-end 2013: the Renewable Electricity Production Tax Credit (PTC), the Business Energy Investment Tax Credit (ITC), and the 50 percent first-year bonus depreciation allowance. However, the Senate Finance Committee recently passed an extension of both of the PTC and ITC through 2015, maintaining the same new definition of commencing construction, as part of a comprehensive tax extenders bill covering 51 other industries and there is some chance that the full Senate and House will adopt this before the end of 2014.

Furthermore, the DOE announced three projects that will each receive up to $47 million to complete engineering and construction as the second phase of the Offshore Wind Advanced Technology Demonstration Program. On the state level, Maryland began promulgating rules for Offshore Renewable Energy Credits (ORECs) for up to 200 MW, and the Maine Public Utility Commission approved a term sheet with a team led by the University of Maine for a pilot floating wind turbine project. Increased infrastructure is necessary to allow demand to be filled. Examples of transmission policies that can be implemented in the short term with relatively little effort are to designate offshore wind energy resources zones for targeted offshore grid investments, establish cost allocation and recovery mechanisms for transmission interconnections, and promote utilization of existing transmission capacity reservations to integrate offshore wind. In 2014, there were few tangible milestones in this area, although long-term plans for offshore transmission projects such as the Atlantic Wind Connection and the New Jersey Energy Link progressed steadily in their development efforts. Regulatory policies cover three general categories: (a) policies that define the process of obtaining site leases; (b) policies that define the environmental, permitting processes; and (c) policies that regulate environmental and safety compliance of plants in operation. In 2014, the U.S. Bureau of Ocean Energy Management (BOEM) announced additional competitive lease sales for renewable energy off Massachusetts, Maryland and New Jersey.

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Section 3. Economic Impacts

Our estimated installed costs have dropped 6% since our 2011 work. This is driven by: new data from European projects, revised design assumptions and more refined estimates from U.S. projects in planning stages. Expected installed costs for a 500 MW farm are $2.86 Billion or $5,700/kW.

Current U.S. employment levels could be between 550 and 4,600 full-time equivalents (FTEs), and current investment could be between $146 million and $1.1 billion. The ranges are driven by Navigant’s uncertainty about from where advanced-stage projects are sourcing components. As the advanced-stage projects start construction, employment levels will likely double or triple to support equipment transport and installation.

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Section 4. Developments in Relevant Sectors of the Economy

The development of an offshore wind industry in the U.S. will depend on the evolution of other sectors in the economy. Factors within the power sector, such as the capacity or price of competing power generation technologies, will affect the demand for offshore wind. Factors within industries that compete with offshore wind for resources (e.g., oil and gas, construction, and manufacturing) will affect the price of offshore wind power.

Factors in the power sector that will have the largest impact include natural gas prices and the change in coal-based generation capacity. As electricity prices have historically been linked to natural gas prices, a decrease in prices of the latter can lead to a decrease in the price of the former. Natural gas prices declined from above $4 per million British thermal units (MMbtu) in August 2011 to below $2/MMbtu in April 2012, largely due to the supply of low-cost gas from the Marcellus Shale. Lower resulting electricity prices can make investment in other power generation sources such as offshore wind less economically attractive. However, natural gas prices have been rising steadily since then and have remained above $4/MMbtu since late 2013 with periods exceeding $6/MMbtu3 and may continue to rise with three new liquefied natural gas export terminals recently approved.

In terms of coal, Navigant analysis reveals executed and planned coal plant retirements through 2020 of nearly 40 GW. As this capacity is removed from the U.S. electric generation base, it will need to be replaced by other power generation resources, including but not limited to natural gas and offshore wind. As such, continued coal plant retirements could increase the demand for offshore wind plants in the United States.

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