TODAY’S STUDY: U.S. OFFSHORE WIND ON THE VERGE

Offshore Wind Market and Economic Analysis; Annual Market Assessment

October 17, 2013 (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 or in the construction phase, there are eleven 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 13 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 second 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 5.3 gigawatts (GW) of offshore wind installations worldwide. The majority of this activity continues to center on northwestern Europe, but development in China continues to progress. In 2012, more than 1,100 megawatts (MW) of wind power capacity was added globally, with the United Kingdom alone accounting for 756 MW of new capacity. The European market will continue to grow rapidly over the next two years, with new and expanding projects likely to contribute a record-setting 2,900 MW in 2013 alone (mostly in Germany and the United Kingdom).

Since the last edition of this report, several potential U.S. offshore wind projects have achieved notable advancements in their development processes. In addition to two Bureau of Ocean Energy Management (BOEM) commercial lease auctions for federal Wind Energy Areas (WEAs), other later-stage commercial-scale projects have made incremental progress toward starting construction. Eleven U.S. projects, representing 3,824 MW, now lie in advanced stages of development. 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 University of Maine, in partnership with the U.S. Department of Energy (DOE), installed the United States’ first offshore wind turbine: a 1/8-scale pilot turbine on a floating foundation. In addition, DOE awarded Advanced Technology Demonstration (ATD) project grants in December 2012. The grants are intended to help address ongoing challenges and cost barriers to offshore wind energy. The DOE will select up to three of these projects to receive additional funding to help carry the projects through final design, fabrication, and installation.

Offshore wind power prices have generally increased over time. For projects installed in 2012 (for which data was available), the average reported capital cost was $5,384/kW. These cost increases are a function of several factors (e.g., a movement toward deeper-water sites and increased siting complexity); however, potential technological advancements aim to help slow and eventually reverse the trend. In addition to advancements in equipment and installation approaches, improved capacity factors may help further mitigate increased capital costs through better energy capture and conversion.

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The average nameplate capacity of offshore wind turbines installed globally each year has grown from 2.9 MW in 2007 to 4.1 MW in 2012. This trend toward larger turbines will likely continue, driven by advancements in materials, design, processes, and logistics, which allow larger components to be built with lower system costs. The average turbine size for advanced-stage, planned projects in the United States, however, is expected to range between 4 and 5 MW, indicating that the United States is largely planning to utilize larger offshore turbines rather than smaller turbines that have previously been installed in European waters.

Globally, offshore wind projects continue to trend further 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.

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Approaches to drivetrain configurations continue to diversify in an effort to improve reliability and reduce exposure to volatile supplies of the rare earth metals required for direct drive generators. The high costs of addressing past turbine equipment failures in an offshore setting have encouraged manufacturers and developers to continue seeking more robust drivetrain configurations. However, recent interest in direct-drive turbines has been somewhat tempered by limited supply and price volatility for several rare earth metals. As a result, several prototypes of machines employing alternate drivetrain designs are expected to be tested in the next two to three years.

The general trend toward diversification of substructure types also continued in 2012 and 2013, as the industry seeks to address deeper waters, varying seabed conditions, increasing turbines sizes, and the increased severity of wind and wave loading at offshore wind projects. However, alternatives to the monopile and gravity-based approaches have only seen limited deployment since 2009, with a total of 350 units installed through the end of 2012 (out of an overall 1,725 units globally). To date, only two full-scale prototype floating foundations have been installed globally.

Few new developments have occurred with regard to vessels, logistics, and the operations and maintenance (O&M) of offshore wind farms since the previous edition of this report. In general, increased turbine size, plant size, and distance from shore all have direct consequences on vessel requirements and availability, as well as on O&M practices. These trends will add to the logistical difficulties of maintaining offshore turbines, particularly as longer distances from shore increase the challenges in accessing turbines due to weather conditions. The relatively slow ramp-up of the U.S. market will likely provide developers ample opportunity to respond to shifting vessel and O&M needs.

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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) 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. In 2013, this critical need was partially addressed through an extension of the U.S. Renewable Electricity Production Tax Credit (PTC), the Business Energy Investment Tax Credit (ITC), and the 50 percent first-year bonus depreciation allowance. In addition, the U.S. DOE announced seven projects that will receive up to $4 million each to complete engineering and planning as the first phase of the Offshore Wind Advanced Technology Demonstration Program. On the state level, the Maryland Offshore Wind Energy Act of 2013 established Offshore Wind Renewable Energy Credits for up to 200 MW, requiring consideration of peak load price suppression and limiting rate impacts.

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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 2013, 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 2013, BOEM held the first two competitive lease sales for renewable energy in U.S. federal waters off the shores of Rhode Island and Virginia. On the state level, Illinois passed the Lake Michigan Wind Energy Act, which requires the Illinois DNR to develop a detailed offshore wind energy siting matrix for Lake Michigan.

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Section 3. Economic Impacts

Current employment levels could be between 150 and 590 full-time equivalents (FTEs), and current investment could be between $21 million and $159 million. 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.

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 to $3.72/MMbtu in October 20133 and may continue to rise with three new liquefied natural gas plants recently approved.

In terms of coal, Navigant analysis reveals executed and planned coal plant retirements through 2017 that exceed 37 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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Conclusion

The development of a comprehensive annual market report is an important step for the U.S. offshore wind industry for two reasons. First, market assessments, especially those produced for government agencies, provide stakeholders with a trusted data source. Second, the production of a comprehensive assessment covering technical, regulatory, financial, economic development, and workforce issues will annually inform the creation of policy to remove barriers facing the U.S. offshore wind industry.

This report provides readers with a foundation of information to guide U.S. offshore wind energy development. As discussed in this report, significant technological advances are already unfolding within the offshore wind industry, but more could be accomplished to direct needed improvements to further reduce offshore wind costs and to stimulate needed infrastructure development. Policy examples from Europe have shown that proper policy designs can stimulate offshore wind markets. Although current U.S. offshore wind employment levels and investment are modest, employment could be between 150 and 590 FTEs, and current investment could be between $21 million and $159 million. As this report is updated and published annually, the Navigant Consortium hopes that the information provided will prove to be a valuable resource for manufacturers, policymakers, developers, and regulatory agencies to move the market toward a high-growth scenario for the offshore wind industry.

The survey, interviews, and workshops that provided important inputs to this report content will be repeated each year as part of the annual data collection and dissemination process. The Navigant Consortium appreciates the input and cooperation that participants have provided and looks forward to similar involvement in future installments of this report.

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