"Congress Needs To Push Targeted Incentives For Offshore Wind"
by Richard W. Caperton, Michael Conathan, Jackie Weidman
More than a decade ago, Denmark built the world’s first offshore wind farm near Copenhagen. Since then offshore wind has been added to the energy portfolio of nine other countries in Europe and Asia. The East Coast of the United States, from the Mid-Atlantic region north through New England, possesses some of the world’s most favorable environmental conditions to tap into this massive renewable energy resource. And even though public opinion throughout the region strongly supports such development, we have yet to begin construction on even a single turbine.
With a stronger commitment from Congress, Atlantic coastal states could advance projects that simultaneously reduce greenhouse gas emissions, lower our dependence on foreign oil, and create jobs and industrial innovation from Maine to the Carolinas.
Yet to take off
2011 was pretty good for advancing the U.S. offshore wind industry in many ways. The Cape Wind project proposed for the waters off Massachusetts received its final permits from the Department of the Interior, theoretically paving the way to begin construction on America’s first offshore wind farm. The Obama administration advanced its “Smart from the Start” initiative, designating wind energy areas off the coasts of five Atlantic coast states, and it is actively pursuing leases with potential developers. And projects in state waters off New Jersey, Texas, and Ohio took important steps and cleared hurdles in the planning and permitting stages.
Unfortunately, as has been the case throughout the history of offshore wind in this country, it soon became another example of three steps forward, two steps back. Less than a month after Interior gave Cape Wind the green light, the Department of Energy informed the company it would not be eligible for a loan guarantee. Then, in the waning days of the year, another offshore wind pioneer, NRG Bluewater Wind, announced that it would back out of a three-year-old power-purchase agreement with Delmarva Power because it couldn’t generate sufficient investor interest.
Meanwhile, developers in the United Kingdom, Denmark, Germany, Spain, France, Norway, China, South Korea, and other countries are proving that offshore wind is a viable economic model. They have permitted more than 40,000 MW of offshore wind energy capacity. The United States has only issued permits for 488 MW. (see table)
Not only does this delay reduction in greenhouse gas emissions and our transition to renewable energy sources, but it also prevents American innovators from taking advantage of the design, manufacturing, and construction jobs that go along with it. In Europe, where more than 4,000 MW of offshore wind capacity is already installed, developers expect to create 169,000 jobs by 2020 and 300,000 by 2030.
Public support isn’t the problem
According to a nationwide survey conducted by the Civil Society Institute, about 7 in 10 Americans (71 percent) support “a shift of federal support for energy away from nuclear and towards clean renewable energy such as wind and solar.” In the Northeast and Mid-Atlantic states, undeveloped land is difficult to find. That means renewable energy developers have to look further afield—in this case, to sea.
In the early days of offshore wind, the obstacles to development in the United States were largely borne of ignorance—concerns that offshore turbines visible on the horizon would destroy property values; that noise, or safety, or storage of lubricating fluid for the turbines would pose unacceptable risks. As other countries around the world have moved ahead with offshore wind development and seen no ill effects from those factors, however, such concerns have dramatically abated.
Support from coastal residents is fundamental to the potential success of offshore wind projects. After all, these wind farms will effectively be built in their backyards. And recently, poll after poll has shown that coastal residents are highly supportive of offshore wind energy. According to a poll of New Jersey residents, offshore wind production is extremely popular among voters and its support cuts across party and geographic lines. The analysis demonstrates that 78 percent of all New Jersey voters and 77 percent of the state’s shore residents surveyed support the development of wind power 12 to 15 miles off their coast.
Public support is strong in Delaware as well. According to a University of Delaware poll, general statewide support for offshore wind in Delaware is 77.8 percent, compared with an opposition of only 4.2 percent.
In Maryland The Baltimore Sun reported in October 2011 that 62 percent of Marylanders favor wind turbine construction off the coast of Ocean City and would be willing to pay up to $2 more per month on electricity bills. Mike Tidwell, head of the Chesapeake Climate Action Network, said, “Marylanders understand that the benefits of offshore wind are more than worth a modest initial investment.”
This view is backed by Maryland Gov. Martin O’Malley, but as The Washington Post reported earlier this week, his efforts to make his state a leader in offshore wind appear to be in jeopardy. Monday’s article quoted Democratic Del. Dereck E. Davis saying, “The situation has gotten worse — not better — for offshore wind since the last time it was up for debate.”
So what has changed?
Congress holds the key
The answer lies in part in NRG Bluewater Wind’s fate. NRG was unequivocal in the reasoning behind its decision to cancel its power-purchase agreement. The company’s press release stated that it was “unable to find an investment partner.” Specifically, NRG placed the blame for this outcome squarely on the shoulders of Congress:
Two aspects of the project critical for success have actually gone backwards: the decisions of Congress to eliminate funding for the Department of Energy’s loan guarantee program applicable to offshore wind, and the failure to extend the Federal Investment and Production Tax Credits … which have rendered the Delaware project both unfinanceable and financially untenable.
While the challenges facing this project are big, they’re solvable. As NRG alludes to, targeted, efficient incentives from the federal government would allow this project to move forward.
The production tax credit
Currently, offshore wind projects are eligible for the production tax credit. This is a credit based on how much electricity a wind turbine generates, and is currently worth 2.2 cents per kilowatt-hour. Unfortunately, this credit expires at the end of 2012, and a long-term extension of the credit is uncertain. CAP has called on Congress to extend the credit for four more years, which will provide needed policy certainty for investors in wind projects.
The investment tax credit
While NRG Bluewater Wind would clearly benefit from a production tax credit extension, other incentives may be more useful for this project. For onshore wind projects—with relatively predictable performance over the life of the project—the production tax credit is very valuable. For offshore wind, however, the credit is less valuable to the project developer. Because offshore wind turbines are relatively new technology and are deployed in environments that have never been used for energy generation, developers can’t predict how much power a turbine will generate as accurately as they can with onshore wind. Thus, developers aren’t as certain about how big their tax credits will be, which affects the profitability of the project.
Congress could fix this problem by making offshore wind eligible for the investment tax credit. Instead of getting a tax credit as power is generated, the investment tax credit would allow offshore wind developers to get an upfront credit for 30 percent of their initial investment, encouraging more to invest. This is much more useful for technologies with more performance uncertainty—like offshore wind—and would be a smart example of matching the tax code to the unique circumstances facing innovative industries.
Uncertainty around offshore wind turbines’ operational performance also makes it difficult to finance these projects. When a bank evaluates a wind farm, it predicts how much power the turbines will produce each year and will only “count” the power that they’re extremely confident will be produced. With an innovative technology like offshore wind, this could mean that only half of the turbines’ expected output is “bankable.” This affects whether or not a bank thinks the developer will pay back a loan, and ultimately influences whether or not a bank offers a loan.
This is a significant problem for offshore wind developers. But the federal government can solve this problem by guaranteeing a loan to a project developer. In this case the government agrees to pay back a loan if the developer is unable to. This puts banks at ease (after all, the U.S. government has a perfect track record of paying back loans) and will allow financing to flow freely.
Congress has two simple ways to create a loan guarantee program for offshore wind. They can create a Clean Energy Deployment Administration, or “Green Bank,” which would offer financing tools like loan guarantees for innovative technologies. Or they can allocate funding to cover the cost of new loan guarantees for offshore wind under the existing Department of Energy Loan Guarantee Program. Either way forward would help drive investment in the burgeoning offshore wind industry.
Somehow, the bright outlook from just a few years ago—moving the United States toward energy independence—has fogged over despite overwhelming evidence from statewide polls that demonstrates sustained support for proposed projects. Congress has the power to support constituents’ interests in the innovative clean energy and economic opportunities offshore wind can produce to move us out of the energy Stone Age and into a sustainable future.
Richard W. Caperton is the Director of Clean Energy Investment, Michael Conathan is the Director of Ocean Policy, and Jackie Weidman is a Special Assistant for the Energy Opportunity team at American Progress. This piece was originally published at the Center for American Progress website.