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.

Loan guarantees

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.

8 Responses to Congress Needs To Push Targeted Incentives For Offshore Wind

  1. Paul says:

    I’d love to see Congress “sell” some offshore wind rights to oil companies, in exchange for ownership of part of the proven reserve. That way, Congress can decide whether to leave it in the ground/

  2. David says:

    This article convinces me that congress should drop all support for offshore wind. Compared to the lower risk and greater stability of other renewable technologies, it just doesn’t compete. The money would be better spent elsewhere. A 3,000 MW onshore wind farm in Wyoming was announced this week. The production tax credit was enough for them.

    This is the way it’s supposed to work. Congress shouldn’t pick winners. Put the incentives out there, and let the market decide who deserves them.

  3. Bill Woods says:

    The contribution of wind to “lower[ing] our dependence on foreign oil” is pretty close to zero.

  4. John Tucker says:

    Like with solar pushing for small token instillations probably just enables facilitates more natural gas dependence. We should be installing 10 -20 times that much per year.

  5. David B. Benson says:

    Yes, even offshore wind power will most probably have to have natgas burners as balancing agents, i.e., backup. So I suspect (but have no reliable data at the moment) offshore will prove to be much the same as onshore in reducing carbon dioxide emmssions; little at best and negative at worst.

  6. Nathan Empsall says:

    Those who say that Congress should eliminate ALL energy subsidies – not just for solar and wind but also for fossil fuels – don’t understand the way the oil industry works. Without federal insurance and loan guarantees, offshore drilling would never be able to exist – no insurance agency will back a project where the cost of an accident is so high, much like nuclear power.

    This means that as long as oil and nuclear exist as energy sources, they will receive de facto federal subsidies. Offering loan guarantees to offshore wind, as the authors propose here, would be a great way to start leveling the playing field.

  7. Alan White says:

    What offshore wind needs is a new platform from which to make power. Exposed blade windmills are not the longterm solution to the need. There is a patent pending fully enclosed true wind turbine called Windshine Electric Generators.

    Offshore wind needs a product that will have a wind profile larger than windmills and cost less to manufacture and install and maintain. They will not kill birds and do not need to be on 400 ft towers. They will not be an eyesore and will not make that whoose noise. They are scalable to commercial use and residential and even down to autos.

    Technology will be the savior of the offshore and onshore wind business not government credits or subsidies.

  8. Davos says:

    “Public Support Is Not The Problem”…


    Well then, how about “LOCAL” public support?

    It seems easily clear to me (given the Cape Wind saga) that it’s local opposition (citizen and political level) that is derailing most of these projects, and in part the loan ‘guarantees’ that the companies seek in order to invest are needed as insurance against the litany of chain-lawsuits and due-process appeals designed to make these efforts take up to 10 years before the first shovel-full of sand is dug.

    Of course the majority of the puplic support Wind Energy — they just all support it being installed somewhere else. The polling on ‘theoretical’ public support off of Jersey and Delaware would almost surely change when the rubber meets the road. Unfortunately (as everyone should realize by now), it doesn’t matter if you have even 90% support– in America, the rights and due-process afforded to even a single citizen are sufficient to derail/delay a project (and surely you can’t/don’t want to take that away).

    And so goes most other energy infrastructure (including renewables). They’re all in the same boat. Perhaps the ‘bundling’ idea that’s being floated in New England could go the furthest toward addressing the problem– whereby you give opposition time to accumulate their complaints, and then you take them on legally all at once, which prevents the 10+ year stall tactics that make it so intimidating to even start it in the first place.