by Rich Heidorn Jr.

Third time was the charm for Maryland Gov. Martin O’Malley this spring as he finally convinced lawmakers to approve his plan to subsidize the offshore wind industry off the Atlantic Coast.

The law puts Maryland in the race with PJM neighbors New Jersey, Delaware, Virginia and North Carolina in the contest to become home to an industry that officials hope will create thousands of jobs in the manufacture and servicing of offshore turbines.

But passing the legislation may prove to be the easy part. As this PJM Insider Special Report will demonstrate, realizing offshore wind’s environmental and economic development potential will require changes in federal policy and billions more in subsidies than Maryland and the other MidAtlantic states have committed to the effort thus far.

Potential

If the U.S. is to join Europe and China in deploying offshore wind, it will almost certainly happen first in the Atlantic, and the PJM states will be in the middle of it.

The Mid-Atlantic region has almost 300 GW of potential wind capacity in ocean waters less than 30 meters deep, more than a quarter of the U.S. shallow-water total and more than enough to supply all of the region’s power needs.  PJM states bordering the Great Lakes also have considerable assets, led by Michigan and Ohio.

Offshore wind is attractive because of its potential to provide a large source of carbon-free generation without any fuel price risk.

The primary motivation for state officials, however, is the promise of jobs. Based on the experience in Europe, which has been building commercial-scale offshore wind for more than a decade, the U.S. Department of Energy’s National Renewable Energy Laboratory predicts every megawatt of offshore wind installed will create more than 20 job-years in manufacturing and installation and 0.8 permanent jobs in operation and maintenance.

The Obama administration estimates that 54 GW of offshore wind will be needed to reach its goal of boosting wind generation to 300 GW by 2035. Reaching the 54 GW goal, NREL says, would create $200 billion in economic activity and 43,000 permanent jobs in operations and maintenance and 1.1 million job-years in manufacturing, construction and engineering.  “Most of the labor for offshore wind will draw from local and regional sources that cannot be easily outsourced overseas,” NREL said in a 2010 study.

No wonder politicians are giddy with the promise. Virginia Gov. Bob McDonnell pledged to make his state the “energy capital of the East Coast,” while O’Malley talked of making Maryland “the regional manufacturing hub for wind turbines.” New Jersey Gov. Chris Christie pledged to make the state a “national leader” in wind, calling the development of the state’s “renewable energy resources and industry … critical to our state’s manufacturing and technology future.”

Yet, it’s not clear whether the potential will be tapped any time in the next decade.

Cost Obstacles

The biggest reason is cost. Offshore wind’s capital costs are estimated at $6,000 per kW ­- almost three times that for land-based wind – because of the high cost of building at sea. Offshore turbines must be robust enough to withstand salt water and hurricane-force winds in the ocean and ice in the Great Lakes.

Offshore wind also has higher operations and maintenance and financing costs. The Energy Information Administration says the levelized cost of energy from offshore wind is $222/MWh (2008$), more than double the $87 for onshore wind and more than three times the $66 for natural gas advanced combined cycle plants. (EIA’s figures exclude any savings from the production tax or investment tax credits.)

These cost concerns have slowed development in PJM.

In Delaware, NRG Bluewater Wind put its proposed 450 MW wind farm on hold in 2011, cancelling a 25-year purchase power agreement with Delmarva Power & Light Co., after failing to find investment partners.

A proposed 25 MW pilot project off the coast of Atlantic City has been unable to persuade regulators or consumer advocates that it will be a net economic benefit. O’Malley may find his plans similarly hampered: the bill the Maryland legislature approved also requires a cost-benefit analysis that may prove difficult to meet.

Jobs: High transportation costs favor local production

What’s at stake?

A large commitment to offshore wind would lead to construction of new manufacturing facilities and jobs along the U.S. shores. Offshore wind turbines are typically larger than their shore-based counterparts and components can be expensive to build in facilities making land-based turbines. The larger size also increases transportation costs, which means new factories are likely to be built along the coastline where the turbines will eventually be deployed.

“Even though the United States has not yet developed an offshore wind project, the logistical requirements of transporting offshore machines would encourage [manufacturers] to build up U.S. manufacturing operations as soon as a long-term pipeline of likely project emerges,” NREL said.

At the American Wind Energy Association conference in Virginia Beach in October, the Boston Globe reported, “German developers talked about how the industry has transformed rusting homeland harbors into bustling ports, while British officials boasted that industry investment in offshore wind will leap from $8 billion in the last decade to $80 billion in the next eight years.”

Offshore wind also will require ships to transport, install and maintain turbines. That would be a boon for U.S. shipbuilders, because the federal Jones Act requires that all goods transported between U.S. ports — wind farm foundations are considered ports — be carried in ships that were built domestically.  Most existing vessels designed for offshore turbine installation are European-owned. Initially, U.S.-owned vessels built to service offshore drilling are likely to be in demand by wind developers.

Insufficient Demand to Lure Investment

But currently proposed projects and those that may result from the subsidies offered by states are not large enough to create the demand needed to spark substantial economic development on shore, according to a study released by the Department of Energy in February.

The study, by Navigant Consulting Inc., concludes that it will take demand of 500 to 800 MW per year for a minimum of five years to lure a U.S. manufacturing plant for offshore turbines. Commitments by the MidAtlantic states fall far short of creating that kind of project pipeline:

• New Jersey’s Energy Master Plan set a goal of 1,100 MW of offshore wind by 2020.
• Delaware and Maryland have proposed subsidies for 200 MW of offshore wind each.

If the three states’ combined commitment of 1,500 MW were built over five years, it would average only 300 MW per year. That could be enough to support a factory manufacturing a single component such as towers or blades, according to the Navigant study, which was based on interviews with suppliers.

Subsidies Needed to Overcome Price Disadvantage

Thanks to more aggressive climate change goals and large government subsidies, Europe has grown its offshore wind capacity to 5,400 MW over more than a decade while the U.S. — second only to China in land-based wind capacity — has no commercial-scale wind power offshore.  Not coincidentally, virtually all of the manufacturing of offshore turbines is owned by non-U.S. companies.

Current federal incentives — Congress’ one-year renewal of the Production Tax Credit and Investment Tax Credit for wind power — also fall short, says Sen. Tom Carper, a Democrat from Delaware.

Carper and Maine Republican Susan Collins reintroduced a bill in February that would make the first 3,000 megawatts of offshore wind energy capacity eligible for the investment tax credit. Tying the credit to a capacity limit rather than having an expiration date will allow the long-term planning that offshore wind requires, Carper says. The bill, which Carper initially introduced in 2011, has been assigned to the Senate Finance Committee but has not had any hearings to date.

Other offshore wind supporters say it will take a fee on carbon pollution to give offshore wind a chance to build the scale economies to compete against fossil fuel-fired generation.

In a February 2013 study commissioned by the Center for American Progress and groups including the Sierra Club, The Brattle Group predicted that the cost of offshore wind could reach “grid parity” with gas combustion turbines by 2024 to 2030. The analysis does not include production or investment tax credits but does assume a carbon price on coal and natural gas-fired generation that increases from $8/mwh in 2014 to almost $62/mwh in 2030 (2012 $). Existing tax subsidies for gas production also are eliminated in this scenario.

The 2030 estimate assumes a 5% “learning rate” for offshore wind — the rate at which costs decline for each doubling of the installed capacity. At a 10% learning rate, grid parity is reached by 2024. Onshore wind cut its capital costs by a learning rate of 15%, the Interior Department reported in a 2006 study.

Building 54 gigawatts of offshore wind will require ratepayer subsidies, or “learning investment,” of $18.5 billion to $52 billion with a carbon fee and $79 billion to $150 billion without one, Brattle estimated.  That translates to an average rate increase of up to 1.7% nationwide, or 3% for the Atlantic and Great Lake states, if costs are concentrated in those coastal regions where the earliest development is likely.

Many are willing to pay a modest premium to build a cleaner source of generation that also acts as a hedge against rising fuel (i.e. natural gas) prices.

A Washington Post poll in February found 58% of Maryland residents supported O’Malley’s offshore wind initiative, which will add up to $1.50 to residential customers’ monthly bills. Thirty-nine percent were opposed. A 2012 poll on a prior version of the legislation — which would have imposed a $2 surcharge — won support from 55% of respondents, with 42% opposed.

Some are willing to pay much more. In a campaign launched in mid-April to persuade utilities and power marketers of customer demand, the developers of a proposed Lake Erie wind farm off Cleveland have gotten almost 1,000 retail customers to sign a “Power Pledge” indicating their willingness to pay extra for offshore wind. The signers said they were willing to see their electric bills increase $10 a month. The developers hope to secure 10,000 signatures by the end of the summer.

But in addition to state support for rate increases, offshore wind will need Washington’s support for a carbon fee.  The Brattle study found that subsidies would need to be three to four times higher without a carbon fee than with one.

Congress rejected efforts to impose carbon fees through a cap and trade system in 2009 and there has been little movement in Washington toward such a fee since.

Lacking a carbon tax, the Obama administration’s efforts on behalf of offshore wind have been limited to streamlining the permitting process and providing grants for research and development.

The Department of Energy has committed more than $270 million in funding for research and development of offshore wind since fiscal 2009.

While they need help from Washington, policymakers in the PJM states also will have to increase their commitment to offshore wind considerably to create enough demand to lure the jobs they crave. Until then, their efforts will be little but hot air.