Braving the Headwinds Hitting U.S. Wind Energy

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Law360 - June 9, 2015

The development of offshore wind projects in the U.S. has been a story of high hopes and many setbacks. Thus far, 2015 has perpetuated the same storyline, with major setbacks plaguing one of the major U.S. offshore wind projects, Cape Wind, but also with Deepwater Wind set to put steel in the water near Block Island this year.

This article reviews the state of U.S. offshore wind development, the hurdles this development has had to overcome and the barriers to further development. The article closes by offering a comparison with the European success story for offshore wind.

Background

U.S. commitment to developing the wind resources of the Outer Continental Shelf ("OCS") along the Atlantic coast began in 2010, with the launch by former Secretary of the Interior Ken Salazar of the “Smart from the Start” program. The former secretary noted that the “initiative for Atlantic wind will allow us to identify priority Wind Energy Areas ("WEAs") for potential development, improve our coordination with local, state and federal partners, and accelerate the leasing process.”[1] While the program may not have fulfilled all of the former secretary’s expectations, the initiative did promote leasing of wind farms off the Eastern Seaboard and has led to the prospect for the first offshore wind ("OSW") farms in the U.S.

The statutory basis for this program is contained in Section 388 of the Energy Policy Act of 2005 ("EPAct"), which authorizes the secretary of the interior to develop renewable energy resources (including wind, tidal and kinetic energy) on the OCS. While the EPAct granted theU.S. Department of the Interior similar leasing authority to what it possessed for oil and gas in the OCS, the law did not grant sole permitting authority to the secretary of the interior.[2] Instead, the EPAct continued to allow federal resource agencies, including the Fish and Wildlife Service and National Oceanic and Atmospheric Administration to regulate whether the development would be compatible with other uses of the ocean, including endangered species and critical habitats, marine mammals, birds and fisheries.[3]

In 2010, the Bureau of Ocean Energy Management, the lead agency in the Department of the Interior, identified four WEAs off the Eastern Seaboard and began both the environmental review and stakeholder involvement process. The BOEM also had to comply with the National Environmental Policy Act before beginning the leasing process. In 2012, the BOEM issued a final programmatic EIS covering the four WEAs and began to qualify interested developers and to set the rules of the road—or the sea—for wind farms.

The BOEM decides whether there is competitive interest in the lease areas, and after qualifying interested companies/bidders, auctions the areas to the highest bidder. This has resulted in 403,405 acres leased to five companies.

Divided Federal-State Jurisdiction over Offshore Wind Projects Complicates Process

A patchwork of uneven state laws and policies has left developers largely on their own to negotiate agreements with adjacent coastal states, utilities and state utility regulators. A unique aspect of OSW development in the U.S. compared to Europe is the divided jurisdiction between the federal government and the states on the Eastern Seaboard. While the Department of the Interior can lease the WEAs on the OCS because it is beyond state waters, it cannot force states or utilities to bring the wind-generated power onshore and to sell the wind to consumers.

The fact that states and local jurisdictions have the power to decide has complicated the development process greatly as each adjacent state has had to negotiate its own terms with developers and stakeholders. There is no single model for bringing OSW to the shore and ultimately to consumers. While the BOEM can offer the states incentives, they cannot preempt local land use or utility rate regulations.[4]

Each affected state has taken its own approach to offshore wind. Some have been aggressive and passed supportive legislation and some have just taken a wait-and-see approach.

For example, in Maryland, the state legislature passed and former Gov. Martin O’Malley signed into law the Maryland Offshore Wind Energy Act of 2012. The law creates a mechanism to incentivize the development of up to 500 MW of offshore wind capacity, at least 10 nautical miles off of Maryland’s coast. A target project size of 310 MW would require the installation of between 50 and 100 wind turbines.[5] Maryland’s new law also creates a system of Offshore Wind Renewable Energy Credits ("ORECs"), which would subsidize the cost of the renewable energy for Maryland ratepayers. The ORECs are capped at $2 per month for residential ratepayers and 2.5 percent on annual bills for commercial ratepayers.

In August 2014, the BOEM auctioned the WEA off the Maryland coast. US Wind Inc., a subsidiary of the Italian renewable energy company Renexia, won the auction with a bid of $8.7 million.[6] 

In New York, the New York Power Authority, Long Island Power Authority and Consolidated Edison Co. of New York Inc. initially worked together to propose an offshore wind project south of Long Island. The BOEM determined that NYPA was qualified to hold a lease and Deepwater Wind submitted an application to LIPA to sell 280 MW from its Deepwater ONE project. In 2014, LIPA turned down the application in favor of buying solar power, which LIPA believes may be less costly. The total energy LIPA is planning to purchase amounts to only 122 MW, far less than the 280 MW of renewable energy the utilities had initially planned.[7] 

In 2010, the New Jersey Legislature passed and Gov. Chris Christie signed the “Offshore Wind Economic Development Act” into law. The law requires the New Jersey Board of Public Utilities ("BPU") to establish an OREC program and requires that a percentage of electricity sold in the state be from offshore wind energy.[8] The BPU has yet to issue final regulations to implement the law, which has frustrated developers. For example, Fishermen’s Energy recently announced that it would be building the onshore portion of its proposed wind farm in state waters despite having been rejected earlier in 2014 by the BPU on the grounds that the project did not demonstrate a net economic benefit to the state, and the project would be too costly to ratepayers.[9] Fishermen's Energy has filed suit asserting that BPU’s denial was both unreasonable and in violation of New Jersey law.[10] BPU’s failure to issue regulations and work with Fishermen’s has left critics questioning the state’s commitment to the OWEDA.[11]

In Rhode Island, the state adopted an ocean management plan for state waters and determined where compatible ocean uses, including offshore wind siting, could exist.[12] Deepwater Wind is scheduled to build its wind farm three miles southeast of Block Island, Rhode Island, in state waters, and has received all of its federal permits according to the company’s website.[13] 

Because Deepwater has all its permits and financing, it expects to have “steel in water” for this project by the summer of 2015. The project will include 15 wind turbines purchased from Alstom in Denmark and produce power for over 17,000 homes.[14] 

In Massachusetts, Cape Wind, one of the first U.S. offshore wind projects, was dealt a major setback at the end of 2014 when two utilities rescinded purchase agreements, citing missed financial deadlines by the company. Cape Wind immediately and publicly pointed to force majeure clauses in their contracts, citing more than a decade of litigation and fighting public opposition as justification for not meeting initial benchmarks.[15] 

In July 2013, BOEM auctioned off a combined Massachusetts-Rhode Island WEA and Deepwater Wind New England LLC was declared the winner of both lease areas for an auction bid of $3.8 million.[16] In an early test of the staying power of OSW, a lease sale for four new WEAs off the coast of Massachusetts, totaling 742,000 acres, was held on Jan. 29, 2015. While the BOEM has qualified 12 companies to participate, it is unclear what effect low oil prices combined with the troubles of other OSW companies will have on the sale.

In Virginia, the state created a Virginia Offshore Wind Development Authority to encourage offshore wind development but has not enacted a law mandating a renewable energy standard or establishing a system of ORECS as Maryland and New Jersey have done. The major utility in Virginia, Dominion Virginia Power, was the successful bidder for the Virginia WEA in 2013 at a bid of $1.6 million. Dominion plans to install its first turbine in the WEA in 10 years, after completing its research and demonstration project, called VOWTAP.[17] 

Lack of Consistent Incentives

The wind industry has historically depended on federal tax incentives to support the requisite upfront investment needed to construct the offshore projects. It is likely that once construction is completed, costs will level out and become more competitive with other energy sources.

At the end of the 113th Congress, which ended in December 2014, Congress passed a one-year only extension of the production tax credit, which seeks to provide fiscal incentives for private companies to return electricity to the grid through renewable sources of energy.[18] This extension did little good because the year was almost at an end when the extension was enacted. The wind industry has asked for a level-playing field to be able to compete with traditional energy sources. The American Wind Energy Association has noted that extending the production tax credit will improve energy security as well as provide economic benefits.

In 2014, the International Energy Agency issued a comprehensive report on U.S. energy policy, which praised the U.S. for its growth in renewable energy. That praise notwithstanding, the IEA’s report decried the lack of an “explicit national policy mechanism” to ensure the U.S. meets its renewable energy goals. At a conference in Washington, D.C., in December 2014, the executive director of the IEA complained that “[y]et another short-term extension of the [production tax credit] undermines investor confidence and contributes to the volatile pattern of annual wind growth.”[19]

Success Stories and the Future of OSW in the U.S.

Despite the long list of impediments, described above, BOEM has leased 403,405 acres in the WEAs and has more lease sales planned for 2015 off of Massachusetts, possibly North Carolina and New York.

Deepwater Wind, the successful bidder for the 2013 Massachusetts and Rhode Island lease sales, has also begun to develop the OSW project off of Block Island, Rhode Island. Since Block Island has no independent source of energy, it is an ideal test bed for OSW. Construction on the Rhode Island project is expected to commence this year as well. As noted above, the Block Island Wind Farm is now “fully permitted.”

In Virginia, the BOEM completed an environmental assessment for the Virginia Offshore Wind Technology Advancement Project ("VOWTAP"). [20] The VOWTAP project will consist of two turbines in an area adjacent to the Virginia WEA and allow testing of turbines to take place over the next two years in an effort to bring costs down and test whether turbines can withstand hurricane force winds. The state has also received federal approval for a research lease which going a long way to providing answers to key questions about maximizing production while limiting visibility of turbines from shore.[21] Finally, the U.S. Department of Energy awarded VOWTAP a $47 million, four-year grant to help fund the construction of this OSW demonstration project.

The Department of Energy awarded grants to two other wind projects in 2014, including Fisherman’s Energy off Atlantic City, New Jersey, and Principle Power off the coast of Coos Bay, Oregon.[22]

Why Has the U.S. Lagged behind Europe?

It’s no secret that U.S. offshore wind development lags behind Europe. In European countries such as Germany, voters have accepted that initial public spending will exceed immediate return on investment for green projects for decades.[23] Despite some recent NIMBY-related setbacks in Europe, renewables, including offshore wind, clearly are entrenched in European energy schemes and receive broad support.[24]

Europeans’ support has translated into a wide variety of publicly supported debt financing, such as public bond measures and loans from state-run banks, totaling approximately $100 billion. The results are unmistakable: Ireland and Denmark now predict that they will obtain over 30 percent of their energy from wind. In contrast, recent examples in the U.S. show that the American public, even in progressive states like Maine, Massachusetts and New York, does not have the stomach for the high startup costs and subsidies required for clean energy projects.

Two other factors have also impacted the growth of OSW in Europe. EU member states have feed-in tariffs to level the playing field. Europe also lacks supplies of natural gas, which has been a focus of U.S. clean-energy policies because of the increase in supply through enhanced production techniques.

European federalism has also worked in favor of clean energy. Under Article 4 of the Treaty on the Functioning of the European Union, member states “share competence” with the EU on environmental and energy issues. That is to say, both individual states and the EU have authority to legislate and implement energy and environmental policies. But, in practice, member states largely are permitted to determine their own appropriate renewable energy policies. This has led to an equilibrium whereby EU environmental policies are paramount, and although the EU cannot directly shape energy in its member states per se, environmental concerns have influenced energy policies that otherwise would be contrary to EU principles, such as the free movement of goods among states.

EU courts have consistently held that renewable energy is a more pressing concern than its founding principle, namely, the free movement of goods. In a landmark decision, the European Court of Justice decided in 2000 that Germany could pass a law mandating energy supply companies to purchase energy from domestic renewable sources at inflated prices.[25] 

On its face, it seemed that the law violated laws on the free movement of goods, as well as competition laws.[26] However, the European Court of Justice found that reducing greenhouse gases was a pressing interest that outweighed the disruption to commerce because the mandatory sales at inflated prices were the “least restrictive way” for Germany to accomplish its goals.[27]

Similarly, in a recent case, the European Court of Justice ruled that a Swedish energy agency did not have to subsidize a Finnish power company that was providing the Swedish power grid clean energy, even though the agency provided subsidies to Swedish companies.[28] However, like in the PreussenElektra case, the European Court of Justice ruled that the public interest objective of promoting the use of renewable energy sources in order to protect the environment and combat climate change. It is hard to imagine American voters and courts allowing anti-competitive behavior that violates the U.S. Constitution's Commerce Clause, especially given the litigation that has hampered offshore resources.

Conclusion

Despite the lack of a complete commitment to offshore wind in the U.S., divided jurisdiction and uncertain tax policies, new OSW development off the Atlantic coast is on the horizon. This year is the first for projects to begin actual construction. In 2017, we anticipate this clean energy resource will be provided to consumers through new and existing power grids.

Footnotes

[1] Salazar Launches ‘Smart from the Start’ Initiative to Speed Offshore Wind Energy Development off the Atlantic Coast, U.S. Department of Interior Press Release (Nov. 23, 2010) available at: http://www.doi.gov/news/pressreleases/Salazar-Launches-Smart-from-the-Start-Initiative.

[2] “Wind Energy: Offshore Permitting”, CRS Rept. 7-5700, Oct. 17, 2012, at 5, available at: https://www.fas.org/sgp/crs/misc/R40175.pdf.

[3] Id. 

[4] Timothy H. Powell, Revisiting Federalism Concerns in the Offshore Wind Energy Industry in Light of Continued Local Opposition to the Cape Wind Project, 92 B.U. L. REV. 2023 (2012).

[5] “Maryland Offshore Wind Act 2012 — Facts and Figures” available at: http://energy.maryland.gov/documents/MDOSWEnergyActof2012.pdf.

[6] Keith Goldberg, Renexia's $8.7M Bid Tops Md. Offshore Wind Auction, Law360, Aug. 20, 2014. http://www.law360.com/articles/569186/renexia-s-8-7m-bid-tops-md-offshore-wind-auction.

[7] North American Windpower of Dec. 18, 2014, available at: http://www.nawindpower.com/e107_plugins/content/content.php?content.13772.

[8] “Governor Christie Signs Offshore Wind Development Act,” Aug. 19, 2010, available at: http://www.state.nj.us/governor/news/news/552010/approved/20100819a.html.

[9] Martin Bricketto, NJ Wind Farm Exec Hopeful Court Will Revive Project, Law360, Dec. 18, 2014. http://www.law360.com/articles/606199/nj-wind-farm-exec-hopeful-court-will-revive-project.

[10] Id. 

[11] Id. 

[12] Rhode Island Ocean Special Area Management Plan, at 9.

[13] Deepwater Wind Company website is available at: http://dwwind.com/news/block-island-wind-farm-now-fully-permitted.

[14] Id.

[15] See: http://www.necn.com/news/business/Cape-Wind-Project-Dealt-Setback-287792051.html.

[16] Bureau of Ocean Energy Management Website available at: http://www.boem.gov/Commercial-Wind-Lease-Rhode-Island-and-Massachusetts/.

[17] See: https://www.dom.com/corporate/what-we-do/electricity/generation/wind/virginia-offshore-wind-technology-advancement-projectcape.

[18] Renewable Electricity Production Tax Credit Website is available at: http://energy.gov/savings/renewable-electricity-production-tax-credit-ptc.

[19] http://www.forbes.com/sites/jeffmcmahon/2014/12/18/iea-scolds-u-s-for-waffling-on-wind-tax-credit/.

[20] Environmental Assessment for the Virginia Offshore Wind Technology is available at: https://www.dom.com/corporate/what-we-do/electricity/generation/wind/virginia-offshore-wind-technology-advancement-project.

[21] Id. 

[22] See: http://energy.gov/eere/wind/offshore-wind-advanced-technology-demonstration-projects.

[23] Jan Hromadko, Wind Power Hopes for Sea Change, The Wall Street Journal, Aug. 7, 2014.

[24] Melissa Eddy, Germans Balk at Plan for Wind Power Lines, The New York Times, Dec. 25, 2014.

[25] PreussenElektra AG v Schhleswag AG, 2001 E.C.R. I-02099.

[26] Id. 

[27] Id. 

[28] Ålands Vindkraft AB v. Energimyndigheten 2014 ECLI:EU:C:2014:2037.

"Braving the Headwinds Hitting U.S. Wind Energy," by Joan M. Bondareff and Stefanos N. Roulakis was published in the June 9, 2015, edition of Law360. Reprinted with permission. To view online, please click here. This article was first published in the ABA Marine Resources Committee Newsletter, available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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