If We Lease It, Will They Build? Offshore Wind Energy Lease Sale Number 2

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BOEMOn Monday, the Department of the Interior and the Bureau of Ocean Energy Management (BOEM) announced the nation’s second offshore wind energy lease sale – this time for an area off the Virginia coast.  The first competitive lease sale, for areas off the coasts of Massachusetts and Rhode Island, is scheduled for July 31.  The auction for this new area, approximately 112,799 acres located 23.5 nautical miles from the Virginia Beach coastline, which will be auctioned as a single lease, is scheduled for September 4.  Tuesday’s “Final Sale Notice” contains more detail on both the process leading up the auction and the auction itself.  The qualified bidders, many of whom are also participating in the Massachusetts/Rhode Island auction, are:

  • Apex Virginia Offshore Wind, LLC;
  • Virginia Electric and Power Company (“Dominion Virginia Power”);
  • Energy Management, Inc.;
  • EDF Renewable Development, Inc.;
  • Fisherman’s Energy, LLC;
  • IBERDROLA RENEWABLES, Inc.;
  • Sea Breeze Energy LLC; and
  • Orisol Energy U.S., Inc.

The announcement portrays the auction as the culmination of a long-running collaborative effort.  It is and it isn’t.  Certainly this auction is the result of a long and significant effort (described in the announcement and in more detail at BOEM’s webpage), but it is hardly the culmination of those efforts; presumably the purpose of the process is not to have an auction, but to see offshore wind resources developed in a cost-effective and environmentally conscious way that contributes significantly to regional and national energy goals.  And that is the question: establishing a clear regulatory process and auctioning off leases is an important accomplishment, but after we lease these areas, will developers actually succeed in building offshore wind projects?

Offshore wind is a potential game changer because of the tremendous size of the resource.  The area auctioned off under this lease alone has the potential to support more than 2,000 megawatts of wind generation.  But offshore wind is a new technology for this side of the Atlantic and, for now, the costs of developing it are likely to be higher than for other renewable technologies.

Even with federal leases in hand, developers are going to face financing challenges.  To finance offshore wind projects, developers are likely to need long-term power purchase agreements for wind energy that may need to be priced above current market rates for energy produced from other resources.  The Cape Wind project was able to use a Massachusetts statutory program to obtain PPAs with Massachusetts utilities for a significant portion of its output.  That avenue may not be available for other projects.  While developers may succeed in finding other ways to obtain PPAs, uncertainty about the future of the production and investment tax credits is not going to help, and Cape Wind’s decade-plus development story is an example of the hurdles, environmental and otherwise, that project opponents might bring to bear to slow or stop offshore wind development.

These auctions are undoubtedly an important and promising step, but it is going to take perseverance, dedication, creativity, and perhaps a fair amount of luck on the part of developers to turn these auctions into wind farms.