Will a Biden presidency propel US offshore wind projects?
Energy Blog, 25 January 2021
Will a Biden presidency propel US commercial scale offshore wind projects?
Sylvian Watts-Jones examines the last four years and looks at the road ahead.
As you may have noticed on the news, the US has just been through a radical governmental transition. After 4 tumultuous years US voters showed up in greater numbers than ever before to deny the Trump administration a sequel, creating a shockwave throughout the States. On 20 January Joe Biden was inaugurated, and the contrast between the 46th president and his predecessor cannot be larger.
While Trump left the Paris Climate Agreement, championed the coal industry, and hinted that you could get cancer from wind turbines, Biden plans to invest USD 400 billion on energy, climate research and sustainable infrastructure over 10 years. This will be the most progressive renewable energy plan ever presented. One of the focus areas will be offshore wind. After years of steady progress, but still just 30 MW installed, this new announcement is good news for the US offshore wind industry and points to four busy years ahead. However, we suspect that progress won’t be driven by how much the Biden administration invests in the industry, but by their ability to design a clear roadmap that can let the industry actually start building turbines.
The US offshore wind industry grew slowly but steadily under 3 very different administrations
The US offshore wind industry started off with the (in)famous Cape Wind project. Almost two decades ago, long before the start of The Apprentice, Cape Wind applied for their federal permit. After years of development, the project officially died just after the fifteenth and final Apprentice season aired in 2017.
Despite this less than auspicious beginning, the industry has not been standing still. Starting under the Bush administration and steadily growing under the Obama and Trump administrations, the US currently has 15 federal offshore wind leases. And even without any commercial scale project currently generating electricity, US offshore wind has developed into a multi-billion-dollar industry that draws attention from the largest and most experienced developers and investors from around the world.
Under the Obama administration, Equinor paid a then staggering amount – close to USD 43 M – for a lease off the coast of New York. A few years later under Trump, Equinor, Mayflower (joint venture between Shell and EDPR) and Vineyard Wind (joint venture between CIP and Avangrid) were each willing to put down USD 135 M for leases off the coast of Massachusetts. This, in combination with falling offtake prices, is an extraordinary achievement by the industry. However, the Bureau of Ocean Energy Management (BOEM) remained uneasily quiet after the last Massachusetts lease, and the next lease, potentially the New York Bight area, is not expected to take place until mid/late 2021.
Where the Trump administration was lacking
The US offshore wind industry under the Trump administration was defined by several issues. First, the focus of BOEM in recent years has been on attracting the highest lease prices from the largest developers, mainly global utilities and (former) oil and gas companies. Whereas in the past, under the Obama administration, multi-factor bidding was explored which could result in a more balanced group of (local) developers with more local support, the last two auctions were just about who has the deepest pockets. In the short-term this sounds appealing; in the long-term this may hamper competition and move qualified but smaller parties out of the market.
Second, Trump did not focus on getting any project fully permitted and actually reversed previous favourable decisions. The most advanced commercial scale offshore wind project, Vineyard Wind, faced significant federal delays in April 2019 when BOEM pushed back their permit approval due to concerns that the project’s wind turbines would harm fisheries and navigation. This permit was once again delayed in November 2020. After two successive delays Vineyard sought to pause its permitting process (which many viewed as a bid for time, in the hope of pushing the project onto the desk of Joe Biden), but just before the winter break the Trump administration decided to cancel the entire construction and operations plan altogether and indicated Vineyard would have to start from scratch.
Third, most states on the East as well as West Coast require a significant amount of new lease areas to meet their renewable energy objectives. Yet there is quite some frustration in the industry around the slow pace at which BOEM is willing to announce new offshore wind lease auctions. Ongoing disputes with the US Navy on the West Coast are also being resolved at a glacial pace.
Finally, with more and more offshore wind projects pushing for their permit applications to be approved, BOEM is tasked with the review of applications which consist of thousands of pages of technical and detailed information. BOEM is not set up for such a workload, which leads to a backlog of work and permitting delays.
Trump could have tried to resolve these issues if he made the permitting process a priority for the Department of the Interior, or if he tried to come to an agreement with the Department of Defense. However, this was apparently not at the top of his to-do list. Reaching “energy dominance,” as former Trump Secretary of the Interior Ryan Zinke preached during AWEA 2018 in Washington, may have been a priority, but the route to achieving this was clearly not via offshore wind or renewables in general.
Federal intervention is not the main driving force for US offshore wind development
Without downplaying the crucial role of the federal government (and therefore Trump or Biden) in designing a framework for the lease areas and approving permits, ultimately the individual states are the real driving force for offshore wind development. Offshore wind farms are large infrastructure projects that require significant upfront investment but have limited operation and maintenance costs. The main concern for developers is to obtain a steady long-term return. In the last four years, individual states have been increasingly promoting offshore wind by signing long-term renewable energy certificate offtake contracts. This is probably the most catalytic thing they could have done as having visibility on the returns is the single most important aspect for developers.
Even worse than bad policy is unpredictable policy
An ongoing hot topic in the US renewable energy industry is the extension of tax credits. These federal tax credits can lead to significant tax reductions for developers and hence large parts of the industry are big fans of this system, unsurprisingly. Tax credits however have a few pitfalls. To fully utilize the credits, investors with large tax liabilities need to be brought into the projects which significantly increases the complexity. Due to this complexity and the uncertainty around the lifetime of tax credits, European financiers and investors, who can add significant liquidity to the market, are not particularly eager to educate themselves on the principle. And why would they; around the world the offshore wind industry is flourishing, and everywhere without tax credits. That makes you wonder if it is really needed.
On 27 December 2020, new legislation extended existing tax credits. Offshore wind projects can now qualify for a credit of 30% if they begin construction on or prior to 31 December 2025, which puts the question around tax credits on hold for at least another few years. The Biden administration has indicated they will continue to support tax credits during their tenure, but whether this is beneficial to the industry depends on Biden’s ability to design a long-term, stable, and therefore predictable tax credit plan.
More important than the actual policy, is the predictability and long-term stability of the system. Having a clear roadmap of auction dates and offtake solicitation dates, clarity on the actual requirements that are needed to obtain all permits, and certainty around the above-mentioned tax credit system is key. This is where Biden can make a huge difference.
This time we are really almost there!
With the maturing of the offshore wind industry in Europe, which goes hand in hand with decreasing returns, sophisticated developers and investors are looking for new markets with higher returns, driving them to the US. And in line with American culture, the US projects being developed are huge, attracting many parties who want their own piece of the American Dream. Some of world’s most experienced developers have been steadily progressing US offshore wind projects for years. Having spent millions in development costs, they are now very eager and ready to finally book some tangible results. With a little regulatory backwind, which Biden promises to deliver, the first projects could finally tip from “under development” to “under construction” in the upcoming year.
US offshore wind is hot and will happen – there is no doubt about that. The participants are too sophisticated, the stakes too high and the projects too large to fail, it is just a matter of time. And if, with no policy, negative marketing and a lack of federal focus the US offshore wind industry can still develop to its current size, just imagine what can happen with the White House occupied by an administration that advocates offshore wind. That being said, Biden faces significant challenges that will not simply be solved overnight. It takes time to solve the staffing bottleneck at BOEM, and it takes time before lessons learned are incorporated to streamline the permitting process.
Clear and stable federal guidelines about timing of future auctions and how to obtain the different permits will be the key to success. The individual states together with the developers can do the rest. The US offshore wind future looks bright. All we need now is clarity and no federal opposition, although a little push and some trust in science wouldn’t hurt as well.