Insight for Industry – Ongoing Technology Advances and Policy Actions Will Lower New York’s Offshore Wind Costs
Global and domestic factors, combined with siting and transmission policies, innovative financing mechanisms, and infrastructure upgrades may allow New York to reduce offshore wind energy costs by 50 percent by 2022. Offshore wind energy cost reductions will enable New York to act independently or collaborate with other states to advance utility-scale renewable generation development. The offshore wind energy cost reduction drivers include continuous technological development across the entire industry value chain. As offshore wind projects are installed and operated in the U.S., project development and operational experience growth are expected to also lower overall costs by approximately one to three percent.

New York State’s Offshore Wind Resource Offers Substantial Potential for Zero-Emission Electricity Generation

The proximity of potential offshore wind projects to New York City’s metropolitan area can significantly increase renewable energy use in the state’s largest electricity demand region (Figure 1). Offshore wind and other distributed energy resource (DER) development is a key component of the Reforming the Energy Vision (REV) proceeding – a strategic initiative designed to address energy generation, transmission, and distribution challenges. The REV market structure and new distributed system platform (DSP) aims to facilitate renewable resource penetration and reduce costs.

As costs continue to decline, offshore wind energy could become a viable option for delivering utility-scale renewable electric generation to downstate New York. On March 10, 2015, the New York Energy Research and Development Authority (NYSERDA) released a study examining strategic steps that New York can take to reduce offshore wind project costs. The study – conducted by the University of Delaware’s Special Initiative on Offshore Wind (SIOW) – identifies pathways to reduce the cost of offshore wind power in New York State. It emphasizes that New York can take near-term actions to achieve substantial cost reductions, without depending on external drivers over the next 10 years. It evaluates cost reductions from technological innovation, global market maturation, and unilateral or collaborative actions by the state. It assumes no improvements in offshore wind policies and financing until New York state implements actions.

State Efforts and Industry Advancements Can Facilitate 50 Percent Offshore Wind Energy Cost Reductions by 2022

The levelized cost of energy (LCOE) for New York offshore wind projects could drop approximately 50 percent from 2014 estimates by 2022 (Figure 2), assuming the following factors:

• Continued global wind energy technology innovation
• Increased competition in the offshore wind supply chain
• Industry-wide efficiencies/economies of scale
• Favorable financing conditions
• Streamlined project siting and permitting
• Transmission and other infrastructure development

Utilizing larger 8 MW capacity turbines over 5 MW turbines – facilitated by ongoing technology innovation and global competition – is expected to reduce offshore wind LCOE by 22.3 percent (from $291.5/MWh to $226.5/MWh). Since 2011, average nameplate capacity of globally-installed offshore turbines has remained at approximately 4 MW. Initially, U.S. projects will likely use 5 MW capacity offshore turbines consistent with recent European offshore wind projects.

According to the SIOW estimate, the Northeast and Mid-Atlantic states are expected to add 4.2 GW to U.S. offshore wind capacity by 2025. The study assumes 750 MW installed capacity in U.S. by 2020 and 4.2 GW installed capacity facilitated by Northeast and Mid-Atlantic projects by 2025. The 2020 assumption reflects potential installations of the following offshore wind projects:

• Massachusetts – Cape Wind project (468 MW)
• Rhode Island/Block Island – Deepwater Wind project (30 MW)
• Maryland – US Wind (Renexia) (200 MW)
• Three technology pilot projects funded by the Department of Energy (DOE) – Dominion Power (Virginia), Fisherman’s
• Energy (New Jersey), and Principle Power (Oregon)

The 2025 projection reflects 2.4 GW assumed for New York and 1.1 GW anticipated from implementation requirements of New Jersey’s 2010 Offshore Wind Economic Development Act. However, in 2014, the New Jersey Board of Public Utilities denied approval for the 1.1 GW project citing risks to ratepayers due to high project costs.

Uncertain Costs Create Volatile Development Environment for Offshore Wind Projects

While onshore wind development has expanded significantly in the U.S., offshore development is challenged by a volatile development environment. Lack of offshore-specific development and infrastructure raises offshore wind cost estimates, which are significantly higher than market electricity prices. Offshore project costs remain uncertain. According to DOE, from 2004-2012, costs have increased as industry began facing the actual costs and risks of developing projects in technically challenging offshore sites. The cost trend is attributed to projects shifting towards greater depths and longer distances to shore, increased spending on risk mitigation and contingency budgets, and lack of competition in the supply chain.

Given the relatively high LCOE for initial offshore projects and low natural gas prices, offshore deployment growth requires stable and long-term policy support. Though DOE’s 2013 data indicate that capital costs are stabilizing – with the average down from $5,385/kW in 2012 to $5,187/kW in 2013 – the DOE states it is uncertain to predict whether the trend will continue. New technologies combined with scale-up of projects and turbines can contribute to cost reductions.

The Bureau of Ocean Energy Management (BOEM) issued the first commercial lease to Cape Wind in 2010. However, in January, National Grid and NSTAR announced a decision to cancel their power purchase agreements (PPAs) with Cape Wind, citing the company’s failure to meet a December 31, 2014 deadline to close financing. The BOEM has held successful auctions for lease areas off the coasts of Rhode Island/Massachusetts, Virginia, and Maryland. Currently 14 offshore wind projects totaling 4,900 MW have reached the advanced development stage and developer timelines indicate the first of these projects to be in service in 2015.

In June 2013, the University of Maine’s DeepCwind Consortium launched VolturnUS off the coast of Maine. VolturnUS comprises a one-eighth scale semi-submersible floating foundation – the first U.S. offshore wind turbine. The DOE’s 2011 Offshore Wind Strategic Initiative has recognized three Advanced Technology Demonstration projects by 2017 – Dominion Power (Virginia), Fisherman’s Energy (New Jersey), and Principle Power Inc. (Oregon).

Initial U.S. Atlantic Coast Offshore Wind Projects Experiences will Contribute to Overall Industry Efficiency

Learning experience of U.S. Atlantic coast states in offshore wind projects will contribute to project efficiencies in the overall U.S. offshore wind industry as the market grows. It will also add incremental improvements for New York offshore wind projects. New York can benefit from inherently local strategies – predevelopment, policy, and infrastructure – to reduce costs. New York can take steps that facilitate:

• Enhanced site characterization for early projects to reduce capital costs
• Favorable borrowing conditions
• Policy revenue contracts that reduce risk to lenders
• Market visibility to enhance competition and attract investors
• Policies supporting offshore wind project siting and transmission
• Infrastructure – port facilities and trained workforce – to reduce costs

Strategic actions in appropriate policies could pay off significantly. New York’s investment in pre-development could be a market enabler and also reduce site uncertainty, resulting in reduced power price and likely pay off through reduced LCOEs of power purchase agreements.

As offshore wind projects are installed and operated in the U.S., improving experience in project development and operations are expected to lower project costs. The SIOW study projects LCOE reduction in the order of two percent by applying learning rate of five percent, for every doubling of installed capacity. Continued technological development between 2020 and 2023 are expected to facilitate additional cost reductions, though reductions could be partially offset by cost increases associated with deeper water installations.

Originally published by EnerKnol.

EnerKnol provides U.S. energy policy research and data services to support investment decisions across all sectors of the energy industry. Headquartered in New York City, EnerKnol is proud to be a NYC ACRE company.