Finally on the verge of breaking into the mainstream energy sector, the U.S. offshore wind market may have suddenly hit the skids.
The Trump administration's delay in granting a key permit for the first major U.S. offshore wind farm exposed several challenging realities for an industry otherwise flush with optimism.
On Monday, developer Vineyard Wind confirmed that it would delay its 800-megawatt project with a contract to sell power into Massachusetts, after the federal government postponed approving the final environmental impact statement (EIS).
The government will instead conduct another study looking at the cumulative impact of the growing list of offshore wind developments proposed along the East Coast. That made it impossible for Vineyard to stand behind its construction timeline of bringing its project online in two phases over 2021-2022, the developer said.
Vineyard's aggressive timeline would have seen U.S. installed offshore wind capacity grow 25-fold over the next three years, while jump-starting the local supply chain in the process.
Whether the delay proves to be a speed bump for an individual project or a broader problem for the industry remains to be seen, but it raises several concerns for a market that has gained momentum rapidly over the past few years.
You down with ITC?
The first is the decline of the federal Investment Tax Credit (ITC) and the impact that artificial cliff is having on the market.
To call the delay of Vineyard's project a complete surprise might be overstating things. Vineyard Wind, a joint venture of the Northeastern U.S. utility Avangrid and Copenhagen Infrastructure Partners, had run into a number of challenges, including recent signals that its EIS might not be in hand as quickly as hoped.
Two weeks ago, Avangrid chief executive James Torgerson made a point of warning investors — and, presumably, the government — that if Vineyard’s final EIS was not issued by early September, the project might need to be reconfigured.
Apparently unmoved, the federal government is now reportedly working within a review window for Vineyard that stretches to March 2020, meaning the project could be in limbo for another six months.
In an emailed statement, a spokesperson for the Bureau of Ocean Energy Management (BOEM) said the government needs to learn more about the cumulative impact of offshore wind developments before proceeding with the final EIS.
BOEM, part of the Interior Department, has “determined that a greater build-out of offshore wind capacity is reasonably foreseeable" than it anticipated when it issued its draft EIS, the spokesperson said.
For Vineyard, the nub of the issue is the ITC subsidy.
Vineyard’s winning bid of $65 per megawatt-hour for an offtake contract with Massachusetts utilities ranks as one of the market's most important moments to date. It demonstrated just how cost-effective offshore wind technology had become and galvanized other states to boost their own commitments.
Key to Vineyard’s ability to deliver at its eye-catching price, however, was its highly aggressive build-out schedule, allowing it to capture 24 percent of the federal ITC over the planned $2.8 billion investment in the project.
It was always clear that Vineyard's schedule, completing the first half of the project in 2021 and the second in 2022, allowed very little room for error.
The 800 MW project will be built with 9.5 MW turbines supplied by MHI Vestas (Credit: Vineyard Wind)
It’s not just developers rushing to catch a piece of the ITC before it disappears; entire states, including New York, raced to get through their first offshore wind procurements to allow winning projects to qualify for the ITC, effectively lowering the power prices for their consumers.
2019 is the last year for developers to qualify offshore wind projects for a diminished chunk of the ITC. More than anything else, that reality has been setting the pace of the market’s development over the last few years.
But it’s a pace that some believe may be too rapid for the industry’s own good.
For the industry itself, the obvious solution is extending the ITC for offshore wind. That would give the market more time to gear up for the first big projects, including doing more outreach with the commercial fishing sector, where relations remain contentious.
But passing any legislation under this divided government, let alone support for renewable energy, looks like an uphill battle.
So much for deregulation
The industry will also be watching closely to see whether Vineyard’s delay represents a fundamental shift in the Trump administration's approach to offshore wind.
Reuters reported two weeks ago that Vineyard had gotten hung up by infighting at various government agencies, with the National Marine Fisheries Service — part of the Commerce Department — refusing to sign off on the project due to ongoing concerns about the fishing industry. The fishing industry has reportedly requested more space between the turbines and a different layout than what Vineyard has planned.
Part of the offshore wind industry’s recent confidence has stemmed from the enthusiastic support of Ryan Zinke, Trump’s first Interior Secretary, who viewed the sector as a natural extension of the administration’s “American energy dominance” agenda.
Zinke left the role earlier this year under a cloud of controversy, and the views of his successor, former oil lobbyist David Bernhardt, remain largely unknown when it comes to offshore wind.
The ruling on Vineyard "contradicts the Trump administration’s objective of reducing regulatory constraints on business growth," Liz Burdock, president and CEO of the Business Network for Offshore Wind, noted in an email.
Vineyard itself may bounce back from the delay. In its updated statement on Monday, Vineyard said that its shareholders have affirmed their commitment to the project, albeit with a delayed schedule. Analysts have said that the language of the ITC allows for “excusable disruptions” like a permitting delay.
For the broader industry, though, BOEM’s new stance on Vineyard raises concerns. Going forward, BOEM says that its draft EIS analysis process will extend to include "potential scenarios based on state procurements that are expected to be awarded."
Such a requirement adds another regulatory hurdle to what is already a long and difficult process, Burdock said. "Requiring a project to assess the impacts of all potential future projects, even though those future projects are not yet defined, is extraordinary," she added.
In its Monday statement, Vineyard said it has not yet received any documentation regarding the requirements BOEM will need for its expanded analysis.
Tom Kiernan, chief executive of the American Wind Energy Association, noted that a number of Republican lawmakers and officials have supported offshore wind's potential for job creation, from Zinke to current Massachusetts Governor Charlie Baker, who has reportedly been to Washington, D.C. in recent weeks to discuss Vineyard's challenges with Interior Secretary Bernhardt.
Vineyard's delay "undermines the Trump administration’s American energy dominance agenda and a major U.S. economic growth opportunity,” Kiernan said in a statement.
In an interview Friday with Bloomberg, Bernhardt gave little away regarding his views on the matter, saying, "“If [the project is] going to be developed, it needs to be developed in a way that everyone gets to say, at least, that we didn’t shave the ball."