Will offshore wind take off in the U.S.?
At 5:30 a.m. on Monday, May 1, 2017, Block Island, Rhode Island received wind-powered electricity for the first time. What was remarkable about this event was not just that it enabled the island to make the switch from diesel to renewables. It was rather that the first commercial-scale offshore wind farm in the United States generated the energy.
So was Block Island a one-off, or will we see offshore wind generation take off in the U.S.?
The financial tipping point
Offshore wind has continued to dramatically gain momentum in Europe. More efficient production, larger turbines, and streamlined installation and maintenance processes have led to economies of scale. As the result, the Levelized Cost of Electricity (LCOE) has been driven to record low levels worldwide.
Across the United Kingdom, the LCOE for offshore wind seen in auctions over halved in just two years, falling from $154 per megawatt hour (MWh) in 2015 to $75 per MWh in an auction this year.
In addition, many European offshore projects are now reaching wholesale cost parity without subsidies. A notable offshore wind auction in Denmark recently saw a record low of $55.94 per MWh. In comparison to recent U.S. electricity prices from July, which range from $20/MWh in the Northwest to $71/MWh in the Southwest, offshore is rapidly becoming financially viable.
As technology and installation methods continue to progress, it’s expected that the LCOE will continue to fall, making the financials for offshore wind look all the more appealing for the U.S. energy market.
Optimal siting, coast to coast
The Block Island project shaped a new mind-set in the industry. “It created a surge of certainty for the offshore sector that was plagued by the failure of predecessors. At the same time, it also showed that the U.S. infrastructure constraints are surmountable and can be dealt with”, says Alla Weinstein, founder of Trident Winds LLC.
The U.S. offers multiple environments suitable for offshore wind development—with stronger, consistent wind capacity offshore, profitability is practically guaranteed in certain regions. For example, the Northeast coast sees the highest wind speeds on the eastern seaboard, and the lower Northwest coast—southern Oregon to northern California—sees similarly strong winds. In addition, the great lakes also offer an “offshore” wind development opportunity.
Though there are certain efficiencies that can be achieved in offshore farm development, geographical and climate considerations should inform the development process—whether through selecting materials to withstand ice floes in northern locations, or utilizing floating turbine platforms to accommodate the steep slope of the west coast’s continental shelf.
When it comes to siting, the bottom line is this: The U.S. Department of Energy states that the U.S. has offshore potential for more than 2,000 GW of capacity—double the country’s energy use today. With ample wind speeds and no shortage of suitable offshore sites, the U.S. coastline and lakes appear to be an abundant, hitherto untapped energy source.
Data source: U.S. Office of Energy Efficiency & Renewable Energy
From government subsidies to customer preferences
While federal energy policies remain unpredictable, many states continue to pursue aggressive renewable portfolio targets. Notable examples include California, New York, Vermont and D.C., all of which have set portfolio targets of 50% electricity from renewable sources before 2032. Hawaii is aiming to source 100% of its energy supply from renewables by 2045.
In addition, a number of states including New York, Maryland, and Massachusetts have proactive policies in place to support developers in site identification, feasibility studies, and energy crediting policies to assure strong returns on renewable development.
Alongside the growing public demand for sustainable power and a market environment where subsidies are no longer necessary for cost competitiveness, federal political uncertainty is unlikely to have significant impact on wind generation in the U.S.
The winds of change are blowing
Favorable financial, technical, geographic, and political factors indicate that offshore wind is primed for take off in the U.S. Energy companies should understand how they can take advantage of this nascent industry and position themselves for maximal returns.
We recommend 3 key actions:
- First, clearly define your offshore strategy, whether as a developer or an investor. In a market environment where evolving economies of scale can rapidly drive down the LCOE, having a go-to-market approach at the ready is key.
- Second, make your move with development and profit realities in mind. While 8 years is a relatively long ramp-up compared to some energy sources, stable, long-term returns can be expected over a 20-25 year period for offshore developments.
- Finally, monitor and anticipate new offshore wind technology. Understanding how new technologies can drive down the LCOE between the date of an auction and the date costs are realized, a few years later, will enable competitive bids—and accurate profit projections.
Since the first offshore wind farm was built in Europe 25 years ago, installed offshore capacity has grown by over 250,000%. With history as a predictor, Block Island will soon be followed by larger and increasingly profitable offshore wind farms, sited from coast to coast across the United States. The time for take off—and taking your wind development plans offshore—is now.
innogy consulting is an energy-focused management consulting firm with operations in North America, Europe, and the Middle East. Backed by 40,000 energy experts at the innogy group, our 200 consultants drive projects from restructuring to innovation, change management to market capitalization, for leading U.S. energy companies intent on fortifying their businesses for the future. To learn more, visit innogyconsult.com.