Taking Projects from Proposal to Reality
The US Offshore Wind industry is in an early stage of development. Nevertheless, participants have taken note of the experiences of other, more mature, OW industries and are using this knowledge to accelerate the progress of the sector. However, hurdles remain in many areas. Last year’s OSOW Conference covered three areas that are key in taking projects from proposal to reality: permitting, financing and addressing possible risks. Here is a short digest of the information.
In 2005, BOEM was given authority to handle leasing of the outer continental shelf (OCS) for energy projects other than oil and gas. “The OCS is a very vital component of this administration’s energy strategy,” says Walter Cruickshank, acting director at BOEM.
Since 2009, the agency has fine-tuned the permitting process to address issues ranging from fishing and fisheries to collision risks and wildlife impacts. “It’s a well-defined process,” says James Bennett, Program Manager, Office of Renewable Energy.
The process starts with the auctioning of a lease. This only gives developers the right to propose projects on a particular area, with no guarantee of getting to commissioning. The lease auction kicks off a chain of events that could last 10 years, including around two years of planning and five years of site assessment and surveys.
This is to ensure that the perspectives of all stakeholders, including for example, the fishing industry, are understood during the consultation. Beth Casoni, executive director at the Massachusetts Lobstermen’s Association, says: “The fishing industry really wants to know what the impacts are going to be. It’s a very sensitive subject for the lobster industry.”
Fortunately, many advocacy groups are keen to support the development of offshore wind. For example, the Natural Resources Defense Council, a large environmental group, sees its two major priorities as fighting climate change and protecting the oceans. Thus, providing it can be done with minimal impact on marine ecosystems, “speeding deployment is a natural goal for us,” says Nathanael Greene, senior renewable energy advocate at the Council.
Financing for US offshore wind is generally not considered to be much of a challenge, given investor appetite for the industry. Pieter Plantinga, executive director for renewable energy and infrastructure finance at Rabobank International, says “a lot of European and Japanese banks are taking a keen interest in the US market. From a liquidity perspective there is no issue.”
It is still unclear whether US financing will follow the pattern seen in Europe, however. Traditionally, European offshore wind has been done through equity financing and then refinancing, says Richard Sarsfield-Hall, director at Pöyry Management Consulting. In the US, tax equity is likely to have a bigger role, says Alexander Krolick, head of infrastructure and energy finance, Americas, at Macquarie Capital (USA). But “the appetite for using project finance during construction will vary,” he predicts.
“It’s going to very much depend on the ultimate sponsor.”
Because there is no single actor that can take on the role of an engineering, procurement and construction firm in offshore wind projects, the US industry, like its European counterpart, will likely see multi-contracting. “That means the banks are going to be a lot more involved in how these contracts are structured,” believes Jérôme Guillet, managing director at Green Giraffe, a European financial advisory firm that was involved in the pioneering Block Island deal in the US.
In the US, the bond market is not set up to take on construction risks, he observes, so that risk will likely remain in the banking sector. The ability for tax equity to take on construction risk is also unproven, he says. Andrew Eckhardt, vice president at KfW IPEX-Bank, a boutique lender, thinks export credit agencies will play a lesser role than they do in Europe, while project financiers will face more competition from non-banks in the US.
Insurance may be a greater risk as there is the possibility of serious weather events, like Hurricane Dorian, which is now moving towards the US Coastline.
Alongside the projects themselves, US offshore wind will also require financing for supply chain developments. In this respect there are opportunities through vehicles such as the New Markets Tax Credit Program, which was introduced as part of the Community Renewal Tax Relief Act of 2000 and has since been regularly extended with bipartisan support.
With offshore wind projects requiring multiple permits from federal, state and local governments, and every permitting decision open to challenges in court, developers face significant risk of litigation. Developers can be sued in any state with a factual nexus to a project and at multiple decision points, although a court will likely combine related claims, according to Joshua Kaplowitz, attorney-advisor at the US Department of the Interior.
And this is just one of several areas of risk. For many observers, the key challenge facing the industry is the development of the supply chain. Tim Halperin-Smith, chief commercial officer for power at AON Risk, which has been involved in 75% of offshore wind farms built so far, says it will be important to foster a local supply chain as quickly as possible, to make sure experience does not have to be imported.”
“We have to be very careful not to forget how much experience exists in the US,” he says. “I’ve seen quite a few joint ventures, which is fantastic.”
Eric Thumma, director of offshore wind policy and development at Avangrid Renewables, says there could be an opportunity for the US to lead in supply chain development because it offers a more consistent regulatory environment than Europe. Enrique Alvarez-Uria, offshore wind business development director for North America at EDP Renewables, a shareholder in the Mayflower project joint venture, says his company has been engaged with the supply chain from day one.
“I’m very optimistic that a supply chain will thrive,” he says. “States are talking and there is a certain degree of coordination.”
The US offshore wind market is probably the most rapidly-developing renewable energy sector in the world. Follow #USOW20 for the latest news and expert opinions.
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