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With developers clamoring for leases, offshore wind lining up as America's next big energy boom

Houston Chronicle logo Houston Chronicle 5/11/2022 By James Osborne, Staff writer

WASHINGTON - Energy companies are pouring tens of billions of dollars into rapidly developing offshore wind farms up and down U.S. coastlines, as they seek to get in on what is shaping up to be America’s next big energy boom.

Long viewed as too expensive on a U.S. power grid that has some of the cheapest electricity costs in the world, offshore wind developers are now jumping over each other to claim increasingly lucrative state and federal subsidies for the technology.

A federal auction in February for the rights to develop wind farms on an almost half million-acre swath of ocean 20 miles from New York City generated a record $4.4 billion — 10 times what previous highest wind auction had raised and more than 20 times what an oil and gas lease sale in the Gulf of Mexico drew last year. And with six remaining auctions scheduled by the Biden administration through the end of next year, the fierce competition for offshore wind leases is only expected to continue.

“Ultimately it comes down to the money,” said Samantha Bobo, an analyst with the research firm S&P Global. “There seems to be industry sentiment they have federal backing they haven’t had before. State targets are constantly being increased. If there continues to be demand, this could perpetuate.”

President Joe Biden has laid out the goal of having 30 gigawatts worth of offshore wind in operation by 2030, which would mean building somewhere between 2,000 and 4,000 offshore wind turbines over the next eight years. Fewer than 10 turbines are in operation now.

At the same time, states along the Atlantic and Pacific coastlines have established lucrative incentives for developers, with electric customers typically picking up the difference between the prices for which wind farms can sell electricity and the high costs of developing a wind farm many miles out to sea.

In Virginia, for instance, Dominion Energy is expected to spend more than $125 per megawatt hour to build a 2,600 megawatt wind farm off the coastline there — more than double what it costs to build a natural gas-fired plant.

The allure for states such as New York and Rhode Island, which has the nation’s only operating commercial-scale offshore wind farm, isn’t just clean energy. With offshore wind comes the promise of a new industry to build and service turbines many miles out to sea, meaning jobs and port redevelopment projects in regions that have struggled to maintain good-paying blue-collar jobs.

“The basic economics of offshore wind is in demand right now,” said Sam Salustro, a director at the trade group Business Network for Offshore Wind.. “There’s state buy-in to tackle transmission, and they’re expanding ports right before our eyes. It’s going to create tens of thousands of jobs.”

An offshore wind auction for the Gulf of Mexico is scheduled for later this year. While it’s unclear how much interest there is in the Gulf’s relatively light winds — compared to the Atlantic or Pacific Oceans — developers are already tapping the expertise of the region’s offshore sector, developed over decades of oil and gas drilling, Salustro added.

How high?

Advances in offshore wind turbines that allow developers to get far more power out of an acre than previously understood is contributing to the land, or rather, ocean rush, Salustro said. With only so much offshore acreage getting parceled out, developers are willing to pay a premium to get in on what they believe could be the ground floor for the energy industry of the future.

This week the Bureau of Ocean Energy Management is scheduled to auction off more than 100,000 acres off the North Carolina coast. The question hanging over the bidding will be how high developers are willing to go.

Not everyone is convinced the high lease prices leases are worth it. Orsted, the Danish offshore wind giant, dropped out of the New York lease sale saying prices were too high to generate necessary returns. BP CEO Bernard Looney, whose company is already developing two offshore wind projects in the Northeast, told analysts earlier this month that the decision to drop out of the bidding in the New York lease sale should be taken as, “a sign of discipline.”

“We obviously want to grow (our offshore wind portfolio), but we do not want to grow it at any cost or at all costs,” he said.

The risk facing energy developers is state energy regulators won’t agree to as high a rate as hoped when it comes to time to negotiate power contracts.

In Virginia, Dominion is now in a battle with the state’s utility commission about the escalating costs on its offshore wind project. State officials are picking apart the company’s budget after the company announced in November the project’s cost would increase $2 billion to almost $10 billion, raising rates even further on Dominion’s 2.6 million customers in Virginia.

In deregulated states like New York, offshore wind projects will be bidding against each other for power contracts, raising the possibility that their agreement with the state would fail to provide their expected rate of return - BP, for instance, says it will only do projects that generate at least an 8 percent return.

“The states will only cover the project to a point. You still have to justify what you’re spending,” Bobo said. “There is some back-end risk, so you need to figure out what’s reasonable to pass on to the customer.”

For many companies, the risk is worth getting in early on an industry only expected to grow as the world shifts from fossil fuels.

Among those paying the sky-high lease prices in February’s offshore auction were the European oil giants Royal Dutch Shell and Total, both of which have pledged to get to net-zero greenhouse gas emissions by 2050.

Looking further out

“For those trying to build up renewables, they want to secure acreage, so they have the energy there in the long term,” said Erik Milito, president of National Offshore Industries Association, a trade group representing offshore energy companies. “They might be willing to pay more of a premium.”

Even with the United States just beginning to lease its waters, developers are looking further out to sea at depths beyond where turbines could be constructed on the ocean floor.

Salustro, of the Business Network for Offshore Wind, said he recently organized a trip to Spain for parts manufacturers to see the latest technology, floating turbines.

“You look at some of the power potential further out, it’s incredible,” said Salustro. “The wind resource is much stronger the further you go out.”

james.osborne@chron.com

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