Energy Finance Report

U.S. Offshore Wind Seeks Critical Mass

Posted by Jim Wrathall on 3/9/16 3:30 PM

Co-author Hayden Baker

Wind_Turbine_Offshore_Under_Construction.jpgLast week’s U.S. Offshore Wind Leadership Conference in Boston had the vibe of a technology sector ready to break out. Industry leaders, federal officials, and a panel of Massachusetts legislators extolled the economic opportunities, and U.S. Senator Edward Markey and Massachusetts Energy and Environmental Affairs Secretary Matthew Beaton delivered inspiring keynotes. Speakers were interspersed with high-energy videos of offshore wind installations in European waters, along with many side meetings among project developers and hopeful supply chain participants.

Offshore wind is garnering more than just hype in 2016. Key developments have this once fledgling energy source poised to finally gain momentum in the United States.

As detailed in our Wind Systems magazine article, the merits of U.S. offshore wind are compelling. At the conference, representatives of DONG Energy and other developers active in U.S. waters described the enormous wind potential of the mid-Atlantic and New England coastlines, focusing on the proximity to underserved energy demand around major urban centers.  Siemens U.S. Offshore Wind Director Jason Folsom discussed a recent study demonstrating the overwhelming economic value of offshore wind relative to conventional power generation when all costs and benefits are considered – even before taking into account greenhouse gas reductions.  Comparing cost curves to other renewable energy technologies in the U.S. marketplace, industry observers expressed confidence that as the industry ramps up there will be sufficient competition to quickly drive down the costs of installation and transmission.

With backing from D.E. Shaw, Deepwater Wind is on schedule to complete its Rhode Island Block Island Wind Farm later this year. The 30 megawatt, 5 turbine project will be the first to come online in U.S. waters.  Block Island is only a precursor to the larger projects currently slated for Massachusetts by DONG Energy, Deepwater Wind and Blackstone-backed OffshoreMW, each of which holds a sizeable federal lease south of Martha’s Vineyard. 

The U.S. industry appears at a tipping point. Sophisticated, experienced developers are ready with mature technology, supportive regulators and abundant wind resources located near load centers.  But the sector needs sufficient reliable demand to justify the massive supply chain investments necessary to scale-up development. 

As the necessary parties for offshore wind step into place, the desire for coastal wind resources, particularly in New England, is becoming acute. Major coal and oil fleet retirements in ISO New England alone are expected to drive at least 3,500 MW of new capacity demand by 2018 – and the ISO estimates several thousand more megawatts are at risk of retirement by 2020. Natural gas plants are not a viable replacement at this scale without significant investment in pipeline infrastructure, leaving offshore wind and imported Canadian hydropower as the primary options for new energy resources in the region. Responding to these factors, Massachusetts legislators reported they expect to announce a comprehensive energy bill this spring.  The sector is poised to receive a huge boost if the bill promotes long term utility purchases of offshore wind energy – and assuming it becomes law. A strong Massachusetts bill could be a prompt for other states, particularly New York, and set the stage for regional cooperation on supply chain development and transmission. Recognizing that the U.S. industry would benefit from a longer glide-path to achieve those lower rates, Senator Markey also touted his forthcoming proposal to extend the 30% federal investment tax credit for offshore wind until 2025.

While all eyes are on the Massachusetts energy bill for the next step, developers are positioning themselves for growth down the coast as well. For instance, in New Jersey, DONG Energy recently acquired from RES Offshore a lease in federal waters off the Garden State’s coast.  Meanwhile across the Hudson River, Deepwater Wind is reportedly considering a waterfront terminal in Brooklyn to stage its offshore activities in the Empire State and to build up the regional infrastructure. In Maryland, US Wind’s proposed $2 billion, 250 MW project has passed initial screening tests and is in the process of qualifying for valuable credits under Maryland’s Offshore Wind Energy Act of 2013.

State policies supporting long term utility offtake agreements are the key to filling the project pipeline. But as the Massachusetts legislators reminded Leadership Conference participants, short term electricity rates are the political measuring stick against which state energy proposals will be evaluated. Koch brother-supported opponents are well funded and undoubtedly will continue their grass roots strategy stoking fears of increasing electricity rates.

In light of these developments, what was the bottom line takeaway from the U.S. Offshore Wind Leadership Conference? The opportunity is huge.  But given the broader political dynamics, business as usual for offshore wind developers likely will not be sufficient.  For offshore wind proponents, now is the time for redoubled public advocacy informing both politicians and the public alike of the vital stakes in this debate.

Topics: Wind, Massachusetts, Offshore Wind, Wind Energy, DONG Energy, Deepwater Wind, BOEM, Siemens

2015 Year in Review - Renewable Energy in the U.S.

Posted by Joshua L. Sturtevant on 12/23/15 3:33 PM

2015-_Green.jpgCo-author Morgan M. Gerard

Despite the low price of oil throughout the year, 2015 may have been an inflection point for renewable energy as a competitive generation source in the U.S. Deutsche Bank has noted that renewable sources, like solar, have reached, or will soon reach, grid parity with fossil fuel sources in many states. As non-fossil energy has become more economically viable, the industry has responded by standardizing and streamlining project processes, and by accessing financing vehicles like yieldcos and public bonds. Despite growth, the past year has also been a tumultuous one full of unexpected developments and policy shifts including the COP 21 agreement and the Clean Power Plan (CPP), and the formation of intriguing grassroots coalitions, like the green tea party. All of these developments were, of course, set against the specter of a potential step-down of the Investment Tax Credit (ITC), and its surprising last-minute revival. The following is a breakdown of some of the major developments impacting renewables in 2015.

COP 21

On the world stage, nearly 200 leaders, including representatives from key nations such as the United States, China, Russia and India, adopted an agreement that seeks to reduce global emissions. Expectations were tempered going into the much-anticipated conference with France calling for a binding treaty, and the U.S. balking at an arrangement that would almost certainly be struck down by a Republican-led Congress. In the end, the agreement established a long-term goal of maintaining a temperature rise “well below 2 degrees Celsius.” To achieve this objective, each country must submit emissions targets by 2020 with an ongoing reporting requirement. This victory for climate change advocates may serve as a leading indicator for a growing market for renewables.

The Clean Power Plan

The Clean Power Plan serves as the unofficial, yet primary domestic implementation framework for the COP 21 agreement. The CPP was promulgated by the Environmental Protection Agency (EPA) under its Clean Air Act (CAA) authority to regulate ambient emissions from stationary sources. The final Plan sets a target of a 32 percent decline in carbon dioxide emissions from 2005 levels by 2030, and contemplates a much larger role for renewables in the nation’s energy mix. Under the CPP each state will submit a compliance plan to achieve the emissions targets by retiring coal fired facilities, increasing natural gas as a fuel source and incorporating more renewables.

However, as the year draws to a close, the final disposition of the plan is far from certain. Hours after the regulation was published in the Federal Register, twenty-seven states filed more than 15 separate cases against the EPA, which have been consolidated before the U.S. Court of Appeals for the District of Columbia Circuit. In support of the CPP, 18 states, including New York and California, have sought to defend the EPA.

Before the merits of the case are even addressed, 2016 will see a three-judge panel address a “stay” of the rule, which halts the CPP’s implementation until the litigation is finalized. The parties seeking the stay, including West Virginia, feel that by meeting their prescribed standard they will be irreparably harmed. Renewable energy advocates argue that the granting of the stay could greatly damage the efficacy of the rule and its ability to be implemented in accordance with CPP (and unofficially COP 21) targets.

Solar_Panels_and_Wind_Farm.jpgThe Production and Investment Tax Credits

While the U.S. government has sought to assist the nascent renewables industry through tax credits in recent years, through most of 2015 the long-term status of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) appeared grim. The PTC has been the great driver of the wind industry as it provides 2.3 cents per kilowatt-hour generated by a wind facility. Its expiration in 2014 led to a noticeable drop off in new wind projects. The ITC, which has been the driver of solar and also serves as a potential alternative credit for wind, provides a credit for 30% of the development cost of a renewable project, and is applied as a reduction to the income taxes for that person or company claiming the credit. The ITC was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems, and to zero for host-owned residential systems by the end of 2016.

Congress had been considering a PTC extension, which passed the Senate earlier this year. However, many thought an ITC extension was “off the table,” despite the fact that the reduction in credit value would render solar as unviable in many areas of the country. Thus, the industry was swept by uncertainty throughout the year. After solar businesses spent the past year reconsidering their business models to ease the pain of the step-down and speeding along projects to clear the credit requirements, Congress, to the surprise of industry, authorized the extension of both the PTC and ITC. The ITC will now be in place for an additional five years, including three years at the current value, followed by three years of more graduated step-downs. The impact of the ITC extension is set to be significant, and will likely inject new life into abandoned projects, protect existing jobs, support additional job creation and ensure that the renewables sector remains poised for an upward growth trajectory.

Yieldcos

In addition to using tax equity, larger solar companies have been able to raise public funds through the “yieldco” approach. Yieldcos are dividend growth-oriented companies, typically created by a parent company that bundles renewable and/or conventional long-term contracted operating assets in order to generate predictable cash flows. With about one dozen YieldCos now trading on North American exchanges, the vehicle has seen explosive growth in the last year.

The cost of capital required for energy projects has been reduced via the YieldCo model due to access to cheap corporate debt and as their use of standardized project structures and documents have lowered transaction “soft” costs. YieldCos have created efficient homes for the assets that large companies formerly kept on their balance sheets and have additionally allowed nascent entities to raise relatively cheap capital for acquisitions. They have also facilitated diversification of the renewable energy investor base as typical dividend-focused individual investors have been able to "go green" as an alternative to low yield bonds in a way that has been difficult in a tax credit-driven environment. Arguably, this has lowered return expectations, and therefore the cost of capital, further.

However, despite significant growth in 2015, the future of the YieldCo model is less than certain as the fourth quarter of 2015 saw great variability in YieldCo share prices. The reasons are myriad with theories addressing MLP values, rising interest rates, negative public statements from management teams, a slowing Chinese economy, lower oil prices, capital constraints and YieldCo disassociation from parents entities all being floated as potential reasons for recent losses in shareholder value. While it is important to decouple share price from the ability of a YieldCo to remain in business, lower share prices paired with rising interest rates could hinder the ability of many entities to continue to grow portfolios and dividends at current rates.

Distributed Energy Resources—Grid of the Future Proceedings

ThinkstockPhotos-178976522_1.jpgIn the wake of super-storm Sandy and the ensuing power outage to downtown Manhattan, the New York Public Service Commission (NYPSC) is proactively exploring revamping incumbent utilities to better incorporate Distributed Energy Resources (DERs) to ease the transition toward a more dynamic and robust energy generation and distribution system. DERs present a challenge to the tradition grid system, which only envisions energy flowing in one direction, typically from one large source located far from the end user. The proliferation of DER has caused a grid issue in that energy now flows bi-directionally—from the utility customer’s generating system into the utility.

NYPSC’s Reforming the Energy Vision (REV) docket envisions many user-sited DERs that will sell capacity into the system or to other energy consumers. Utilities will act in a new capacity, Distributed System Platforms (DSPs), as “gatekeepers” to a multi-sided platform market with the utility functioning as the platform provider. The utility will facilitate the transaction between the DER owner/operator and the consumer.

Similarly, California is also experimenting with incorporating and leveraging DER formally within their grid framework. The California Public Utility Commission is in the process of facilitating the utilities to develop distribution resource plans (DRPs) that incorporate DER into utility grid-planning and investment regimes. Currently, the Commissions’ mandate is for the utilities to determine the value of DER to their systems, specify where on their systems DER should be incorporated, and propose demonstration projects.

Solar in the Southeast

Developments in several Southeastern states, such as North Carolina, Georgia, Florida and South Carolina are highlighting changing shifts in attitudes toward solar in previously unfriendly jurisdictions. Policymakers in the Southeast are enabling both increased utility scale solar and the introduction of rooftop generation. For example, the Georgia legislature, thanks in part to a coalition comprised of environmentalists and conservative Republicans known as the green tea party, passed the Solar Power Free-Market Financing Act of 2015. The new law opens up third-party ownership of leased rooftop solar projects up to a maximum of 10 kW generation capacity.

Similarly, in South Carolina, utilities were required to submit their plans to implement the Distributed Energy Resource Program Act (DERPA), which mandates programs to achieve at least 2% renewable energy adoption by 2021, including plans to invest in or procure distributed resources. Earlier this year, Southern Carolina Electric & Gas (SCE&G) and Duke Energy reached separate agreements with state regulators, ratepayers and environmental advocates on programs for meeting this objective. SCE&G committed to invest $37 million to install approximately 84 MW of solar on the state’s electric grid by 2021, including 42 MW of utility-scale solar and 42 MW of residential, commercial-industrial, and community solar. Duke Energy agreed to a $69 million program to place in service 53 MW of utility-scale solar and 53 MW of residential and commercial solar.

Net Metering Debates

Utilities are not all for adapting to new and innovative business models, and in many states are continuing to push back against distributed generation. Net metering, which has incentivized hundreds of distributed energy projects, is a legislative policy that allows generators to sell unused electricity into the utility grid. Once supported by utilities, these policies are becoming more contentious across the country since in cost-of-service versus the rate-of-return regulatory jurisdictions, there is the argument that net metering prevents utilities from recouping their full return on grid investment. Utilities have raised concerns that net metering policies create an inequitable cost-sharing paradigm, whereby customers are paid for over-generation, but do not bear the responsibility or cost for updating and maintaining transmission lines.

For example, contention over net metering in Hawaii brought a regulatory proceeding to halt as the island’s utility maintained that costs are shifted to non-net metering customers. The utility recommended a model for distributed energy resources where owners would be compensated for net-metered electricity at $0.18 per kWh, which lengthens the payback period for solar infrastructure investments. Similarly, the Arizona Public Service Company (APS) established a charge for new rooftop solar panel installations connected to the electric grid through net metering, amounting to $0.70/kW—approximately a monthly charge of $4.90 for most customers.

Regulators and legislators from Nevada and California are considering whether NEM has run its course as a method to encourage solar adoption, or if the policy is a fair method of compensating rooftop generators. Utilities argue, not without merit in some cases, that they are purchasing electricity at a dollar rate greater than what it would take them to generate an equivalent amount of electrons. Moreover, electrons are only part of the story, as utilities still need to provide solar customers with standby power and voltage support to turn on their appliances and open their garage doors. Thus, NEM is heavily tied into the “grid-of-the-future” discussions as utility’s role evolves from vertical integration to DER network operators.

Offshore Wind

One of the drawbacks to renewables increasing their percentage share of the domestic energy mix is that these sources are intermittent with solar PV only generating electrons when the sun shines and wind turbines only turning when the wind blows. However consistent power - base-load - is still required, usually in the form of a fossil-fueled plant, or a nuclear facility. Offshore wind has long been touted as the next big addition to the U.S. energy mix since the wind blows harder and more consistently offshore, which would potentially allow this renewable energy source to replace some portion of base-load. Offshore wind had a rocky start in the United States as these large infrastructure projects face difficult regulatory obstacles, including a maze of permitting and environmental laws and requirements as well as classic NIMBY issues. One prominent example is the first proposed off-the-coast wind farm, Cape Wind, which has faced 14 years of litigation surrounding its development process. However, many are hoping that the start of construction of the Block Island Wind Farm off the coast of Rhode Island will trigger a gale force of offshore wind energy

Looking Ahead to 2016

The year ahead shows promise for the U.S. renewable industry—the COP 21 agreement and CPP set the stage for policies to drive and incentivize renewables, new states are opening as potential markets for both utility scale and residential rooftop solar and grid systems across the country are adapting to incentivize greater DER deployment. The stabilizing extension of the ITC and PTC ensures that these energy sources remain financeable in the New Year, and new financers may feel comfortable entering the market as the industry matures. With these policies in place, the U.S. has the opportunity to deploy more renewable infrastructure to meet stated targets, and those working in the renewable energy industry have cause for cheer this holiday season.

Topics: NY REV, Energy Policy, Energy Finance, Distributed Energy, YieldCo, Solar Energy, Renewable Energy, Wind, COP21, Renewable Energy 2015, Distributed Energy Resources, CPP, Green Tea Party, Net Metering, Net Energy Metering, NEM, DG, Energy Project Finance, Renewable 2015, Green Energy, Green Energy 2015, Solar Energy 2015, DER, Offshore Wind, Clean Power, clean power plan, Georgia Solar, 2015, energy, Wind Energy, Energy Project, Green 2015, California DRP

Mid-Atlantic: Distributed Energy Opportunities

Posted by Joshua L. Sturtevant on 11/3/15 11:58 AM

Solar panels at a roof with sun flowersThe Mid-Atlantic region (Maryland, Delaware, Virginia and the District of Columbia) is currently at the forefront of discussions regarding the next generation of distributed electricity markets. Notable developments pushing the region into the spotlight recently include M&A activity, creativity on the part of public service commissions, local innovations in PACE finance, and increasing flexibility on the part of local utilities.

Programs and developments of particular note include:

- Net metering and renewable portfolio standards in Maryland

- PACE financing in Montgomery County, Maryland

- Discussions around undertaking a REV-like proceeding in Maryland

- Interconnection standardization in D.C.

- Microgrid studies being undertaken in D.C.

- Potential third-party bidding for large-scale solar in Virginia

- Renewable portfolio standards and net metering in Delaware

- Community solar innovations and discussions throughout the region

Please join SEIA and Sullivan & Worcester’s Energy Finance team on November 5th live in SEIA’s new offices, or by dial-in, as we host a roundtable discussion on developments in the region and the unique business opportunities they could present. After Rhone Resch’s introductory remarks, Elias Hinckley will moderate a panel comprised of industry experts with unique opinions, including Maryland PSC Commissioner Anne Hoskins, Dana Sleeper of MDV-SEIA, Anmol Vanamali of the DC Sustainable Energy Utility, Bracken Hendricks of Urban Ingenuity and Rick Moore of Washington Gas. Interested parties can register here.

Topics: Water Energy Nexus, Utilities, Water, Carbon Emissions, Energy Security, Thermal Generation, Energy Policy, M&A, Structured Transactions & Tax, Energy Storage, Energy Efficiency, Power Generation, Microgrid, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy, Wind, Oil & Gas

First Democratic Presidential Debate Recap— Where Do the Candidates Stand on Energy?

Posted by Jeffrey Karp on 10/16/15 9:59 AM

American Republican and Democratic party animal symbolsIn stark contrast to the Republican match up in September, energy and climate change related policy was freely discussed during the first Democratic presidential debate. For energy industry participants, the question becomes: how will climate policies affect the kinds of projects that get built and financed if a Democrat becomes President? The takeaway after surveying the positions of the candidates presented on Tuesday night is that Americans would be building a great deal of new energy infrastructure.

Martin O’Malley: Former Maryland Governor O’Malley advocated for a green energy revolution, and put forward a plan to move the country to a 100% clean electric grid by 2050. He claims that his clean energy plan would create 5 million jobs along the way. Stressing the fact that he was the only candidate to set forth a compressive energy plan, Mr. O’Malley took issue with President Obama’s current “all of the above” strategy. In particular, Mr. O’Malley’s plan would ease financing for solar and wind energy project development by extending tax incentives through the Investment Tax Credit (ITC). His plan also calls for stricter rules to curb greenhouse gas emissions and to encourage energy efficiency. Although hawkish on clean energy, Mr. O’Malley did not address the recent domestic oil and natural gas boom. He also did not address the country’s transition towards 100% clean energy while maintaining base load and peaking.

Jim Webb: Former Virginia Senator Jim Webb was the outlier pro coal candidate on the slate who also supports offshore drilling and the Keystone XL oil pipeline. He touted his Senate record as an “all of the above” energy policy legislator, and highlighted his introduction of alternative energy legislation. Mr. Webb also pledged his strong support for nuclear energy as both clean and safe.

Bernie Sanders: Senator Bernie Sanders challenged Mr. Webb on the issue of nuclear energy as “safe,” but wants to act aggressively on the climate change front. Although, Mr. Sanders did not promote a plan for the nation’s energy future, he advanced a bill in July in the Senate that would make solar energy more accessible to low income families. The Sander’s bill would allocate $200 million of Department of Energy loans to offset the upfront costs of installing solar facilities.

Hillary Clinton: Former Secretary of State Hillary Clinton did not address energy policy, but seems comfortable following an “all of the above” strategy. She is a defender of the Clean Power Plan. According to Mrs. Clinton’s “climate change fact sheet,” she would extend the ITC and expand installed solar capacity to 140 gigawatts by the end of 2020, a 700% increase from current levels. Mrs. Clinton’s plan lacks a strategy on the natural gas shale boom occurring in America, but she just may be holding back discussing her complete energy policy as she did with her decision to oppose the Keystone XL oil pipeline.

Lincoln Chaffee: Former Rhode Island Governor Lincoln Chaffee stated that he consistently has taken on the coal lobby during his time in the Senate and named the lobby the enemy he is most proud of combating. Although he didn’t have an opportunity to comment on energy policy, his campaign website states that he always has opposed the Keystone XL oil pipeline, as well as drilling in the Artic region.

Energy and climate change issues will remain a priority topic for the Democratic candidates on the campaign trail and it will be interesting to watch the role these issues play in future debates. Both parties appear to support building more energy infrastructure. However, they seem to diverge on the types of projects that would be promoted, with Republicans leaning towards building oil and gas pipelines with varying stances on renewables while Democrats favor solar energy development. Although the primary season has just begun and it is early in the election cycle, participants in the energy sector should be mindful of how the candidates’ energy policies may impact their business model.

Topics: Carbon Emissions, Energy Policy, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy, Wind, Oil & Gas

Offshore Wind Update: Is the Tide Finally Turning for Offshore Wind in the United States?

Posted by Jeffrey Karp on 9/10/15 9:54 AM

Offshore Wind Turbines ThinkstockPhotos-472311594

Co-authors Jim Wrathall and Van Hilderbrand

For more than a decade, offshore wind has been viewed as the next big thing in the U.S. energy mix. In Europe, billions of euros have been invested in 82 offshore wind farms — 10.4 GW of capacity, according to the European Wind Energy Association (EWEA) — roughly equivalent to the power production of 10 large nuclear power plants. Meanwhile, the United States market stalled completely, mired in regulatory uncertainties, litigation, and lack of financing.

However, there are several reasons to believe the sector has reached an inflection point in 2015. Macro energy supply, economic considerations, and climate-related concerns support development of U.S. offshore wind projects (now more than ever), particularly in the New England and mid-Atlantic regions. Traditional coal-burning power plants are rapidly being retired, and they’re not being replaced. Offshore wind is one of the few resources offering the necessary scale to fill the coming void. Wind energy is also becoming far less costly, given technology improvements, and is increasingly supported by federal and state policies addressing climate change.

Can the U.S. offshore wind market finally turn the corner? Recent developments suggest that it could.

Please see our publication in Wind Systems Magazine starting at page 14 for more information on offshore wind: Is the Tide Finally Turning for Offshore Wind in the United States?

Topics: Renewable Energy, Wind

Offshore Wind Has Come to the U.S.; EPCs Can Help It Gain Momentum

Posted by Jeffrey Karp on 8/27/15 10:08 AM

Co-authors Jim Wrathall, Van Hilderbrand and Morgan Gerard

Offshore wind energy could add 4.2 million megawatts to the generating capacity of the U.S., according to the National Renewable Energy Laboratory, but the U.S. market has stalled almost completely, hindered by regulatory uncertainties, political opposition, litigation and a lack of available financing. Recently, however, several broad market and regulatory themes have emerged—record low energy prices, technology improvements, the start of construction of the first commercial offshore project near Rhode Island’s Block Island and increasingly favorable federal and state policies for renewables such as the Clean Power Plan—that give reasons to believe that the sector has reached an inflection point in 2015. The question now is how to build and sustain the momentum.

Please see our publication on ENR.com for more information about offshore wind: Offshore Wind Has Come to the U.S.; EPCs Can Help It Gain Momentum

Topics: Utilities, Energy Policy, Structured Transactions & Tax, Power Generation, Energy Finance, Legislation, Wind

Is the Tide Turning for Offshore Wind in the United States?

Posted by Van Hilderbrand on 8/6/15 11:58 AM

BLOG_offshore wind turbines_ThinkstockPhotos-505771725

Co-authors Jeff Karp and Jim Wrathall

Offshore wind has long been touted as the next big addition to the U.S. energy mix. With the start of construction of the Block Island Wind Farm off the coast of Rhode Island, many are hoping the project will trigger a gale force of offshore wind energy. Offshore wind resources are abundant, stronger, and blow more consistently than land-based wind resources. The U.S. Department of Energy (U.S. DOE) estimates that 4 million megawatts (MW) of capacity could be accessed in state and federal waters along the coasts of the United States and the Great Lakes.

Indeed, macro energy supply, economic considerations, and climate-related concerns support the development of U.S. offshore wind projects in regions such as New England and the Mid-Atlantic. As traditional fossil-fuel power plants are retired from states’ energy portfolios, offshore wind energy is ready to step into the void to help meet demand through a renewable medium.

Still, offshore wind in the United States remains in its infancy. Large scale offshore projects face difficult regulatory obstacles, including a maze of permitting and environmental laws and requirements. This is no more evident than in the long-awaited 130-turbine Cape Wind project in Nantucket Sound off the coast of Massachusetts, which remains in limbo after more than a decade of planning, regulatory proceedings, and federal court litigation. Other proposed projects off the coasts of New Jersey and Delaware have succumbed to these obstacles as well.

The Outlook for Offshore Wind Energy is Bullish as All Eyes Turn to the Coast of Rhode Island

At the moment, attention is focused on the first commercial-scale offshore wind project to commence construction: Block Island Wind Farm, off the coast of Rhode Island. Deepwater Wind, the project developer, estimates the proposed wind project will generate over 100,000 megawatt hours of energy annually, supplying the majority of Block Island’s electricity needs. The first of five 1,500-ton foundations, which will support the 30 MW project, was installed last month. The project is expected to begin producing energy in late 2016.

There is optimism that if this project succeeds, it will open the door for other economically sound offshore wind projects. And, as discussed below, the factors that previously impeded development of such projects are beginning to line up favorably, thus causing industry leaders to be bullish on the future of offshore wind.

BLOG_offshore wind turbine_ThinkstockPhotos-100815677Regulatory and Legal Clarity: It is important to note that the current road block for the Cape Wind project is purely economic. During the project’s pendency, many of the regulatory and legal uncertainties driven by challenges from opponents were resolved in court rulings. Earlier this year, however, the project stalled over financing issues when its energy off-takers withdrew from their power purchase agreements. Previously, other uncertainties were resolved by the passage of the Energy Policy Act of 2005. In particular, questions of federal versus state jurisdiction and the authority of the federal government in waters up to 200 miles from the shoreline were resolved by this legislative action, which established permitting authority in the Bureau of Ocean Energy Management (BOEM), a federal agency within the Department of the Interior.

The Block Island project has clearly benefited from lessons learned by Cape Wind, as witnessed by the speed with which the former moved through the offshore wind approval process. Although the Block Island development is in Rhode Island state waters, Deepwater Wind already has “steel in the water” as a result of collaborative efforts of state regulators and BOEM. The federal agency timely awarded a right-of-way (ROW) grant for an eight nautical mile-long, 200-foot wide corridor in federal waters on the OCS for transmission to connect the wind farm to the mainland.

In part, these achievements occurred due to Deepwater Wind’s successful engagement with stakeholders. The project developer worked closely with the U.S. Army Corps of Engineers to analyze the potential environmental effects of the project under the National Environmental Policy Act, and received a Finding of No Significant Impact (FONSI) in late 2014. Also, environmental groups like the National Resources Defense Council (NRDC) were engaged and their concerns addressed by altering the construction schedule to allow migratory whales to mate from November through April, and agreeing to utilize the best available technology to protect marine life from sound harassment.

Favorable Political Climate: The political climate for offshore wind also appears to be brightening. The U.S. DOE has promulgated a national plan to support deployment of 10 gigawatts (GW) of offshore wind capacity by 2020 and 54 GW by 2030. Additionally, there remain glimmers of hope that federal wind tax incentives will remain in place, with the Production Tax Credit (PTC) extender bill passing the Senate Finance Committee in July 2015. Moreover, the U.S. Environmental Protection Agency’s final Clean Power Plan, which was announced on August 3, 2015 by the Obama administration, requires a 32 percent reduction from 2005 levels in carbon emissions from existing power plants by 2030. To reach this goal, the plan incentivizes states to implement zero-carbon emitting sources of energy, such as solar and wind.

Additional Leases: The availability of lease sites, a crucial factor for successful project development, also appears to be trending upward. BOEM, in conjunction with several coastal state governments, is poised to open the procurement process in New York and New Jersey, while stakeholders presently are being engaged in North Carolina and South Carolina. On the other hand, there are less than ten active leases, which were awarded on a competitive basis. Recipients of these leases must submit to BOEM a Site Assessment Plan and Commercial Operation Plan for approval. Thus, a BOEM-issued lease does not authorize any construction; instead, it paves the way for a full Environmental Assessment (EA) which adds at least a year onto a project’s timeline before ground breaking may occur. Acquiring projects in mid-development is also an option, but proposed lease assignments are also subject to approval by BOEM.

Financing: Obtaining project financing has been a challenge too. Financiers are wary of unproven technologies and the other risks associated with offshore wind energy, preferring to fund land-based resources with which they are familiar. Although offshore wind is a proven energy producing technology in Europe, the same can’t be said for the U.S., where the only examples are failed projects.

BLOG_offshore wind turbines_ThinkstockPhotos-465147453Yet, the landscape seems to be shifting on the financing front as well. The Cape Wind project blazed a trail through the federal and state permitting landscape identifying and removing many of the administrative and regulatory obstacles that had haunted offshore wind projects. The Block Island project secured its required $290 million in debt and equity financing earlier this year. Given the relative speed with which the Block Island regulatory approvals were obtained, regulatory risks may become less of a concern for investors. It bears reminding, however, that the Block Island project is small compared to other pending offshore projects, which have price tags in the $1-3 billion range. That said, having secured the needed permits, successfully navigated the regulatory reviews, and obtained financing, there is reason for optimism that the Block Island project will open the door for future offshore wind projects.

One such 68-turbine project being planned by US Wind, Inc., off the coast of Ocean City, Maryland, will be capable of generating 500 MW of electricity. To cover the project’s nearly $2.3 billion cost, the company plans to pursue a mix of financing mechanisms including a substantial state subsidy to be repaid after the turbines are constructed and operating. Another project from the same developer as Block Island, Deepwater Wind, is Deepwater ONE also in Rhode Island Sound. This planned 150-200 turbine project will be capable of generating from 900 to 1,200 MW. It too will carry a much larger price tag than the Block Island project. Thus, the proponents of these projects and others will look to Block Island’s success to help overcome investor reluctance to finance offshore wind projects.

Offshore Wind is Poised to Fulfill Expectations

With added certainty in the regulatory and legal landscape and a more favorable political climate, financing opportunities are poised to increase as the technology and financing models are proven. Thus, the offshore wind industry finally may fulfill its promise as a crucial resource that will curb greenhouse gas emissions and help wean the U.S. off fossil-based fuels. The Block Island project is the first to have “steel in the water,” but we believe it will most certainly not be the last.

**Sullivan & Worcester served as pro bono counsel for the Conservation Law Foundation, assisting the non-profit organization’s participation as an amicus curiae party in the federal court litigation supporting the proposed Cape Wind project.

Topics: Carbon Emissions, Energy Policy, Power Generation, Energy Finance, Legislation, Distributed Energy, Renewable Energy, Wind

Tax Extenders Bill Passes Committee: Spotlight the PTC and Wind Energy

Posted by Merrill Kramer on 7/22/15 10:59 AM

wind post PTC 2The Senate Finance Committee on Tuesday gave the first go ahead to extending the Production Tax Credit (PTC) and other tax incentives to renewable energy developers, among other beneficiaries. The tax extension will apply to new wind, geothermal, biomass, landfill gas, hydroelectric and ocean energy projects, provided the projects commence construction by December 2016. The PTC that expired at the end of 2014 provided a rebate of $0.023/kWh for wind, geothermal, closed-loop biomass projects and $0.011/kWh for other eligible technologies that were under construction on the expiration date. The IRS has issued guidelines as to what constitutes commencement of construction for qualifying projects.

The extenders bill passed 23-3 with noteworthy and broad-based Republican support. Senators Pat Toomey (R-Pennsylvania) and Dan Coats (R-Indiana) led the opposition, calling for a headcount during the session to force members to individually state their support for the PTC extension. Their Republican colleagues however shook their heads in a silent plea to withdraw the requested vote, to which they acceded.

The vote in the Senate suggests that opposition to renewable tax programs is no longer de rigueur within the Republican Party. Many GOP districts benefit from wind and other renewable project development and employment. Broader Republican support will be tested when the bill goes to the full Senate for a vote. Tax legislation must originate in the House of Representatives. Therefore a parallel bill must be taken up by the House tax committee and move through the full House, with differences to then be reconciled through a joint conference.

The solar industry was hoping to join the process by including an extension of the Investment Tax Credit (ITC) as part of the extenders’ bill. However, Senator Orrin Hatch (R-Utah), Chairman of the Finance Committee, limited consideration only to expired tax measures. Solar will try to get another bite at the apple when the extenders bill reaches the floor. Chairman Hatch could also offer an amendment before the bill is submitted to the full chamber; however, this possibility seems unlikely as it could upset the balance reached.

Topics: Energy Policy, Solar Energy, Renewable Energy, Wind

Renewable Tax Extenders Package Set To Emerge From Finance Committee

Posted by Merrill Kramer on 7/20/15 8:42 AM

PTC articleRenewable energy is back on the docket for the Senate Finance Committee, and Chairman Orrin Hatch (R-Utah) is likely to release the draft of his bill as early as this week. The Committee is considering a two-year extender for tax incentives for new wind, geothermal, biomass, landfill gas and ocean energy projects during a markup. Also being considered is the extension of second generation biofuel producer tax incentives for production of biodiesel and renewable diesel. The extenders package covers 52 items concerning a wide range of industries in addition to renewable energy, including mortgage lenders, education, and retail and restaurant improvements. The 30% investment tax credit for solar and fuel cell projects is not expected to be on the table. The Solar Energy Industries Association (SEIA) urges the solar community to advocate the investment tax credit, which is set to step-down in 2016 without an extension.

Senator Chuck Grassley (R-Iowa) is lending support to the Production Tax Credit (PTC) extension as its original author in 1992. The modern PTC that expired at the end of 2014 provided a rebate of $0.023/kWh for wind, geothermal, closed-loop biomass projects and $0.011/kWh for other eligible technologies. The PTC generally applies to the first 10 years of a project’s operation. The PTC expired at the end of 2014; however, the Internal Revenue Service provides “safe harbor” to projects that were under construction on the expiration date.

In the past it has proven difficult to finance new projects once the PTC expires. For example, when Congress failed to extend the PTC in 2013, the wind industry experienced a 92% drop in new installations and a $23 billion plummet in private investment according to the American Wind Energy Association. Similar cliffs occurred when the PTC expired in 2000, 2002 and 2004.

One hurdle for the Senate’s tax extenders bill is finding a legislative vehicle to put to vote before the full Congress. Congressman Paul Ryan, Chairman of the House Budget Committee, has suggested combining international tax reforms with a highway trust fund extenders’ bill that has already passed the full chamber. However, members of Chairman Ryan’s party have sought to eliminate the tax credit and have co-sponsored a bill introduced by Rep. Marchant (R) in the House aptly named the “PTC Elimination Act.” Wind energy could prove to be a wedge issue for Republicans since, among the Congressional districts, over 81 percent of all installed wind capacity is in Republican-held districts in the 112th Congress.

Topics: Biofuels, Biomass, Energy Policy, Structured Transactions & Tax, Energy Finance, Distributed Energy, Renewable Energy, Wind

Six Questions to Consider about Microgrids

Posted by Jim Wrathall on 7/14/15 2:30 PM

microgrid ThinkstockPhotos-156606910

 

What is a microgrid?

The traditional electricity distribution model can be viewed as a “macrogrid,” using a large centrally located power station to provide electricity over an extensive service territory. This model was designed during the early days of electrification with the objective of providing affordable and reliable power to as many customers as possible. However, with technological advancements, a localized microgrid may provide the multiple benefits of grid resiliency and cleaner, more efficient energy production and distribution. Regarding resiliency, the microgrid may be able to disconnect or “island” from the macrogrid, minimizing and isolating blackout incidents and providing for power redundancy. Concerning energy efficiency, the microgrid uses local sources of energy to serve local loads, reducing energy loss in transmission and distribution. Additionally, this smaller grid can more easily deploy distributed energy resources (DER) such as solar energy and combined heat and power (CHP) to meet grid demand.

Why the push towards microgrids?

As stated above, microgrids provide the dual benefits of energy efficiency and resiliency. Picture Superstorm Sandy in Manhattan, if downtown had the capability to island and maintain power notwithstanding the downed Con Edison station? Or, perhaps, picture the upper east side of Manhattan being able to provide some power to the seven million people left without electricity? Even the nation’s capitol is vulnerable, as demonstrated when a PEPCO transmission line recently took out power in downtown D.C., with power disruption affecting federal buildings including the White House Complex. Not to mention, electricity can be saved by diminishing losses from long transmission.

Ok great! Why not build microgrids everywhere?

Currently, developers face uncertainties as there is not a clear policy or regulatory path in place, thus affecting the potential to obtain private financing. Previously, we lacked the technological capability to deploy a variety of distributed generation (picture roof-top solar, a traditional combined heat and power station, and a small wind turbine working together in different locations) through a set of advanced, real-time controls to manage energy demand across the entire microgrid. While the idea of a clean-tech microgrid is relatively new, the concept of a microgrid is not so new. University campuses, military bases and some industrial parks have been operating them for years, maybe even decades, but all such grids are on a solitary campus with one stand-alone energy customer. What is new is the desire to place microgrids throughout a utility grid system servicing commercial customers, perhaps in competition with the utility. The potentially competitive relationship with the utility may be why we haven’t seen microgrids popping up everywhere, unless they are utility-sponsored.

What is the utility’s stake in microgrid adoption?

Where a third-party, non-utility provides electric generation and distribution to retail customers, the utility may have a lot at stake. The traditional model always has been the use of a macrogrid, in which a solitary utility provides both the generation and distribution of electricity for a specified geographic area, their “service territory.” Simplifying the regulatory terrain, utilities are heavily regulated in exchange for their exclusivity and must set rates through a proceeding before the state’s public service commission (PSC). This is why electricity bills typically remain constant because change can only occur in a rate making proceeding. Depending upon how the state set up its relationship with the utility (during the late 1800s or through some subsequent restructuring), the utility may own its right to exclusivity, making it very difficult for a state to change its laws.

Some states and their utilities have opened the market to multiple electricity generating entities and, for example, enabled solar providers such as SolarCity through third party roof-top leasing. However, utilities have invested a great deal of capital in fixed wire distribution systems that physically connect your homes or businesses to electricity. Microgrids would directly compete with such fixed wire distribution; therefore, utility resistance may be expected. Depending upon the jurisdiction, fixed wire distribution may be the exclusive franchise of the utility. However, some states, like New York with its Reforming the Energy Vision (REV) docket, are seeking to modify the utility relationship, showcasing the vast differences in utility precedent by jurisdiction.

Are there other obstacles to microgrid adoption?

Lawmakers and public service commissions may need to realign their energy laws and regulations to enable the clean-tech microgrid. For example, to make a private microgrid financeable, the developers will need to know approximately how many customers (ratepayers) they can lock into their grid. Many states have competition laws that allow customers to choose their electric generation supplier. This approach may disadvantage a financed microgrid, as customers may be able to switch providers. Also, it is unclear what level of regulation microgrids will experience. Are they utilities? The common answer is most likely not, but the question remains: will there be any requirements in place to prevent rate spiking? Another unknown, will the microgrid as a whole be able to net-meter to the macrogrid? What will the interconnection procedures look like? The list of uncertainties needs to be addressed to provide developers and financers with better clarity.

With all of these challenges, what is the future for microgrids?

There is accelerating momentum behind the push to deploy microgrids. SolarCity already is offering a microgrid service to collaborate with municipalities and universities. With more severe and unpredictable storms and increased vulnerability to cyber-attack, microgrids are becoming the next horizon for our energy future. Utility and policy concerns are surmountable as demonstrated by REV and the market restructurings that enabled competitive generation. To gain a foothold, the microgrid revolution will take a tailored approach to local issues, and will be led by some pioneering developers, and, perhaps, a handful of forward-thinking utilities that are ready to capitalize on a new opportunity.

Topics: Utilities, Energy Policy, Structured Transactions & Tax, Energy Storage, Energy Efficiency, Microgrid, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy, Public/Private Partnership, Wind

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