New York starts spreading the News: 50 percent Offshore Wind Power Cost Reduction is on the Way

This is Part I of a two-part series on offshore wind power in New York. It discusses opportunities to cut the cost of offshore wind by 2020 by using strategies set out in a new report written by the University of Delaware's Special Initiative on Offshore Wind (SIOW) for the New York State Energy Research and Development Authority (NYSERDA). Part II of this series will explore further how to increase pricing competitiveness by fully accounting for offshore wind's benefits.

Offshore wind power has a host of benefits to offer--pollution-free power, increased grid reliability, economic development and jobs. This week, NYSERDA helped bring those benefits one step closer to reality by releasing an important and methodical report that shows that the Empire State can cut the price of this clean energy technology by more than half by 2020 if it puts the right policies in place now.

Now is an especially good time to act because New York is the midst of root-and-branch reform to change the way energy is produced and delivered in the state, called, "Reforming the Energy Vision". It is a sweeping effort to make New York's electric system cleaner, more reliable and more affordable. My colleague, Jackson Morris, describes the REV initiative in detail here.

Offshore wind is clean and reliable, as evidenced by wind local speeds, the correlation of the resource with periods of high demand in New York City and Long Island, and offshore wind's growing track record in Europe.

With a technical potential off New York's shores that exceeds the state's energy needs, offshore wind can become a dominant clean energy resource in the state as its cost go down.

The report, with its catchy and efficient title, "New York Offshore Wind Cost Reduction Study", provides guidance that can and should move questions surrounding offshore wind power's deployment in New York's waters out of the wispy realm of "if" and into the material world of "when."

The New York Offshore Wind Cost Reduction Study

As my colleague Kit Kennedy writes, the study creates a roadmap for the development of a multi-gigawatt offshore wind industry between 2015 and 2023 that can be anchored in New York and distributed up and down the Eastern seaboard.

The study's goal is to locate the "sweet spot" where global cost reduction trends driven by the European offshore wind build out combine with cost reductions from the first US projects and targeted New York State policy interventions to rapidly driven down costs.

New York has charted a path to the sweet spot, including the proper sequencing and timing of the actions needed to get there.

Going forward, all it has to do is put the pieces on the board and start to move them.

Methodology and Approach

The study sets out a logical framework to systematically drive down the costs of offshore wind by developing detailed assumptions from leading experts and the literature and using these assumptions to generate model results (using NREL's CREST model) for four hypothetical 600 megawatt (MW) wind farms sited in the New York Bight. The study has the projects reach financial close successively in the years 2020 to 2023.

The study's authors work in a stepwise fashion - first by isolating and quantifying the effects of global cost reductions, then by isolating and quantifying US learning effects and then by isolating and quantifying the relative effects of possible policy actions that New York could take.

Finally, since some of the possible actions that New York could take are more impactful than others, and because some actions overlap, the study tests different "bundles" of actions, to see which bundles have the biggest bang for the buck and recommends an optimal sequencing of actions.

I won't discuss the bundling or sequencing analysis in detail here, except to note that the study concludes that (i) if New York applies all of the identified interventions, it can reduce costs relative to the base case by up to 53% and (ii) in order to achieve the cost reductions by 2020, New York requires immediate action in 2015 in the areas of lease acquisition, stakeholder engagement and policy design.

In other words, the authors conclude that the time for action is now.

1. Cost Reductions through Global Innovation and U.S. Learning

The study begins by taking a hypothetical "base project" in a "stagnant" offshore wind policy and financing environment − "stagnant" in this sense means that nobody, neither New York State, nor the region, nor the Feds, does anything to enable offshore wind markets, so that the sector remains completely unsupported by policy or market reform (i.e. no tax credits, no MACRS, no RECs, etc.)

The base project is a 600 MW wind farm composed of 5 MW turbines, financed in 2020 and favorably sited in New York waters. The study compares the base project to another project developed under identical conditions in 2020, except that its uses 8 MW instead of 5 MW turbines. The study then compares the 8 MW project to three later projects financed in the period from 2021 to 2023.

When the base project and its 8 MW doppelgänger are compared, the study reveals that the price of energy from the 8 MW turbine project (using a metric called the levelized cost of energy or "LCOE") is 22% less than the 5 MW turbine project. A full 22% -- and that's solely due to the delivery of "global cost reductions" through improved technology without any New York policymaker lifting a finger. (Merci, les Européens!)

The 8 MW turbine is not speculative or a pipedream. Deepwater Wind last week announced that its Block Island project off of Rhode Island will use 6 MW turbines, which turbines only began being commercially deployed in Europe last year. Last summer, the first commercial contract for 8 MW turbines was signed, so deployment of 8 MW turbines in the US by 2020 is by no means a stretch and may border on the conservative. 10 MW turbines are in the works.

The study predicts that later hypothetical projects - numbers 2, 3 and 4 - will each use 8 MW turbines, and that incremental cost reductions will continue to occur, but that as projects move in deeper water (like project 4) additional construction costs start to erode the efficiency gains.

Next, the study layers on the benefits generated by the experience of US-based projects developed prior to 2020.

The study assumes that 750 MW of offshore wind will be installed by 2020, including Cape Wind, Block Island, the DOE-funded pilot projects and a Maryland wind farm. The study also assumes that New Jersey installs four 250 MW projects between 2020 and 2023, bringing the total US offshore wind capacity by 2025 to 4.2 GW. The study then describes how the US projects drive additional cost reductions.

Our main takeaways:

• Technology: Global technology advances will benefit the US in very close to real time. This is demonstrated by the Deepwater Block Island deal to use 6 MW turbines. Turbine size is the key factor for cost reduction and New York should have a high degree of confidence that 8 MW turbines will be standard well before then.

• Scale and Role of Early Projects: The study concludes that the minimum commitment for New York is 2.4 GW. However, that amount assumes 750 MW having been built out in other states prior to New York's first project, and another 1000 MW being built out in New Jersey in parallel with the first New York project. Some of these projects may not happen. This suggests that New York should move aggressively to fill the gap with its own early projects, even though more expensive, since these "one off" projects can have minimal ratepayer impact and can directly benefit later projects. This also suggests that New York's target should exceed the minimum 2.4 GW to ensure the full potential benefit of cost reductions. We recommend 5 GW by 2025.

2. New York State Policy Interventions

The study then layers on the benefits of New York specific policy interventions to support the industry's development. This is the meat of the document where things get really interesting -- NRDC has long recognized that state offshore wind policy is the critical enabler for the industry.

We summarize the policy interventions as well as rank them in terms of cost reduction impact, in Table 1 below.

Table 1: NYS Potential Interventions Summary

Our main takeaways:

• Long-term market signals: The single most important action for New York is to lock in a phased, long-term commitment to build a critical mass of projects. This is because the deep cost reductions result from offshore wind supply chain companies competing for US projects and the companies will not devote resources to a market unless they see the potential for long term growth.

• Long-term, fixed price contracts: The second most important action for New York is in the realm of financing. To reduce capital costs and hence LCOE by 2020, New York has to move quickly in 2015 to put in place a revenue policy that works. The study suggests that this can be achieved in a number of ways, such as long term power purchase agreements, contracts for differences or offshore renewable energy credits (ORECs), so long as long term, fixed price offtake and swift regulatory approval are assured. However, to make rapid progress in attracting developers to New York, we recommend that the state either build on existing Main Tier central procurement system but expand it to include bundled OREC and energy payments, or (preferably) use the tried and true method of power purchase agreements with public and investor-owned utilities in the state. NYPA and LIPA should reinvigorate their existing efforts to develop offshore wind, guided by NYSERDA and its green bank division.

• Timing and Bundling: A specific offshore wind package of policy interventions is required for the cost reductions to materialize. The big cost reduction opportunities (numbers 1, 2 and 3 on Table 1 above) are generally low cost and low risk policy innovations, but action is needed now, so once again, New York should heed the report and act immediately on the recommendations.

• Industry partnerships and New York offshore wind expertise: The third most important action is that New York develop and agree on a cost reduction trajectory with developers and supply chain companies. This will set expectations for realistic cost reductions and put everyone on the same page regarding assumptions. If cost reductions don't materialize or are better than anticipated, the public and private parties should know why. We recommend that the State quickly establish in 2015 a dedicated offshore wind office staffed with experienced experts able to effectively partner with industry.

• Data sharing: A final insight is that transparency around the cost and performance data is necessary to increase the efficiency of competition. NY should require data delivery for use by later projects, which should allow them to price more accurately.

In sum, the New York Offshore Wind Cost Reduction Study is a tremendous step forward. We look forward to working with NYSERDA and other stakeholders to implement the recommendations and make reduced cost offshore wind energy reality.