Posted on August 4, 2021
The following is a contributed article by Dean Koujak, a director in Guidehouse’s Energy, Sustainability and Infrastructure segment. This article reflects the views and opinions of the author and does not reflect the views and opinions of Guidehouse Inc. (“Guidehouse”) or any of its other independent experts, professionals or affiliated entities.
Several Northeastern and mid-Atlantic states have established significant offshore wind procurement targets. To facilitate the build-out of offshore wind, the federal government, under the Bureau of Ocean Energy Management (BOEM), designated lease areas pursuant to extensive study. BOEM has proceeded to auction off the rights to develop those lease areas to the highest collective bidders under an ascending clock auction. This design extracts the maximum possible lease price and cost from qualified bidders.
Under this scheme, potential bidders must make two payments to BOEM: a cash “bonus” payment, which will go up in price subject to the outcome of the auction, and a rent and fee payment paid during the term of the lease that is determined and prorated based on actual usage and energy production of the lease area, as further set forth under the respective leases.
In contrast, states such as New York and New Jersey have established procurements for offshore wind energy delivered into and for the benefit of their states. Accordingly, whoever wins the lease area auctions will be able to exercise market power in these offshore wind procurements. In addition, they will pass on the cost of these leases, including the “bonus” cash payment, to ratepayers within these respective states.
Effectively, the outcome of the BOEM process constrains competition and creates a highly stressful situation for prospective bidders. They have to compete aggressively in a one-day auction for all lease areas to have a chance at offshore wind development.
Raising the cost of entry of offshore wind is contrary to policy
The Biden administration has established aggressive decarbonization targets of more than 50% by 2030 and 100% carbon pollution-free electricity by 2035. Accordingly, policy should promote the cost-effective development of offshore wind. But achievement of this goal is stymied by the lease auction construct, which maximizes the cost to developers and the ultimate off-takers of offshore wind energy and associated credits.
Offshore wind continues to have a cost disadvantage compared with land-based wind due to higher development and construction costs. This cost burden should not be exacerbated unnecessarily, rather it should be reduced when possible.
Competition is constrained and grid optimization is lost
The New York Bight wind lease areas include eight adjacent lease areas. Multiple awardees of the lease areas might not be able to leverage the potential synergy of the lower cost of a coordinated transmission infrastructure. Under the current solicitation design, each would presumably and independently build a new and separate transmission cable into New York or New Jersey. As more projects are leased, the result might be a spiderweb of transmission ties due to the lack of coordination of the project sites.
Solution: Change the auction design
BOEM prequalifies who is eligible to bid on the offshore wind lease areas. But rather than initiate an ascending clock auction, the next step of BOEM should be to identify which party can get the power onshore at the most economical price. BOEM’s current process determines who has the deepest pockets and greatest appetite for risk to effectively pay the maximum price possible.
Under the Proposed Sale Notice published in the Federal Register, BOEM states that it “proposes to start the auction using the minimum bid prices for each of the Lease Areas and increase those prices incrementally until no more than one active bidder per Lease Area remains in the auction.” In doing so, the process does not sufficiently consider the benefits that a project could confer regionally. Rather, it engages in a game of survivor where the last bidder that remains standing and willing to pay the incremental posted price wins.
An ascending clock auction that favors the buyers of offshore wind renewable energy credits (OREC), similar to the European design, could be held over the course of days or weeks to facilitate optimization of the lease award. BOEM would facilitate the lease to the party willing to accept an off-take agreement at the lowest possible price delivered onshore. If it makes more sense to interconnect a given lease area to New York than New Jersey, or vice versa, the lease award would be optimized accordingly on account of the cost and thus price.
Off-takers for ORECs would specify their desired interconnection zone and quantity at each ascending price level. Demand for ORECs is satisfied as developers accept price levels, if able, based on the characteristics of the lease areas. Bids can reflect either a multi-area bid or single-area bid, with preference given to economize the deal size to the extent possible. Off-takers would include the present buyers, such as the New York State Energy Research and Development Authority and the New Jersey Board of Public Utilities, as well as potentially corporate buyers.
As a less optimal alternative, the process could reflect the one used for offshore oil & gas leases, which uses a sealed bid design. Qualified bidders would submit single-area and multi-area bids reflecting co-optimization. Under this design, BOEM would select the projects that maximize value and economy of scale while, to an extent, mitigating the potential for developers to overpay for such leases.
Separating the transmission can reduce costs
A further step in the right direction is to facilitate a separate process for the development of an offshore wind transmission system. For example, regional independent system operators would have a public policy requirement for a transmission planning process. Developers would plan and submit the most economical and beneficial interconnection plan that considers all the available lease areas and would then proceed through this separate Federal Energy Regulatory Commission (FERC) authorized process. This measure would ensure that redundant transmission systems for each lease area are not separately constructed, but rather, consolidated and optimized.
Better regional coordination and collaboration is needed
As each state continues to implement its own offshore wind program, further conflicts will arise and the result will likely be suboptimal for all. Significant investment in the energy transition is already required, and any opportunity to optimize such investment should be taken.
Parties that are interested in purchasing offshore wind energy and renewable attributes should coordinate at the FERC level to solve the regulatory roadblocks impeding such collaboration. Particularly, they should be working toward organizing the offshore wind auction process and the interconnection of such projects on the grid.
