The prospects for near-term offshore wind take-off in the United States dimmed at the end of 2014, as the two utilities that had agreed to buy the electricity output of the 468 MW Cape Wind offshore project terminated their contracts. The deals collapsed because the developers of Cape Wind had failed to reach key contractual milestones for project financing and construction launch by December 31, 2014. National Grid signed a conditional power purchase agreement (PPA) in 2010 for 50% of the project output, and utility NSTAR agreed to purchase an additional 27.5% of the project’s output in 2012.
Saying they do not regard the terminations as valid, Cape Wind officials claim that force majeure provisions in the contracts stipulate that the milestones should have been extended. Once again, the embattled project is in a legal dispute – and this one with potentially show-stopping consequences. No offshore wind project in the United States can proceed without the price certainty of a PPA. The outcome of these contract disputes could deal a fatal blow to a project that has been under development for 14 years.
Not in My Ocean
Planning for Cape Wind has taken so long partly because it was the first to navigate the unchartered waters of offshore wind development in a country that has little offshore wind policy and, as yet, no steel in the water. Vociferous and well-funded opposition to the project’s location off Nantucket Island – a popular vacation destination for the affluent and influential – plagued it from the beginning. The developers have been fighting a two-front battle against the challenges of offshore wind and the legal hurdles put up by anti-wind activists, coastal homeowners, and conservative billionaires.
The unfortunate reality is that, while the United States has excellent offshore wind potential along the Eastern seaboard and growing need for diversified and clean electricity generation, U.S. policies are ill-suited to support offshore wind. The production tax credit (PTC) and investment tax credit (ITC) for renewable energy projects subsidize around 30% of the cost of building an offshore wind farm. European countries like Germany, Denmark, and the United Kingdom provide similar levels of subsidy. The major difference is that those incentives have been consistent and long-lived enough to support projects that are years in development.
Back and Forth
Unlike most developed countries, where tax law is permanent until changed through legislation or other decrees, many U.S. tax laws and incentives are increasingly enacted on a temporary basis. This is partly because U.S. lawmakers count on industries like wind power to help finance their election campaigns. As a result, tax favors are largely granted on a 1- or 2-year basis, resulting in boom and bust cycles (13 GW of wind installed in 2012 in the United States, for example, followed by 1 GW installed in 2013). This also results in severe inefficiencies in manufacturing and human resources as factories lay off workers only to rehire again when incentives resume.
The onshore wind industry grudgingly copes with this back-and-forth because onshore wind can be built in 1- and 2-year cycles. But offshore projects require much longer to develop and build. Eventually, U.S. lawmakers may realize the benefits of offshore wind and provide suitable long-term incentives. Unfortunately, that will likely come decades after more progressive countries in Europe – and now China – are far ahead in offshore wind.