Everything to Know About Offshore Wind Lease Sales in the U.S.
When do U.S. offshore wind developers pay their bids, what do they receive in return, and where does the money go?
If you are involved in the world of offshore wind in the U.S., you have likely heard about the outcome of the New York Bight and Carolina Long Bay lease auctions.
The New York Bight auction was the first major offshore wind energy lease auction of 2022, commencing on February 23 and comprising of 25 pre-qualified companies and consortia. Drawing six winning bids for over 488,000 acres, the selected offshore wind developers’ bids totaled $4.37 billion. This large figure shocked many in the industry. American Clean Power, for example, estimated total company bids to be $1.1 billion, while the actual outcome saw one developer place a winning bid of $1.1 billion for a single area.
The Carolina Long Bay offshore wind auction marked the second major offshore wind energy lease auction held this year. The auction was for two lease areas in the Carolina Long Bay — offshore of North Carolina and South Carolina. Both areas are similar sizes and distances from shore and have similar wind resource potentials, together totaling 110,091 acres with 1.3 gigawatts of installation capacity, according to the U.S. Department of the Interior. After 18 rounds of bidding, the auction resulted in two winning bids totaling $315 million from two different companies: TotalEnergies Renewables USA and Duke Energy Renewables Wind.
The New York Bight auction attracted more interest and higher bids than Carolina Long Bay, largely due to the former having greater potential to supply energy to major metropolitan areas.
The Carolina Long Bay auction differentiated from New York Bight in that it included a 20% credit for bidders who are monetarily committed to supporting workforce training programs and/or U.S. domestic supply chain development. The bidding credit resulted in $42 million being committed to these initiatives.
According to the Environmental and Energy Study Institute, BOEM had “raced to hold” the Carolina Long Bay auction ahead of July 1st, 2022, after which a ten-year moratorium began, banning all offshore leasing for the purpose of energy “exploration, development, or production” off the coasts of North and South Carolina, Georgia, and Florida. Since the lease auction occurred prior to July 1st, the projects will not be impacted by the moratorium. Stakeholders such as American Clean Power claim that the lease sale should be “a sign to Congress to repeal the ten-year moratorium on offshore wind leasing.”
Now that provisional winners have been established for both auctions and project development is ramping up, questions about the lease sales may still linger: when do the winning bidders pay their bids, what does their money buy them, and what will the Office of Natural Resources Revenue do with this substantial influx of cash?
Here is everything you need to know about the bid process related to U.S. offshore wind leases, such as those for the New York Bight and Carolina Long Bay.
Auction Settlement
The Outer Continental Shelf (OCS) Lands Act requires the Bureau of Ocean Energy Management (BOEM) to award leases competitively after responses to BOEM’s official Request for Interest (RFI) indicate that competitive interest exists. Thus, within 30 days following a lease auction, the Department of Justice and Federal Trade Commission conduct an anti-competitiveness review of the auction.
This review process screens for collusion between bidders that could affect final auction prices (e.g., agreements not to bid or to bid at a particular price). To engage in the auction, bidders were required to front a $5 million bid deposit; thus, the winning bidder’s required payment is called the bonus bid, equal to their winning bid minus the bid deposit.
Once the review confirms the auction represented true competition, the winning bidder is issued the lease contracts.
Within two weeks of receiving the lease contracts, the winning bidder must complete an electronic funds transfer in full payment to the Office of Natural Resources Revenue (ONRR).
If the winning bidder does not complete this payment or comply with other terms outlined in the Final Sale Notice, they may lose the lease area, and BOEM may award the lease to the next highest bidder who has not won another lease area in the same auction.
The Power of a Lease
A lease grants the developer the exclusive rights to occupy the lease area and install and operate facilities to conduct commercial activities.
Additionally, the developer can obtain one or more project easements without further competition from other bidders. An easement essentially allows the lessee to install export cables within a corridor outside of their lease area on the Outer Continental Shelf. The project easement area has a width of 200 feet, centered on the cable, and runs the length of the cable to shore. Without a project easement, a lease area would be virtually valueless to a developer because generated electricity could not legally make it to shore.
Further Payments
Despite the high costs of securing exclusive rights to lease areas in the New York Bight and Carolina Long Bay, the lessee must still pay rent, financial assurance, and operating fees to the ONRR, with the first rent payment due within 45 days of the winning bidder receiving the lease contracts.
In the period between acquisition of the lease and operation of the farm, the lessee must pay an annual rent of $3 per acre. This equates to $129,168 and $377,892 for the smallest and largest areas in the New York Bight, respectively, and approximately $165,000 for each of the two lease areas in the Carolina Long Bay. Compared to the bonus bids, these rents are relatively very low.
Upon approval of their Construction and Operations Plan, the developer must pay another relatively low annual rent, this time on their project easement, equal to $70 per mile length of the export cable corridor.
Within 10 days of receiving the lease contracts, the developer must provide a bond of $100,000 to ONRR as financial assurance.
Lastly, during operation of the wind farm, the developer must pay an annual operating fee equal to 2% of the estimated wholesale market value of the projected annual electric power production. This fee is calculated by multiplying together the product of the farm nameplate capacity, number of hours in a year, farm capacity factor, and regional wholesale power price; this equates to an annual operating fee of $1.5 million and $3.9 million for the smallest and largest areas in the New York Bight, respectively, and a total of $3.6 million for the two lease areas in Carolina Long Bay. These values were calculated assuming a capacity factor of 0.4 and an annual average regional wholesale power price of $40/megawatt hour.
The Future of Billions of Dollars
ONRR is no stranger to large influxes of revenue, receiving billions of dollars from oil and gas royalties and bonus bids each year. BOEM believes that “resources on the Outer Continental Shelf (OCS) in U.S. waters belong to all U.S. citizens,” and thus, revenue from OCS lease sales is dispersed throughout the federal government.
According to BOEM, a majority is put into the General Fund of the U.S. Treasury — “America’s checkbook” — which is used for general daily operations of the federal government. This includes loans issued to federal agencies for general operations and cash disbursements to the public.
A much smaller chunk of the money is distributed into two funds which protect natural and historic lands: the Land and Water Conservation Fund (LWCF), which protects national public lands, including parks, wildlife refuges, forests, and trails, and the Historic Preservation Fund (HPF), which provides grants to state and tribal offices to support the conservation of cultural and historic sites, as decreed by the National Historic Preservation Act.
For lease areas lying partially or entirely within state waters, auction revenue is shared with the state governments so that they may fund efforts to mitigate any adverse environmental and economic impacts of development. This share equals 27% of revenue generated within 3 miles of shore.
For lease areas in the Gulf of Mexico, under the Gulf of Mexico Energy Security Act (GoMESA), 37.5% of auction revenue is shared with four nearby coastal states — Alabama, Louisiana, Mississippi, and Texas — to be used for coastal conservation, restoration, and hurricane protection. The act also mandates additional allotment to the LWCF.
The distribution of these funds for oil and gas revenue in the 2019 fiscal year can be seen below:
A separate source, the Outer Continental Shelf Governors Coalition, reports that only half the revenue is funneled into the General Fund of the U.S. Treasury, while the other half is disbursed to various other funds.
These funds include the aforementioned organizations and the Reclamation Fund for the construction, operation, and administration of hydropower and irrigation projects across the U.S.
The Department of Interior’s Natural Resources Revenue Data web page allows you to explore the federal government’s revenue from wind lease bid bonuses and rents by fiscal year.
Key Takeaways and Future Development
The New York Bight and Carolina Long Bay lease auctions have set powerful precedents for the future of offshore wind. The outcomes reflect the shifting opinions of those financing the industry: a previous novel, bold venture has become a safer, desirable, and high-demand investment. As we enter this golden age of project development, developers’ attention will likely turn towards the California lease sale anticipated to occur at the end of the year.
The California lease sale will be the first of its kind on the West Coast and the first in the nation to include floating wind turbines. With a total potential of producing 4.5 gigawatts of power, the outcome of the offshore wind lease auction will play a pivotal role in the direction of offshore wind in the U.S.
