U.S. Offshore Wind Farms and Electricity Ownership: A Crash Course
Offshore wind developers, banks, electric utilities, renewable energy credits, power purchase agreements … how do they all connect?
Introduction
When you think of the owners of electricity, who comes to mind? Try the more topical question: who can boast that their electricity is renewable when a mix of sources powers the electrical grid? How does the grid become “cleaner”? With the time-sensitive nature of today’s clean energy transition, public pressure is increasing on federal and state governments to accelerate the development of clean electricity projects.
Unfortunately, it isn’t easy to track regional progress of the clean energy transition. Once electricity generated by clean sources feeds into the grid, it is indistinguishable from electricity generated by fossil fuels — the electrons flow together without any kind of fingerprint. Therefore, specific methods help track the ownership of renewable electricity as it is pooled in the grid together with electricity generated by fossil fuels.
So, let’s look at how electricity ownership runs from offshore wind farm owners to residential, commercial, and industrial customers.
Offshore Wind Farm Ownership
Deregulated Electricity Markets
Before 1992, electric utilities were vertically integrated in the U.S., meaning they owned and operated power plants as well as the transmission and distribution infrastructure. However, in 1992, the federal government prompted the breaking apart of this vertical system through its Energy Policy Act, aiming to create power market competition and increase renewable energy development. This allowed some states to create deregulated electricity markets, which separated electricity generation from transmission and distribution.
Today, about half of the coastal states in the U.S. have deregulated electricity markets. This includes Maine, New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, Delaware, New Jersey, Maryland, Texas, and California. Many of these states overlap with those setting offshore wind procurement goals. Thus, in these states, independent developers are the generators of offshore wind electricity.
Developers Create Farms and Transmission Infrastructures
In the world of offshore wind, development companies, such as Vineyard Wind LLC and South Fork LLC, are often joint ventures between two experienced development partners.
Unsurprisingly, the enormous feat of building an offshore wind farm comes with investment amounts that can reach into the billions of dollars, so developers rely on internal and external financing from a range of sources. External financing comes in the form of debt, from banks and other investment companies, as well as tax equity from large institutional investors.
In addition to creating farms, developers can be responsible for creating the infrastructure that delivers electricity to the grid. The accepted method of farm-to-grid interconnection is with generator lead lines. In this method, one generator lead line runs underwater from the offshore substation to the onshore grid interconnection point for every farm. However, this grid interconnection method is not necessarily scalable for every wind project requesting grid access. The number of onshore interconnection points is limited and the onshore grid system requires upgrades at every point of interconnection to meet radically increased electrical loads.
In fact, as of October 2020, 52 GW worth of offshore wind interconnections have been proposed along the East Coast. Regulators’ concern over the grid’s ability to support this load at many interconnection points has sparked interest in following a European model of transmission, in which independent farms are connected by an offshore network with fewer grid interconnection points, focusing grid upgrade efforts on fewer locations. In this case, other entities besides the offshore wind developer would develop and own the transmission network.
Farm Operation
Following construction of the farm, the developer retains its ownership. One of the partners in the joint venture may buy out the other in order to acquire full ownership of the farm, as the other may wish to focus their efforts on development instead of operations and maintenance (O&M). Otherwise, the developer may keep the farm or sell it and transfer the debt to another entity entirely. The wind farm generates revenue over time, allowing the owner of the farm to pay back the debt.
During a guarantee period lasting a few years following installation, original equipment manufacturers (OEMs) of wind turbines, foundations, cables, etc., are responsible for carrying out O&M activities. Following this period, developers may outsource O&M activities to different service providers or elect to conduct O&M themselves.
Electric Utilities
Once the electricity reaches the grid, electric utilities become key stakeholders. Their main job is to maintain the infrastructure for electricity transmission and distribution within a defined geographic area. Electric utilities may be private (investor-owned utilities or utility cooperatives) or public (owned by federal or local governments).
Since the transfer of electricity between states qualifies as interstate commerce, the Federal Energy Regulatory Commission (FERC) regulates the electrical grid. Operating under oversight from the FERC, independent system operators (ISOs) and regional transmission organizations (RTOs) control and monitor their respective grids, which only reach to certain geographic boundaries, as shown below in Figure 1.
ISOs/RTOs ensure that the grid is balanced between generation and load. When the wind is blowing strongly and an offshore wind farm is producing maximum power output, ISOs/RTOs direct fossil fuel power plants to reduce their generation. Conversely, when the wind isn’t blowing as strong and an offshore wind isn’t supplying enough power to the grid, ISOs/RTOs direct fossil fuel power plants to produce more power. Of course, the more renewable energy projects connect to the grid, the smaller the gap between renewable energy generation and demand will be, and the less the reliance ISOs/RTOs will have on fossil fuel power plants.
Developers Hand Off the Power to Utilities
At a grid interconnection point, electricity flows from a developer’s generator lead line to an electric utility’s transmission line. Accordingly, the electricity must be sold from the developer to the utility. But electricity isn’t the only thing being sold — the credit for renewable energy must be sold, too.
Renewable Energy Certificates
Renewable energy has value supplemental to its simple ability to turn on light bulbs and power electric vehicles — consumers value it because it is seen as the most important tool in mitigating the climate change crisis. State governments decide to what degree to utilize this tool: some states mandate utilities to generate a certain percentage of their electricity from renewables through Renewable Portfolio Standards (RPSs), which guarantee utilities’ cooperation in purchasing renewable electricity.
For governments to achieve their policy goals, for corporations to follow through on their strategy, and for consumers to live according to their values, there needs to be an asset that makes tangible the symbolic value of renewable energy over fossil fuel energy. This is where Renewable Energy Certificates (RECs) are used. An REC is a tradable asset, representing one megawatt-hour of renewable electricity, that acts as a tracking mechanism for ownership of renewable energy. Its value floats on the open market based on demand for clean energy. Electricity suppliers purchase RECs to verify that they are meeting their RPSs, and companies or individuals may purchase RECs from utilities to offset their emissions. Upon acquiring and reporting the purchase of an REC, the REC must be retired, such that it cannot be traded again.
Developers establish the customers of future electricity and credit for offshore wind energy early on in the development process, using one of two methods: a power purchase agreement or an offshore wind renewable energy certificate contract.
Power Purchase Agreements
A power purchase agreement (PPA) in wind development is a long-term contract between the developer and the utility. There may be one or more PPAs made for a given offshore wind farm. Under a PPA, the utility guarantees they will buy electricity from the developer at a fixed rate for the contract duration, regardless of the fluctuating wholesale price of energy. Over time, in addition to selling electricity, the developer sells RECs to the utility. The utility sells electricity to ratepayers and the wholesale market and sells RECs to electricity suppliers.
Some PPAs between developers and electric utilities are shown below.
Offshore Wind Renewable Energy Certificates
PPAs are not allowed in every state, so a second method exists for offshore wind procurement. An offshore wind renewable energy certificate (OREC) represents the ownership of one megawatt-hour of offshore wind electricity, including its capacity, ancillary services, and environmental attributes. In this method, the developer sells electricity directly to the wholesale market at a fixed price and sells the ORECs to the utility. Electricity reaches ratepayers through the wholesale market, and the utility sells the ORECs to electricity suppliers.
Some OREC contracts between developers and electric utilities are shown in Table 2.
Conclusion
PPAs and OREC contracts serve as proof of future revenue for offshore wind developers seeking external financing from banks or investment firms. During wind farms’ operations, developers sell both RECs/ORECs and generated electricity to electric utility companies, who ensure that this electricity is delivered to ratepayers. ISOs/RTOs ensure there is enough electricity in the grid for every ratepayer.
Attributing tangible ownership to renewable energy is a crucial method to drive renewable energy development in the US. As demand for both electricity and RECs increases, independent developers will continue to pounce on new lease areas auctioned off by the federal government. Hopefully, utility companies within states with regulated electricity markets will follow Dominion Energy’s lead and join the race, too, leading to the realization of offshore wind projects all over both US coasts.
