The offshore wind lease auction process needs a desperate solution
The following is an article written by Dean Koujak, Director of Energy, Sustainability and Infrastructure at Guidehouse.
Several states in the northeast and central Atlantic have established significant offshore wind supply targets. To facilitate the development of offshore wind, the federal government, under the aegis of the Bureau of Ocean Energy Management (BOEM), has designated concession areas following an in-depth study. BOEM auctioned off the development rights for these rental areas to the highest collective bidders as part of an ascending clock auction. This design extracts the maximum possible rental price and cost from qualified bidders.
Under this scheme, potential bidders must make two payments to BOEM: a “bonus” cash payment, the price of which will increase depending on the outcome of the auction, and a payment of rent and fees paid during the auction. term of the lease which is determined and prorated based on the actual energy use and production of the rental area, as set out later in the respective leases.
In contrast, states such as New York and New Jersey have established markets for offshore wind power delivered to and for the benefit of their states. As a result, whoever wins the lease area auction will be able to exercise market power in these offshore wind energy purchases. In addition, they will pass on the cost of these leases, including the “bonus” cash payment, to the taxpayers of those respective states.
Indeed, the result of the BOEM process limits competition and creates a very stressful situation for potential bidders. They must compete aggressively in a one-day auction for all rental areas to have a chance to develop offshore wind.
Raising the entry cost of offshore wind is against the policy
The Biden administration has set ambitious targets for more than 50% decarbonization by 2030 and 100% carbon-free electricity by 2035. Accordingly, the policy should promote the profitable development of wind power. offshore. But the achievement of this goal is hampered by the construction of rental auctions, which maximizes the cost to developers and ultimate buyers of offshore wind power and associated credits.
Offshore wind continues to be at a cost disadvantage compared to onshore wind due to higher development and construction costs. This financial burden should not be unnecessarily exacerbated, but rather should be reduced as far as possible.
Competition is limited and network optimization is lost
The New York Bight wind concession areas include eight adjacent concession areas. Multiple tenants of rental areas may not be able to take advantage of the potential synergy of the lower cost of a coordinated transmission infrastructure. Under the current solicitation design, each would likely independently build a new, separate transmission cable to New York or New Jersey. As more and more projects are rented, the result could be a spider web of transmission links due to the lack of coordination of the project sites.
Solution: change the auction design
BOEM pre-selects who is eligible to bid on offshore wind turbine rental areas. But rather than running an ascending dial auction, BOEM’s next step should be to identify which party can get the electricity ashore at the most economical price. BOEM’s current process determines who has the deepest pockets and the greatest risk appetite to effectively pay the maximum possible price.
Under the draft notice of sale published in the Federal Register, BOEM states that it “proposes to start the auction using the minimum bid prices for each of the rental zones and gradually increase these prices until there is only one active bidder left per zone. rental in the auction “. In doing so, the process does not sufficiently take into account the benefits that a project could confer at the regional level. Rather, he engages in a game of survival where the last bidder who remains standing and willing to pay the incremental posted price wins.
A bottom-up clock auction favoring buyers of offshore wind renewable energy (OREC) credits, similar to the European design, could run over days or weeks to facilitate lease award optimization. BOEM would facilitate the rental to the party willing to accept a pick-up agreement at the lowest possible price delivered ashore. If it makes more sense to interconnect a given lease area in New York than in New Jersey, or vice versa, the lease allocation would be optimized accordingly because of cost and therefore price.
Buyers of ORECs would specify their interconnection area and desired quantity at each ascending price level. OREC’s request is satisfied because the developers accept price levels, if possible, based on the characteristics of the leased areas. Bids may reflect a multi-zone auction or a single auction, with preference given to save transaction size to the extent possible. Buyers would include current buyers, such as the New York State Energy Research and Development Authority and the New Jersey Board of Public Utilities, as well as potential buyers.
As a less optimal alternative, the process could mirror that used for offshore oil and gas leases, which uses a sealed bid design. Qualified bidders would submit single-zone and multi-zone bids reflecting co-optimization. As part of this design, BOEM would select projects that maximize value and economy of scale while mitigating, to some extent, the potential for developers to overpay for such leases.
Transmission separation can reduce costs
Another step in the right direction is to facilitate a separate process for the development of an offshore wind transport system. For example, regional independent grid operators would have a public policy requirement for a transport planning process. Developers would plan and submit the most economical and beneficial interconnection plan that would consider all available rental areas and then go through this separate process authorized by the Federal Energy Regulatory Commission (FERC). This measure would ensure that the redundant transmission systems for each rental area are not built separately, but rather consolidated and optimized.
Better regional coordination and collaboration is needed
As each state continues to implement its own offshore wind program, other conflicts will arise and the outcome will likely be sub-optimal for all. Significant investments in the energy transition are already necessary, and any opportunity to optimize these investments must be seized.
Parties interested in purchasing offshore wind power and renewable attributes should coordinate at the FERC level to resolve regulatory barriers hindering such collaboration. In particular, they should work on the organization of the offshore wind auction process and the interconnection of such projects on the grid.