December 14, 2011
Delaware

Bluewater: What went wrong?

Written by AARON NATHANS, The News Journal, www.delawareonline.com 14 December 2011

When the public rallied behind the Bluewater Wind offshore project four years ago, the drama played out against a backdrop of economic prosperity, high – and rising – electricity prices, and no reason to doubt a federal commitment to the price subsidies underpinning the pioneering idea.

But today, with almost all of that changed, Bluewater’s owner, NRG Energy, faced the new normal and opted Monday to terminate its hard-fought contract with Delmarva Power, all but scrubbing hopes for a wind farm 13 miles off of Rehoboth Beach unless a buyer for the project comes forward by Dec. 23.

Observers say uncertainty was the biggest factor in Bluewater’s woes: namely federal inaction to renew the wind energy subsidies, but also wider economic instability that has altered the political landscape while deflating the expected growth in demand for energy in Delaware and the nation.

And they also said that the compromise contract with Delmarva Bluewater accepted made its project especially vulnerable to those external forces, since the price it accepted for power from its planned farm was much lower than prices other offshore wind firms have won from other utilities along the Atlantic Coast.

For now, all of that makes the project too costly – and risky – for investors.

“Until the public really makes a commitment to large-scale renewables such as this, market forces will not be able to place projects of this scale into operation,” said Daniel Cohen, president of Fishermen’s Energy of New Jersey, which is working with the state of New Jersey to build a small pilot offshore wind farm in state waters.

‘Entirely political’

In announcing the decision, NRG’s president and CEO, David Crane, noted problems obtaining financing for the project, as well as the scheduled expiration of federal tax credits at the end of 2012.

NRG had also been seeking to use a federal loan guarantee program for renewable energy projects, but that was slashed as part of a compromise that kept the government open in April.

Herman Trabish, a reporter at Greentech Media, a website and consulting firm, said Bluewater’s problems were “entirely political.” Republicans took over the House of Representatives in 2010 elections, and have blocked numerous environmental initiatives, including government subsidies for alternative energy.

In the current atmosphere, federal incentives can’t be counted on over the long term, even though Europe’s success with offshore wind shows it can be done, with the right government support, he said.

Matt DaPrato, analyst with IHS Global Insight, agreed that factors outside Bluewater’s control, including the potential loss of subsidies, played a big part in the developer’s problems.

Untimely economics

At the time the Bluewater project was born, natural gas prices were high, making electricity generated by plants using gas as a fuel more expensive. And demand for electricity appeared insatiable, DaPrato said. All of which helped to drive Delaware to press for a local source of reliable electricity with a set cost.

But with domestic shale formations – and broad adoption of fracking – opening up huge deposits of natural gas, prices plummeted, leading to drops in electricity prices, he said. Once the deep recession set in and idled broad swaths of industry, lower demand depressed electricity usage, further driving down prices, he said.

That made offshore wind look even more expensive than old-school electricity, which made it less appealing to prospective investors in the Bluewater project and other offshore wind developments, such as Cape Wind in Massachusetts.

Those political and market forces placed even more pressure on the contract with Delmarva Power and the low price, adding to the project’s undoing, DaPrato said.

Bluewater initially proposed a 600 megawatt wind farm, but that shrank as a regulatory and political battle wore on. In a compromise at Legislative Hall in June 2008 that helped bring Delmarva on board, the project was cut to 200 megawatts, enough energy to power 54,000 homes.

That trimmed the revenue that would flow into the project, and reduced the economies of scale supporting its profitability.

Delmarva Regional President Gary Stockbridge said at the time that Delmarva did not see itself as the project’s primary buyer of power, and that it would “be regionalized” – possibly growing larger if other buyers committed. But few other buyers stepped forward.

More uncertainty

The smaller buy was designed to protect Delmarva ratepayers, but didn’t do much to protect Bluewater’s shareholders, DaPrato said. Bluewater took on too much uncertainty as part of its business plan, including the need for a robust renewable energy credit market to compensate for a low energy price, DaPrato said.

In addition to revenue from the sale of the power, Bluewater also was to earn renewable energy credits for each unit of power generated. Those credits are sold, providing a critical second revenue stream.

But a robust credit market has not materialized, in part because of the bad economy. Utilities were not selling as much electricity overall, so they needed fewer credits.

“I think what’s been evident for quite a long time, that the contract that was in place was not enough to support the project,” DaPrato said.

Rep. Greg Lavelle, R-Sharpley, rejected the idea that the compromise was to blame for Bluewater’s troubles. Some technologies succeed in the marketplace, and some don’t, he said.

“The Legislature gave the project more crutches than perhaps it deserved,” Lavelle said.

Matt Elliott, a clean energy advocate for Environment New Jersey, said he still believes in offshore wind as one of the best options to get away from fossil fuels, which contribute to global warming. It will be a learning process to bring this technology to reality, he said, adding he believes people still are willing to pay a premium for it.

“I don’t think it’s necessarily the end of the world when it comes to wind energy, if we see projects that don’t make it all the way to completion,” Elliott said. “But for the U.S., this is such a new industry, we’re still trying to figure out how to build these things the right way.”

A slowed mission

When Bluewater reached the power purchase agreement with Delmarva Power in 2008, it was the first contract for offshore wind in the United States.

John Mueller, vice president for litigation for the Chesapeake Bay Foundation, said that in this economy he sees people resisting environmental upgrades, whether it’s controlling stormwater runoff or investing in renewable energy.

“There’s not much appetite for spending money on environmental stuff,” Mueller said. “It’s mostly been discussions about jobs, preserving jobs, looking for stimulus.”

But environmental projects can also create jobs and stimulate the economy, he said.

Jobs, DaPrato said, are one reason a pilot project is expected to go forward in Rhode Island. Its small size, and its location in state waters, also help, he said.

“This could be our first step,” he said.

URL to article:  https://www.wind-watch.org/news/2011/12/14/bluewater-what-went-wrong/