It was almost too good to be true. In 2005 the Texas General Land Office (TLO) first announced that the State of Texas had signed an agreement with Coastal Point Energy to allow the first offshore wind-energy project in the United States, to be built off Galveston Island. The 300MW project would mark a “new era” for energy development in America. In 2009, a further two offshore wind leases were signed by Baryonyx Corporation (Baryonyx). This Texas Company planned to produce a minimum of 750MWs of electricity on each of the two coastal areas using turbines that produce up to 5MW each with no significant environmental impact.
Once built, the two offshore wind farms were projected to earn the Texas Permanent School Fund approximately $338,000,000 over the 30-year life of the leases.
Fast-forward to present day 2017 and while offshore wind in Europe is considered “serious business,” Texas still has no turbines in the water. All leases issued by the TLO have either expired or show no prospect of renewal.
Texas’ viable offshore wind industry became economically unfeasible due to low natural gas prices resulting from the American “shale gas revolution.” Additionally, inadequate state Production Tax Credits (PTCs), and an absence of federal funding have likely contributed to the failure of offshore wind in Texas.
The potential of offshore wind worldwide is vast. Electricity powered by offshore wind alone could meet seven times the demands of the region, and the four times the present demands of the United States (US). More than 90% of the world’s offshore wind power is currently installed off northern Europe, in the North, Baltic and Irish Seas, and in the English Channel. A 500MW project reduces emissions of carbon dioxide by 945,000 tons per year, the carbon reduction equivalent of taking approximately 200,000 cars off the road.
The US in particular has excellent wind resources for offshore wind development.The country boasts a relatively large amount of coastal area where wind speeds are relatively strong and consistent in direction which allows developers to install larger, higher capacity turbines.
Texas currently boasts a combined onshore installed wind capacity of 12,755MW comprising 7,986 turbines which generate enough electricity to power the equivalent of more than 16 million homes. A further estimated 7000MW is currently under construction. Wind energy comprised 8% of Texas’ total electricity generation in 2010 and accounts for more than 25% of the current total installed wind capacity in the United States.
Texas established a comprehensive policy framework that has been essential to supporting the deployment of grid-scale wind farms. Texas also has a key regulatory advantage over other states in the country whereby owner providers and utilities operate almost exclusively within Texas borders. The wind energy industry in Texas has already created thousands of jobs and provided billions of dollars in economic benefits, including directly to the Texas Permanent School Fund.
The Texas General Land Office (TLO) is responsible for leasing the state waters and generates revenue from leasing royalties. Offshore wind in Texas is attractive to the State for economic reasons and developers due to an absence of layers of federal oversight present in projects planned in federal waters for both geographic and political reasons.
From 2005 to 2009 the prospect of offshore turbines on state lands meant renewable revenue for public education in Texas.For the Land Office, developing that potential is one way the agency works to diversify the revenue stream for the Permanent School Fund, a fund that the TLO has contributed nearly $10 billion in oil and gas revenues since 1922.
Baryonyx’s two state leases off South Padre Island have expired and the company has not applied for renewal. The 40,000 square acre leases have expired because the company did not make its annual payments of more than $86,000. Baryonyx, likely for commercial reasons, did not publically conceded the failure of this project. However, the GLO confirms the company made its last lease payment on 23 December 2013. Finally, Coastal Point Energy’s lease is due to expire in November 2014 and the GLO is certain this will not be renewed.
Baryonyx and Coastal Point Energy will not renew their offshore leases because offshore wind in Texas was not financially viable. The industry could not compete with US low natural gas prices resulting from the shale revolution, the lack of a stable market and financial incentives for investors alongside the competitive cost of onshore wind in Texas has resulted in a market that the offshore wind industry cannot remain competitive in.
Lack of Federal Funding
One of the most direct support mechanisms for offshore wind is the creation of a market in renewables. Often Governments need to spur renewable markets due to diseconomies of scale. The offshore wind industry is novel in the US. Newer industries lack widespread manufacturing support, lower supply costs, employee expertise and training and “network effects” that tend to accompany larger industries and attracts investment. Therefore continued federal funding is required in order to develop offshore wind systems to the point of being functioning commercial operations which will stimulate investment.
Further funding through the initiative issued through the DOE’s Offshore Wind Advanced Technology Demonstration Projects program would likely have provided the “network effects” necessary to commence the offshore industry in Texas, had Baryonyx been selected to receive the second round funding. This is because the program’s projects were aligned with partnerships with a broad consortium of industry leaders and developing breakthrough offshore wind energy generation projects. The additional funding, had Baryonyx received it, would have been directly applied to the erection of 3 test turbines that would have been a first for both Texas and the US. The mechanisms the project sought to implement would have addressed key challenges associated with installing full-scale offshore wind turbines, connecting offshore turbines to the power grid, and navigating new permitting and approval processes in Texas.
Such benefits may still eventually reach Texas; however. The offshore projects selected for the second round of funding will establish key pathways and critical steps for all future offshore wind projects in the US, including Texas, if and when the industry progresses.
The Texas Renewable Portfolio Standard
The offshore wind industry in Texas appeared most promising between 2001 and 2009. During this time cost of conventional sources of electricity, especially oil and gas prices were rising significantly, and US policy makers foresaw a future increasingly dependent upon natural gas imports. The generation of electricity through offshore wind technology was an attractive alternative to the TLO which was “working aggressively”to develop the industry.
In response to the unattractive market conditions observed in the late 90’s, Texas established a renewable portfolio standard (RPS) in 1999 and further amended it in 2005. The RPS was created in order to increase the purchase and generation of electricity from renewable resources. The Texas RPS mandates 5,000 MW of “qualifying renewables” be installed in Texas by 2015 and sets a target of 10,000 MW of renewable energy capacity by 2025. Wind energy is a “qualifying renewable” and the introduction of the RPS created a market demand for the offshore industry, and strengthened the incentives for potential investors in offshore wind. The state’s compliance with the RPS mandates either through physical compliance, or through the purchase of Renewable Energy Certificates (RECs) which can be traded in order to achieve compliance.
The Texas RPS has become increasingly important in light of the Greenhouse Gas Regulations promulgated by the United States Environmental Protection Agency under section 111 of the Clean Air Act. (CAA) The RPS is a central to ensuring existing power plants achieve the best system of emissions reduction adequately demonstrated. The regulations set goals for reducing greenhouse gas emissions from power plants and directs states to implement plans that achieve these goals. A strategy the EPA recommended to the states to reduce emissions was by substituting generation at electric generating units with low or zero-carbon generation.” With the exception of nuclear power, renewable technologies are the only sources of zero carbon generation. The EPA recognizes this and has referred to the RPS as a “core building block” of its CAA carbon regulations.
Shale Gas Revolution
The offshore wind industry cannot compete with the plummeting US shale gas prices. The low natural gas prices resulting from shale gas revolution have played a significant part in rendering the Texas offshore wind industry uneconomical, and this is unlikely to change in the foreseeable future unless natural gas and oil prices drop to the extent that fracking becomes cost prohibitive.
In 2009 the natural gas ‘revolution’ was born. The emergence of new technologies in horizontal drilling and hydraulic fracturing stimulated the production of formally inaccessible shale formations producing an abundance of natural gas. This has revolutionized US national energy options by increasing domestic natural production and providing low natural gas prices for the foreseeable future. The revolution has been a worldwide phenomenon, but the US is the industry world leader. Large-scale production is taking place primarily in the Marcellus Shale and the Eagle Ford Shale. Now US policy-makers foresee that domestic production will be sufficient to serve the country’s needs for as many as 100 years.
The increased development of newly accessible shale formations lead to an oversupply of natural gas on the US market; and a significant drop in US domestic gas prices. Demand has increased alongside production, and utilities have increased usage of natural gas, driving up net electricity generation from 18.7% in 2005 to more than 30% in 2012.
The cost of power generated by offshore wind was forecast to be marginally profitable at a time where oil and gas prices had risen significantly; the outlook for the offshore industry no longer looked economically viable in the face of the shale gas revolution. Furthermore, in 2010, the Texas onshore wind industry alone exceeded the RPS mandates requiring 5,880 MW of renewable energy by 2015, and surpassed the state target of 10,000 MW of renewable capacity by 2025.
Production Tax Credits
The US Federal Government has played a limited role in encouraging renewable energy development. In 1992 the Federal Production Tax Credit (PTC) a short-term financial incentive was established. The PTC is a tax credit provided to 12 different renewable electricity sources, including wind. The PTC provided Texas wind energy producers a 2.2 cents per KWh credit for wind generation and has been the primary incentive for investment in wind energy projects and vital in the industry’s research and development.
The PTC has expired several times since its inception and been extended mostly in 1-2 year intervals or allowed to expire on several occasions. The unpredictability of the longevity of the PTCs made it difficult for the industry to remain fully cost-competitive; when the PTC’s future is uncertain or in doubt, developers and investors are reluctant to continue with projects that cannot compete on the market without the PTC, and therefore projects stall.
On Feb 17 2009 President Obama signed into law the American Recovery Reinvestment Act 2009 which extended the PTC for the production of electric energy from wind facilities from December 31 2009 to December 31 2012. It also provided that a qualified wind farm project was eligible for a Department of the Treasury grant of up to 30% of the cost of the facility. The newfound stability of these “relatively long-term” PTCs prompted developers to extend their wind farms developments into new areas and resulted in an additional construction of 535 MW of onshore wind capacity in 2012. Despite the economic downturn for the US generally in 2009, the wind industry was said to have a “good future” most notably in in Texas. However a 3-year extension proved too short a time-period to win the confidence of investors.
