POWER May 2020 - 20

LEGAL & REGULATORY
Dorothy Black Franzoni, Joe Hall, and
Brian Plunkett
O
Solving Issues of
Power Deliverability
for Offshore Wind
Generation
ffshore wind generation could be a game-changer for
U.S. generation-tremendous size, scalability, high capacity
factors, zero-carbon, zero-cost fuel, and a proven
track record in the UK and Europe. The industry is supported by
aggressive state renewable programs, including in New York (9
GW by 2035) and New Jersey (7.5 GW by 2035), which rely on
offshore wind to achieve clean energy targets.
The offshore wind industry, however, has a problem-generation
deliverability. This is a complicated and expensive problem.
Offshore generation deliverability costs can account for 15%
to 30% of total project costs, depending on a variety of factors,
including water depth, seabed conditions, and distance to
shore. Consequently, the cost and risk allocation of generation
deliverability facilities and the regulatory mechanism governing
onshore delivery to load are critical considerations for each offshore
wind project.
The UK and European models currently are little help to U.S.
developers and policymakers. In the UK and in Europe, generation
deliverability costs are almost entirely assumed or mitigated
by government ownership or regulatory cost-socialization. In the
UK, a government regulator, Ofgem-Office of Gas and Electricity
Markets-implements auctions to award winning bidders a lowreturn,
low-risk, long-term operation agreement. While returns are
low, these contracts pay owners of generation delivery facilities
regardless of the relevant offshore wind generation facility's production.
Thus, their return on investment and profitability is not
tied to the generation assets' performance (or lack thereof).
In other European countries with robust offshore wind generation
(Germany, the Netherlands, and Denmark), offshore
transmission facilities are owned and operated by either statesanctioned
or state-owned monopolies, and generation deliverability
facility costs are, in effect, socialized. Thus, again, the
operational risk of the generation delivery facilities is mitigated.
In the U.S., offshore wind developers have assumed the
cost and risk of generation deliverability and therefore projects
will not move forward unless that risk is mitigated. Moreover,
there may be insufficient onshore access points to profitable
load centers for the amount of planned offshore generation
capacity. Thus, faced with development risk and potentially a
limited number of access points, offshore wind developers-
as well as policymakers-must evaluate the most financeable
approach for getting offshore wind power to onshore load.
While third parties can own generation tie-line assets, performance
payments are still currently tied to generation performance.
At this time, most states and the federal government do
not appear to be interested in assuming this risk. This may or may
not change in the future. As for onshore access, there are two approaches
being debated in the industry, including by stakeholders
in the New York ISO, PJM Interconnection, and ISO New England.
One is the traditional generation " tie line " approach, and the
other is the offshore transmission " hub " approach.
20
The generation tie-line approach has significant benefits. Federal
Energy Regulatory Commission policies exempt generation
tie lines from full " open access " requirements and rebuttably
presume that the scope and sizing of the generation tie-line asset
is appropriately tailored to serve the relevant generation facilities,
and not third parties. This legal presumption makes it more
difficult for third parties attempting to gain access to a project
owner's generation tie line. This increased level of assurance of
generation deliverability decreases development risk.
Moreover, the independent system operators and regional
transmission organizations currently evaluating offshore wind
projects already have tariff procedures that can, in general, accommodate
offshore wind projects. Therefore, the learning
curve for evaluating interconnection requests for offshore wind
generation facilities is not steep. However, from a policy perspective,
the generator tie-line approach potentially encourages
incremental, " project-by-project " development of offshore wind,
and does not coordinate generation planning. This may ultimately
hinder the development of a robust offshore wind industry.
As for offshore transmission hubs, they could promote a
coordinated planning process, but they implicate significant
regulatory questions. For example, stakeholders are contemplating
the categorization of hubs as " public policy " infrastructure
projects, which could potentially qualify their costs for cost
socialization akin to what is done in Europe (thereby mitigating
developers' risk). This type of cost socialization, however,
throws gasoline on the already raging debate in the U.S. concerning
the appropriate level of subsidies for " green " projects,
which is already a polarizing issue in some areas. Moreover,
hubs implicate the classic " cart-and-horse " project development
conundrum because hubs are difficult to study unless
they link to specific, dedicated generation facilities.
In turn, offshore transmission hubs not tied to specific facilities
may also raise concerns regarding preferential treatment
relative to onshore and offshore. Onshore generation is not
permitted to maintain queue positions when no specific interconnecting
generation project is identified. A different standard
arguably cannot fairly apply to offshore generation.
It is not yet clear which direction the industry will go. For the
first projects, the generator tie-line approach may be the only realistic
possibility. That has been the experience to date in both
New York and New Jersey. Through creative commercial arrangements
with third parties knowledgeable about transmission operations
in the relevant U.S. markets, owners of these first offshore
wind projects should be able to achieve some cost savings from
separating the operating risks of the project's transmission assets
from those of its generation assets. As more projects are
planned, however, the viability and merits of generation tie lines
versus offshore transmission hubs may become more apparent. ■
-Dorothy Black Franzoni and Joe Hall are partners, and Brian
Plunkett is an associate at Eversheds Sutherland (US) LLP.
www.powermag.com
POWER | May 2020
http://www.powermag.com
POWER May 2020

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