Offshore Wind Policy Options Paper

Offshore Wind Policy Options PaperSubmitted byNew York State Energy Research and Development Authority (NYSERDA)January 29, 2018

ContentsContents. 2Executive Summary . 4123456Introduction and Objectives . 121.1Organization of this Options Paper . 121.2Introduction . 121.3Objective . 181.4Opportunities and Challenges. 19Offshore Wind Eligibility . 222.1LSE Compliance Obligation Eligibility . 222.2Procurement Eligibility and Evaluation Criteria . 22Procurement and Contracting . 233.1Phased Approach . 243.2Phase I Procurement and Contracting Structure Options . 243.3Procurement Options Assessment. 403.4Procurement Schedule and Targets . 423.5Cost Containment . 443.6Co-incentives . 473.7Finance . 473.8Contracting. 48Funding through LSE Obligations . 494.1Offshore Wind Obligation Structure . 494.2LSE Compliance Obligation Targets. 54Transmission and Interconnection . 555.1Phased Approach . 555.2Phase I Transmission & Interconnection Options . 56Cost Analysis . 616.1Key Findings . 626.2Base Case Assumptions . 626.3Procurement Structure Scenarios . 636.4Project Size Scenarios . 652

6.5Transmission Ownership Scenarios . 66Appendix A. Technology Methodology . 69A.1 Site Characteristics and Deployment Assumptions . 69A.2 Cost Methodology . 73A.3 Capex . 77A.4 Opex . 78A.5 Development & Construction Financing . 79A.6 Capacity Factors . 79A.7 Learning . 81A.8 Results . 85Appendix B. Finance Cost Methodology . 86B.1 General Assumptions . 86B.2 Inputs . 88B.3 Analytical Method . 92B.4 Results . 93Appendix C. Cost and Benefit Methodology . 96C.1 Levelized Cost of Energy . 97C.2 Levelized Market Revenue . 97C.3 Commodity Prices . 98C.4 Carbon Benefits. 99C.5 Air Quality and Health Benefits. 100Appendix D. Scenarios and Sensitivities . 105D.1 Scenarios . 105D.2 Sensitivities . 107Appendix E. Benefits . 112E.1 Carbon Benefits . 112E.2 Public Health Benefits . 113E.3 Workforce Benefits . 113E.4 Wholesale Price Impacts . 115Appendix F. Acronyms . 1163

Offshore Wind Policy Options PaperExecutive SummaryIn this Offshore Wind Policy Options Paper (Options Paper), NYSERDA provides an assessment ofalternatives for addressing a wide range of policy issues pertinent to the successful deployment ofoffshore wind energy within the context of Governor Cuomo’s goal of obtaining 50 percent of NewYork’s electricity from renewable sources by 2030 (50 by 30 target). This Options Paper forms part ofNew York’s Offshore Wind Master Plan (Master Plan), published concurrently. 1Background. NYSERDA’s development of the Master Plan was announced by Governor Cuomo in his2016 State of the State address. In the Master Plan, NYSERDA (i) provides a roadmap for the costeffective and responsible development of offshore wind projects (ii) includes proposals for the bestpossible sites for development, (iii) suggests guidelines for developers, and (iv) provides optionsregarding the purchase of offshore wind energy to ensure lowest costs to ratepayers.Governor Cuomo issued a further directive in his 2017 State of the State address, announcing acommitment to support the development of up to 2.4 gigawatts (GW) of offshore wind energy. In his2018 State of the State address, the Governor proposed to procure at least 800 megawatts (MW) ofoffshore wind generation over the next two years as the initial step towards achieving the 2.4 GW goal.As the State drives toward the Governor’s 2.4 GW goal of offshore wind deployment, it will be necessaryto provide clear market direction with respect to: (i) procurement and contracting, including hedgingapproaches and cost-containment provisions; (ii) coordination with New York’s Renewable EnergyStandard (RES); (iii) transmission and interconnection (T&I); (iv) responsible identification of new WindEnergy Areas (WEAs); and (v) support of offshore wind related workforce, supply chain, andinfrastructure opportunities. In this Options Paper, NYSERDA addresses the first three of these fivecomponents. NYSERDA addresses the other components listed above – such as identification of newWEAs, workforce development, supply and infrastructure opportunities, and related issues – in theMaster Plan.Benefits and Costs Associated with Bringing Offshore Wind to New York. Development of offshorewind in New York will provide a range of benefits, including economic growth, job creation, public healthimprovements and greenhouse gas (GHG) emission reductions. Achieving the State’s 2.4 GW offshorewind goal would reduce carbon emissions in New York by more than 5 million short tons of CO2e by2030, which would comprise a significant portion of the 50 by 30 target. These GHG-reduction benefits,estimated in this Options Paper at around 1.9B (net present value), are approximately equal toestimated program costs for the most cost-effective procurement options. This indicates that the carbonreduction benefits alone could justify the costs of the State’s commitment to 2.4 GW of offshore wind,even before accounting for other anticipated benefits.Deployment of a new source of renewable energy in close proximity to load centers in New York Cityand Long Island provides a host of additional non-carbon benefits, including diversification of our energysupply, and a generation profile that is more closely matched to peak demand than other renewableresources. Offshore wind development will also result in considerable economic development andhealth benefits for New Yorkers. On the basis of NYSERDA’s initial screening analysis carried out for the1See ore-Wind/New-York-Offshore-Wind-Master-Plan4

Offshore Wind Policy Options PaperMaster Plan, the public health benefits of 2.4 GW of installed offshore wind are estimated atapproximately 1.0B (net present value). Additionally, nearly 5,000 new New York jobs could be createdfrom New York and regional offshore wind deployment, from construction, manufacturing andoperations jobs to engineers and investors, many of which are in sectors that deliver long-term localeconomic benefits through the operating life of the wind farms. Such benefits are discussed in theWorkforce Opportunity of Offshore Wind in New York report, which is published as part of the MasterPlan.A quickly-declining cost trend of offshore wind is also an essential aspect of the benefit-cost assessmentin this Options Paper. In Europe, offshore wind development costs have decreased dramatically inrecent years; in many cases offshore wind is cost-competitive with land-based renewables. The costreductions seen in Europe depended to a material extent on local learning and local infrastructuredevelopment resulting from economies of scale. With achievement of the 2.4 GW goal contributing tosimilar scale economies in the U.S. Northeast, NYSERDA projects that by 2030 the cost to procureoffshore wind will be lower than the cost of Tier 1 Renewable Energy Credits (RECs) associated withother large-scale renewable technologies.Proposal to Develop the 2.4 GW Commitment in Two Phases. In addition to the cost challengeassociated with early-stage offshore wind deployment in the U.S., the sector faces several other nearterm challenges. Development lead times are longer than those of other types of renewables projects,and the federal government’s offshore wind energy area leasing activity has limited the number ofdevelopers initially eligible to compete.Therefore, in this Options Paper NYSERDA proposes that initial policy decisions will be made for a “PhaseI” of offshore wind procurement and deployment. In line with the Governor’s announcement at his 2018State of the State address, this would be comprised of two initial annual offshore wind procurementrounds of at least 400 MW each in 2018 and 2019. NYSERDA expects that policy options for futureprocurements would be reviewed and adjusted as appropriate.NYSERDA also concludes from the aforementioned offshore wind challenges that New York’s offshorewind procurement should proceed on the basis of a competitive procurement mechanism which seeksonly offshore wind proposals, with commensurate volumetric load-serving entity (LSE) obligations,ramping up to the goal of 2.4 GW by 2030.Procurement Options. To aid the Public Service Commission (Commission or PSC) with its decisionmaking, NYSERDA has assessed a full range of procurement options that can be utilized to deliver the 2.4GW offshore wind target and kick-start the North American offshore wind industry. NYSERDA’s costanalysis carried out in support of this Options Paper demonstrates that the choice of procurementapproach for offshore wind deployment has a critical impact on the resulting cost. Key differentiatingfactors between procurement options are the extent to which hedging benefits are provided againstrisks of commodity revenue uncertainty, and the level of involvement of NYSERDA and otherorganizations, such as utilities. Procurement Option 1 – Fixed REC: NYSERDA’s past large-scale renewables (LSR) procurementauctions under the Renewable Portfolio Standard (RPS) Main Tier, and current procurementsunder Tier 1 of the RES, employ a structure that provides a limited revenue hedge. Under this5

Offshore Wind Policy Options Paperapproach, winning LSR projects receive a fixed, as-bid REC price throughout the contractlifetime, but no hedge is provided against changes in commodity electricity (energy and/orcapacity) prices, so the risks and rewards of fluctuations in the energy and capacity marketsremain with the project developer. This elevated risk to the developer leads to increased cost ofcapital and thus higher projected program costs than those expected under other procurementoptions with more far-reaching hedging benefits. Procurement Option 2 – Bundled PPA: This procurement structure provides a hedge againstcommodity electricity price risk, and thus could unlock significant reductions in project cost offinance. Under this approach, one or more utilities would competitively procure offshore windprojects and make an all-in, fully-hedged revenue stream for commodity value and RECsavailable to winning projects. Procurement Option 3 – Utility-Owned Generation (UOG): Like the Bundled PPA option, thisoption would involve competitive procurement by one or more utilities. Offshore winddevelopers would develop, design, build, and potentially operate offshore wind facilities; andonce completed, project ownership would be transferred to the utility or utilities. UOGrepresents an alternative form of hedged procurement that would benefit from the low costs ofcapital that would be available through rate-basing utility investments. Procurement Option 4 – Split PPA: This option pairs NYSERDA fixed-price REC procurement (asunder Option 1) with fixed-price commodity energy and capacity procurement by a utility. Froma developer’s perspective, this option would be similar to the Bundled PPA option in its hedgingbenefit, effectively providing a fully-hedged product consisting of a fixed commodity and a fixedREC-price component. However, from the perspective of the State’s ratepayers, the effectivecost premium associated with the REC-price component would depend on the level of the fixedcommodity value compensation offered by the utility. Procurement Option 5 – Market OREC: Unlike the Bundled PPA, UOG and Split PPA options, theMarket OREC structure would provide commodity hedging benefits without necessitating utilityinvolvement. Under this option, NYSERDA would provide a premium payment to projects basedon the net difference, from time to time, between the project’s winning bid price (expressed asan all-in revenue amount) and the actual revenue the project was able to achieve from itscommodity sales (whether in the regulated wholesale m

Offshore Wind Policy Options Paper . 6 . approach, winning LSR projects receive a fixed, as-bid REC price throughout the contract lifetime, but no hedge is provided against changes in commodity electricity (energy and/or