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Financing Offshore Wind Farms

The details are just being sketched in, but ratepayer subsidies are already an issue for offshore wind.

Offshore wind developers appear to be moving toward a consensus on how the state should finance the building of wind farms off the Jersey coast, but it could be at least three to five years before wind turbines start churning out power.

In a meeting at the Board of Public Utilities (BPU) offices in Trenton, developers, power suppliers and utility executives yesterday debated the details of how the wind farms would earn offshore renewable energy credits (ORECs) for the electricity their wind turbines generate. The certificates are designed to help the projects line up the financing from banks to build wind turbines by providing certainty to lenders that developers will receive a steady stream of revenue to pay off their investments.

While there seems to be some agreement on how the system should generally work among the four offshore developers farthest along in the process, many details remain to be ironed out between wind farm advocates and the power suppliers that will be required to buy the certificates. Yesterday’s hearing was the first of three stakeholder meetings scheduled on the issue by the agency, which tentatively has said it hopes to adopt a final rule by October.

Higher Costs for Consumers

More importantly, little is known about how much the push for offshore wind will increase the cost of electricity to consumers and businesses, who, in the end, will bear the cost of the ORECs. Peter Stricker, vice president of offshore wind development for NRG Bluewater Wind, said the state's goal of building 1,100 megawatts of offshore wind likely will require up to $5 billion in capital investment.

How that cost translates to ratepayers remains to be seen, but Mark Finfrack, director of corporate risk for Atlantic City Electric, projected the annual cost of the certificates to ratepayers is likely to exceed $600 million a year. Presumably, that burden would be eased by the energy and capacity payments the offshore wind farms generate, which will be returned to ratepayers.

In a state with some of the highest electric rates in the nation, that cost is unsettling to consumer advocates. "Our concern, obviously, is over the cost,'' said Paul Flanagan, an attorney with the New Jersey Division of Rate Counsel. A new Energy Master Plan released by the Christie administration raises concerns about the high costs of solar power, which the state has heavily subsidized in the past.

The good news is those costs are not expected to hit ratepayers anytime soon. Asked by a BPU staffer when is the earliest the offshore wind farms could be operating under the assumption the developer has already secured a federal lease (which have yet to be granted) and an OREC order from the state (not expected until sometime next year at the earliest), Robert Gibbs, vice president of Garden State Offshore Wind, said 2016. NRG said the best case scenario would be 2014.

Leasing Ocean Blocks

New Jersey is aggressively pursuing development of offshore wind as a way of delivering cleaner energy to residents and businesses and jump-starting the economy by luring manufacturers to its ports. Eleven developers earlier this year expressed interest in leasing blocks of ocean water off the coast to build wind turbines.

Among the wind developers who have been active in New Jersey the longest, there seems to be general agreement on how the OREC process should work. Two draft proposals, very similar in concept, have been submitted to the board by Garden State Offshore Energy and Offshore MW.

Both proposals rely on a "clearinghouse" that would act as a sort of middleman to handle financial transactions dealing with the certificates, payments among power suppliers, utilities and customers. "In our view, it is a fair balance between the commercial realities of developing offshore wind and ratepayers' interests," Gibb said.

The clearinghouse also would establish a reserve to cover events such as enabling an offshore wind developer to recover revenue if a power supplier defaults on buying the required amount of monthly certificates or if a drop in energy demand reduces the revenue they projected the wind farms would produce.

Making Monthly Payments

The most controversial aspect of the two proposals involves a recommendation that suppliers make monthly payments for the certificates they purchase. Several retail energy companies said such a requirement would cause cash flow problems and be an administrative nightmare.

The offshore wind developers, however, countered that banks were insisting on monthly payments if they are to finance the projects. "It’s not our issue; it’s theirs," said Peter Mandelstam, president of NRG Bluewater Wind.

Lance Miller, representing Offshore MW, argued that monthly payments by power suppliers would lower the risk of the projects. That, in turn, also would lower the cost of the certificates and ultimately the cost paid by ratepayers.

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