The offshore wind industry requires patience from developers and investors who have the vision to support projects through the inevitable peaks and valleys associated with offshore wind energy, according to Bryan Martin, a managing director and head of U.S. private equity at the D. E. Shaw group, a global investment firm that counts Providence, R.I.-based Deepwater Wind among its portfolio companies.
‘This is an industry that requires some patience and thoughtful capital [and requires investors] willing to wait for its return in order to build high-quality projects,’ Martin told NAW in the wake of NRG Bluewater's decision to not extend its power purchase agreement (PPA) with Delmarva Power & Light for a 200 MW wind project off the coast of Delaware.
Such news, he said, should not give a black eye to the industry, but rather serve as a reminder of the cold realities of today's market.
"I have always believed that great projects find a way to get built,’ Martin explained. However, he admitted, ‘It is harder in the current economy for projects to find capital and get built.’
Nonetheless, the termination of NRG Bluewater's contract should not necessarily be seen as the company's failure to attract investment.
‘[NRG] did a really good job of identifying and developing that project,’ he said.
Furthermore, more time is required for offshore projects located in federal waters than for projects planned for state waters, due to the complexity of the regulatory leasing process.
The ability to more easily control a project is one reason why D.E. Shaw is focusing on Deepwater Wind's 30 MW Block Island project, which is planned for state waters three miles southeast of Block Island, R.I.
While the Block Island project does not require a full federal determination, Martin explained, it still must work with federal agencies on some aspects of the project.
The project had its own share of controversy relating to a PPA the company signed with utility National Grid. Before the Rhode Island Public Utilities Commission (PUC) approved the contract, the PUC initially rejected the agreement, calling it "not commercially reasonable."
However, fearing the state would lose out on a significant economic opportunity, Gov. Donald Carcieri, R -R.I., intervened and insisted the PUC revisit the contract.
Carcieri told NAW that the PUC wrongly compared the cost of an offshore wind project against the traditional cost of fossil fuels.
"The advantage of offshore wind, in many cases, is that wind farm development is located 15 to 20 miles from the population centers, so we can plug the power into where the need is greatest," he said. "When you look at the question, you need to factor in not only the cost of the power and the turbines, but also the transmission."
What's more, the PUC did not take into account the project's economic and environmental benefits, Carcieri said.
Looking back on the acrimony, Martin said, ‘We are very appreciative of the support. It takes strong and consistent political support, as well as development capital, but that is required to get a large, successful project built in the face of real adversity.’
While he characterized 2012 as ‘an important year,’ Martin said he is also optimistic when it comes to surveying the marketplace.
For starters, there is a lot of interest from international players, particularly from European companies that have already built offshore wind projects and are seeking U.S. participants with which to partner.
"We fully expect European companies to bring their expertise and balance sheets to the U.S. industry when there is more regulatory clarity,’ Martin said. ‘Right now, the European business model is much less complicated than the U.S. model, since government regulators and commercial off-takers work closely together in Europe to grant tariff-based contracts to offshore lease concessions."
Such close cooperation is a primary reason why the European offshore wind industry has thrived, while the U.S. has yet to build its first project, Martin noted, adding that he expects European entrants will work closely with U.S. partners that have a better understanding of the more complex regulatory and leasing system in the U.S.
‘We believe that the combination of European experience and local development expertise should offer the lowest-cost power to consumers in the U.S.," Martin said. "I am optimistic because the cost of delivered power and equipment has come down more quickly than the cost of power in the most expensive markets along the East Coast, like Long Island and New York, therefore creating a market opportunity."