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Tuesday, October 12, 2010

Google Invests in Offshore Wind Transmission Cable: Boon or Bane?

This morning, Google and Good Energies (a New York based financial firm) announced that they inked a deal to provide 37.5% of the equity investment costs for a proposed $5 billion backbone transmission line, which is being called the "Atlantic Wind Connection" ("AWC"), and which will be used to link future offshore wind farms along the Atlantic Seaboard. Google and Good Energies join Marubeni, a Japanese trading company which has committed to a 10% stake in the project.

The project developer, Trans-Elect, describes the project as a 350-mile underwater spine that will run bi-directionally up and down the Atlantic coastline from Virginia to Maine. As has been discussed in a prior post, the AWC has been touted to resolve certain inherent problems with offshore wind generation, including the proverbial elephant in the room: intermittency. Trans-Elect says it hopes to begin construction in 2013.

Several media sources have reported that U.S. Government officials have indicated cautious optimism about the AWC project: “Conceptually it looks to me to be one of the most interesting transmission projects that I’ve ever seen walk through the door...It provides a gathering point for offshore wind for multiple projects up and down the coast.” (See here). Notably, Secretary of the Department of the Interior specifically referenced the AWC during his keynote speech at the AWEA Offshore Wind Conference last week.

There are some questions regarding the economic impact that will result from a transmission system that essentially negates the individual utility of each individual offshore wind installation. In the present regulatory environment, the end-user prices for electricity are set by state regulators and therefore, vary from state to state. Therefore, electrons generated from a facility in State A will garner a different price if they are deployed to State A or to State B. The Regional Transmission Operator ("RTO") makes the decision where a facility's electrons will be deployed based on grid conditions (i.e., where electricity is needed based on demand), not on pricing. This means that offshore wind generators must account both for the uncertainty resulting from intermittency, as well as uncertainties arising from where the RTO will direct their electrons.

This much uncertainty doesn`t bode well with investors. Unless there is some unifying policy or legislation to standardize end-user prices (or the utilities' sales price) for electrons generated by state based offshore wind installations, there is insufficient revenue predictability to assure debt investment in offshore wind. Insufficient debt financing can lead to a disproportionate cost burden being levied on state residents who may or may not reap the benefit of these costs. Without some tangible and guaranteed financial benefits, why would any state utility board or other authority support state financing (via mechanisms such as New Jersey's Offshore Wind Economic Development Act) of offshore wind projects? And without state support, most projects just can`t make the numbers work.

One way to resolve pricing variances between the states would be to implement some sort of unifying federal policy, regulation or legislation. Alternatively (and perhaps in light of agreements such as the Atlantic Offshore Wind Energy Consortium, more practically), states could enter into regional cooperative agreements to conform end-user and/or utility pricing as an incentive for renewable energy projects facing intermittency and high upfront development costs. However, adding new regulatory challenges to an already hyper-regulated industry seems like an inefficient way to get offshore wind farms built in our lifetimes.

Moreover, none of the above seems to jibe well with the law of Occam's razor-- there are just too many decision makers and moving parts. So what would be the alternative to a bi-directional backbone transmission project and what are some of the potential benefits thereto?

Local transmission lines only would omit the need for state and regional regulation/policy considerations to some extent. In addition, shorter transmission lines are less expensive transmission lines. But that leaves that intermittency elephant standing smack in the middle of the room.

This brings us to the holy grail of renewable energy: energy storage. If the benefit of offshore wind energy (for the Atlantic Seaboard) is demand center proximity, there is no economic benefit to extending transmission lines beyond the nearest shore-based substation. Notwithstanding that a viable accumulator technology has not yet been developed, I would be willing to bet that energy reservoirs would be at least as effective (if not more effective) at managing intermittency than a backbone subsea cable.

In sum, the backbone cable offers some solutions, but may create some difficult economic hurdles without significant policy and regulatory attention. Alternatively, local transmission options avoid some of the economic issues, but will not be able to truly resolve intermittency issues (which are themselves economic issues) until energy storage technology radically improves. In my humble view, neither option presents an ideal approach. What do you think?

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