estimating the value of offshore wind along the united ... · profile of electricity production....

EstimatingtheValueofOffshoreWindAlongtheUnitedStates’EasternCoast

Authors:

AndrewD.Mills,DevMillstein,SeongeunJeong,LukeLavin,RyanWiser,MarkBolinger

EnergyAnalysisandEnvironmentalImpactsDivisionLawrenceBerkeleyNationalLaboratory

April2018

ThisworkwassupportedbytheU.S.DepartmentofEnergy’sWindEnergyTechnologiesOfficeunderLawrenceBerkeleyNationalLaboratoryContractNo.DE-AC02-05CH11231.

Disclaimer

ThisdocumentwaspreparedasanaccountofworksponsoredbytheUnitedStatesGovernment.Whilethisdocumentisbelievedtocontaincorrectinformation,neithertheUnitedStatesGovernmentnoranyagencythereof,norTheRegentsof theUniversityofCalifornia,noranyof theiremployees,makesanywarranty,expressorimplied,orassumesanylegalresponsibilityfortheaccuracy,completeness,orusefulnessofanyinformation,apparatus,product,orprocessdisclosed,orrepresentsthatitsusewouldnotinfringeprivatelyownedrights.Referenceherein toanyspecificcommercialproduct,process,or serviceby its tradename,trademark, manufacturer, or otherwise, does not necessarily constitute or imply its endorsement,recommendation,orfavoringbytheUnitedStatesGovernmentoranyagencythereof,orTheRegentsoftheUniversity of California. The views and opinions of authors expressed herein do not necessarily state orreflect thoseof theUnitedStatesGovernmentoranyagency thereof,orTheRegentsof theUniversityofCalifornia.

ErnestOrlandoLawrenceBerkeleyNationalLaboratoryisanequalopportunityemployer.

CopyrightNotice

ThismanuscripthasbeenauthoredbyanauthoratLawrenceBerkeleyNationalLaboratoryunderContractNo.DE-AC02-05CH11231withtheU.S.DepartmentofEnergy.TheU.S.Governmentretains,andthepublisher,byacceptingthearticleforpublication,acknowledges,thattheU.S.Governmentretainsanon-exclusive,paid-up,irrevocable,worldwidelicensetopublishorreproducethepublishedformofthismanuscript,orallowotherstodoso,forU.S.Governmentpurposes.

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Acknowledgements

FortheirsupportofthisresearchattheU.S.DepartmentofEnergy,weespeciallythankPatrickGilman,AlanaDuerr,GaryNorton,RichTusing,andDanielBeals.Additionally,forreviewingelementsofthisreportorprovidingusefulfeedbackduringitsexecution,wealsoacknowledge:FredricBeck(U.S.DOE),PhilippBeiter(NREL),BenCohenandGaryDavidson(NYISO),LucasFeinberg(U.S.BOEM),JeremyFirestone(U.Delaware),JamilKhan(DeepwaterWind),andWaltMusial(NREL).LawrenceBerkeleyNationalLaboratory’scontributionstothisreportwerefundedbytheWindEnergyTechnologiesOffice,OfficeofEnergyEfficiencyandRenewableEnergyoftheDOEunderContractNo.DE-AC02-05CH11231.Theauthorsaresolelyresponsibleforanyomissionsorerrorscontainedherein.

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TableofContents

Acknowledgements.......................................................................................................................................i

TableofContents.........................................................................................................................................ii

TableofFigures............................................................................................................................................ii

Abstract.......................................................................................................................................................iii

1. Introduction..........................................................................................................................................1

2. Background...........................................................................................................................................2

3. Methods................................................................................................................................................33.1 WindEnergySites,Speeds,andOutputProfiles........................................................................33.2 ValueQuantification...................................................................................................................43.3 FactorsNotConsidered..............................................................................................................5

4. Results...................................................................................................................................................64.1 TheValueofOffshoreWind.......................................................................................................64.2 ApproachestoIncreaseValue..................................................................................................134.3 ComparingValuetoCost..........................................................................................................14

5. ConclusionsandFutureOutlook.........................................................................................................15

6. References..........................................................................................................................................17

TableofFigures

Figure1.Totalmarketvalueateachsite,averagedover2007-2016(left)andfor2016only(right),consideringthecombinedvalueofenergy,capacity,andRECs...........................................................7

Figure2.Normalizedtotalmarketvalueanditsenergyandcapacitycomponents...................................8Figure3.Capacitycreditofoffshorewindinsummerandwinter..............................................................9Figure4.Medianenergy,capacity,andRECvaluebyyearforsiteswithineachregion.Thelinesshowthe

10th(dashed)and90th(solid)percentileofthetotalmarketvalueacrossallsiteswithineachregion..................................................................................................................................................10

Figure5.Comparisonof2016energyandcapacityvalueforoffshoreandonshorewind.......................11Figure6.AvoidedSO2(topleft),NOx(topright),PM2.5(bottomleft),andCO2(bottomright)emissions

ratebyyearforaverageoffshorewindprofileineachregion............................................................12Figure7.Medianenergy,capacity,andRECvaluealongwiththein-regionnaturalgaspriceeffectand

wholesaleelectricitypriceeffectaveragedover2007-2016..............................................................13Figure8.Netvaluemeasureofoffshorewind(tobeusedonlytoranksites)..........................................15

EstimatingtheValueofOffshoreWind│iii

Abstract

OffshorewindpowerdeploymenthasbeenconcentratedinEurope,andremainslimitedinotherareasoftheworld.Amongthemanychallengestodeploymentistheneedtounderstandthevaluethatoffshorewindprovideswithinelectricitymarkets.ThisarticledevelopsarigorousmethodtoassesstheeconomicvalueofoffshorewindalongtheeasterncoastlineoftheUnitedStates,seekingimprovedunderstandingofhowthevalueofoffshorewindvariesbothgeographicallyandovertime,andwhathasdriventhatvariation.Thearticleuseshistorical(2007-2016)weatherdataatthousandsofpotentialoffshorewindsites,combinedwithhistoricalwholesaleelectricitymarketoutcomesandrenewableenergycertificate(REC)pricesathundredsofpossibletransmissioninterconnectionpoints.Wefindthattheaveragehistoricalmarketvalueofoffshorewindfrom2007-2016—consideringenergy,capacity,andRECs—variessignificantlybyprojectlocation,from$40/MWhtomorethan$110/MWh,andishighestforsitesoffofNewYork,Connecticut,RhodeIsland,andMassachusetts.AsenergyandRECpriceshavefalleninrecentyears,sotoohasthemarketvalueofoffshorewind.Thehistoricalvalueofoffshorewindisfoundtoexceedthatofonshorewind,duetooffshorewindsitesbeinglocatedmorefavorablyintermsofconstrainedpricingpoints,andalsoduetoamore-favorabletemporalprofileofelectricityproduction.Finally,weexploremultiplewaystoenhancethevaluepropositionforoffshorewind,includingstrategiesassociatedwithinterconnectingtohigher-pricedlocationsandtheadditionofelectricalstorage.Whetheranyofthesestrategies,andoffshorewindmoregenerally,iseconomicallyattractivewilldependontradeoffsbetweenvalueandcost.CostreductionsthatapproximatethosewitnessedrecentlyinEuropemaybeneededforoffshorewindtoofferacredibleeconomicvaluepropositiononawidespreadbasisintheUnitedStates.

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1. Introduction

Onaglobalbasis,windpowerhasexperiencedrapiddeploymentinrecentyears,reaching487GWofcapacity(GWEC2017)andnearly5%ofglobalelectricitysupply(WiserandBolinger2017)bytheendof2016.Mostofthisdevelopmenthasoccurredonland,butoffshorewindpowerinstallationshaveacceleratedinrecentyears—especiallyinEuropeand,morerecently,inChina(GWEC2017).TheUnitedStates,meanwhile,hostsonlyasingle,small(30MW)offshorewindproject.CommonlynotedbarrierstotheoffshorewindindustryintheU.S.includehighcostsandstiffcompetitionfromotherlower-costresources(includingnaturalgas,onshorewind,andsolarphotovoltaics),acomplexandlengthyregulatoryprocessforplanningandsiting,andalackofpre-existinginfrastructuretomanageconstructionatlowcost(DOEandDOI2016;Musialetal.2017;Graceetal.2017).Despitethesebarriers,offshorewindremainsofinterest(DOE2015;Musialetal.2017;DOEandDOI2016;Graceetal.2017;Firestoneetal.2015),giventhattheoffshorewindresourceisvast(Musialetal.2016)andthatsiteconditionsalongtheU.S.easterncoastaregenerallyfavorable,withrelativelystrongwindsandshallowwaters(Beiteretal.2016).Moreover,theoffshorewindresourceislocatednearmajorpopulationcenters,andsodoesnotrequireinvestmentinlong-distancetransmission(DOE2015).Andlargeprojectsizesarepossible,aluxuryrelativetothemuchsmallerland-basedrenewableenergyprojectsthatcanbedevelopedinthepopulouseasternUnitedStates(DOEandDOI2016).Finally,atleastontheeastcoast,offshorewindcompeteswithsomewhathigher-costalternativeresourcesthaninotherpartsofthecountry—e.g.,onshorewindandsolarresourcesarelessfavorableintheEastthaninotherregions.NotwithstandingtheargumentsinfavoroforagainstaggressiveoffshorewinddeploymentintheUnitedStates,thereremainsanunclearunderstandingoftheeconomicvaluethatoffshorewindprovideswithinlocalorregionalelectricitymarkets.Thislackofclarityisdue,inpart,tothefactthatoffshoreprojectscanbedevelopedinmanydifferentlocations,andthatdiurnalandseasonalwindresourceprofilesvarybyprojectlocation.Differencesinlocationandlocation-specificgenerationprofilescanaffectthevalueofwindpowerintermsofwhichothergeneratorswinddisplaces(andhenceboththetypeandquantityoffuelsandemissionsthatwindpowerreduces),wind’scontributiontomeetingpeakdemand,andthelocalpriceofelectricityandrenewableenergycredits(RECs)thatwindearns.Withtheseandothervaluecomponentsinmind,thisarticleseekstoprovideinsightintotheeconomicandenvironmentalvaluethatoffshorewindoffersalongtheeasterncoastoftheUnitedStates.Specifically,thisworkexploresthequestion:WhatwouldthemarginalvalueofoffshorewindprojectsalongtheeastcoastoftheUnitedStateshavebeenfrom2007-2016,hadanysuchprojectsbeenoperatingduringthattimeperiod?Usinghistoricalweatherdataatthousandsofpotentialoffshorewindsites,combinedwithhistoricalwholesaleelectricitymarketoutcomesandRECpricesathundredsofpossibletransmissioninterconnectionpoints,wedeveloparigorousmethodtoanswerthisquestion,focusingmostlyonmarginaleconomicvaluebutalsoincludingenvironmentalimpacts.

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Weconsiderenergy,capacityandRECvalue,avoidedairemissions,thewholesaleelectricityprice‘merit-order’effect,andnaturalgaspricesuppression.Inadditiontoassessingeachvaluecomponent,andhowvaluehasvariedgeographicallyandovertime,weevaluatevaluedifferencesbetweenoffshoreandonshorewind,thecapacitycreditofoffshorewind,thevalueofinterconnectingatandsellingtodifferentlocations,theincrementalvalueofstorage,andtheimpactofdifferentwindturbinedesigns.Wecontrastthesehistoricalvalueestimateswiththepossiblecostofcurrentandfutureoffshorewindprojects.Finally,weconcludebydiscussing,atahighlevel,variousfactorsthatmightdriveeachvaluecomponenthigherorlowerinthefuture.Althoughthehistoricalnatureofthisanalysisshouldbenoted—limitingitsapplicabilitygoingforward—knowinghowthehistoricalvalueofoffshorewindhasvariedbothgeographicallyandovertime,andwhathasdriventhatvariation,providesimportantinsightstoavarietyofstakeholders.Theseinclude,perhapsmostprominently,energypolicymakersconsideringoffshore-specificincentiveprogramsandmandatesaswellasthoseintheenergyindustryexploringoffshorewind.FocusingonmarketvaluemayalsohelptoinformpublicandprivateR&Deffortsbyhighlightingthecosttargetsthatneedtobeachievedifoffshorewinddeploymentistoaccelerate.

2. Background

Previousresearchhasfocusedonboththecostandvalueofoffshorewind.Historicalcosttrendshavebeenmixed.Aninitialreductionincostsamongtheearlyfixed-bottomoffshorewindprojectsinthe1990swasfollowedbyincreasingcostsinthe2000s(e.g.,asprojectsmovedfurtherfromshore)and,mostrecently,indicationsofsteepcostreductionsinEuropeantenders(DismukesandUptonJr.2015;Voormolen,Junginger,andvanSark2016;Musialetal.2017;Heptonstalletal.2012).Whilesomequestionthelikelihoodofsignificantfuturecostreductions(SchwanitzandWierling2016),windexperts(Wiseretal.2016)andrecenttenders(Musialetal.2017)alikesuggestongoingexpectationsforsizablecostreductionsinthecomingyearsanddecades.Givenoffshorewind’shighcostshistorically,researchersandprojectdevelopershavesoughttoconveythevalueofoffshorewindaspartofalargerelectricitysupplyportfolio.Researchhasemphasizedthefavorableoutputprofileand/orlocationofoffshorewindalongtheeasternseaboard,sometimesincomparisontotheoutputprofileandneedfortransmissionassociatedwithonshorewind(BaileyandWilson2014;Maietal.2012;Wilson2014;Dvoraketal.2012,2013;GEEnergy2005,2010,2014;NY-ISO2010;SACE2013;ISO-NE2017,2016b;Lin2016).Thisbodyofworkhasfoundthatoffshorewindhasgreater‘marketvalue’thanonshorewind(consideringenergyandcapacity),consistentwithwinddeploymentexperienceinGermany(Ederer2015).Othershavehighlightedthepossibleroleofoffshorewindinreducingwholesaleelectricitypricesviathe‘merit-order’effectand/orinsuppressingnaturalgasprices(ISO-NE2016a;GEEnergy2010,2014;CRA2012;Simãoetal.2017;ABB2014;Tabors,Rudkevich,andHornby2014;Taborsetal.2015;PfeifenbergerandNewell2010;EnerNex2011).Researchhasalsoassessedtheclimateandhealthbenefitsassociatedwithoffshorewinddeployment(Buonocoreetal.2016;Chiangetal.2016;Kemptonetal.2007;ISO-NE2016a;Simãoetal.2017),and

EstimatingtheValueofOffshoreWind│3

thelocaleconomicdevelopmentimpactsassociatedwithbuildingandservicingoffshorewindinstallations(BVG2017;Tegenetal.2015).Stillotherworkhassoughttobringthesetwostrandstogether,comparingthecostandvalueofoffshorewind(Levittetal.2011;Beiteretal.2017)andestimatingtheroleandvalueofoffshorewindinfutureelectricityportfoliosintheU.S.(DOE2015)andglobally(Gernaatetal.2014).Thisstudybuildsonthispreviousworkinseveralrespects.First,weassessthevalueofoffshorewindalongtheentireeasternseaboardoftheUnitedStates,enablingacomprehensiveassessmentoftherelativevalueofoffshorewindacrossmanydifferentlocationsandincomparisontoonshorewind.Second,weassessalargenumberofpossiblevaluecomponents,reflectingbotheconomicandenvironmentalconsiderations.Third,wecapturethefullrangeofspatialandtemporalvariationobservedinbothwindresourceconditionsandelectricsystemcharacteristics.Fourth,weanalyzeseveralmeansofboostingthevalueofoffshorewind,whilealsocomparingthevalueofoffshorewindtoitscurrentandpotentialfuturecost.Finally,byapplyinguniquedatasetsoveralengthyhistoricalperiod,weareabletoexplorehowthevalueofoffshorewindhasvariedbothgeographicallyandovertime,andwhathasdriventhatvariation.

3. Methods

WindEnergySites,Speeds,andOutputProfiles3.1WeusedNREL’sWindToolkit(Draxletal.2015)toidentifypotentialoffshorewindsitesalongtheU.S.easternseaboard(fromMainetonorthernFlorida,andconsideringsitessuitableforbothfixed-bottomandfloating-platforminstallations),screeningoutthosesitesthatareinsufficientlywindy(<7m/saverageat100m)orareinespeciallydeep(>1000m)ornon-USwaters.TheWindToolkitisthemost-extensive,publiclyavailablegrid-integrationwinddatasetavailableintheUnitedStates,providingsimulatedwindspeedsona2-kmx2-kmgeographicscale.Forourpurpose,theWindToolkitprovidesestimatedhourlywindspeedsateachofthe6,693sitescontainedinouranalysis,from2007-2013.Toextendeachsite’shourlytimeseriesthrough2016,werelieduponcoarserreanalysisdatafromMERRA(Gelaroetal.2017).Ateachsite,aseparateregression,betweentheWindToolkitwindspeedandcorrespondingMERRAwindspeed,wasdevelopedforeachhourofthedayandforfourseasons,leadingto4×24=96regressionequationsforeachsite.Ourmethodisbroadlyclassedasa‘measure-correlate-predict’approach,similartothatdescribedinCartaetal.(2013),althoughsectionedbytimeandseasonratherthanwinddirection.Acrossvalidationofseasonalanddiurnalwindspeedcyclesdemonstratedthatthemethodreasonablyapproximatedthemore-detailedWindToolkitdata,andledtolowerrors(<3%MAE)inwholesalevalueestimatesonanannualbasis.Windspeedisthenconvertedtowindpowerusingarepresentativepowercurvefora6MWwindturbinewitha155mrotorandahubheightof100m(Musialetal.2016).Netoutputassumes96%availabilityandincludesassumptionsforwake,electrical,andotherlossesthatcanvarybysiteand

EstimatingtheValueofOffshoreWind│4

hourlywindspeed.FurtherdetailsonthisandotheraspectsofthemethodologycanbefoundinMillsetal.(2018).

ValueQuantification3.2EachoffshorewindsitethatfallswithinoneofthethreeorganizedIndependentSystemOperator(ISO)marketsalongthecoast—i.e.,ISONewEngland(ISO-NE),theNewYorkISO(NYISO),orthePJMInterconnection(PJM)—isthenpairedwiththenearestwholesalemarketpricingpointwithsubstantialcapacity(definedasanypricingpointwithasubstationhavingavoltageofmorethan138kVorassociatedwithmorethan200MWofgeneration).Eachofthesepricingpoints,inturn,ismappedtoaspecificISO,ISOcapacityzone(toestimatecapacityvalue),andstate(toestimateRECvalue,aswellasreductionsofbothemissionsandnaturalgasprices).Energyvalueisbasedonthewindplant’shourlynetoutputmultipliedbyhourlynodalreal-timeenergypricesattheinterconnectionpoint(i.e.,locationalmarginalprices,orLMPs).ThehourlyLMPaccountsforthetimingofwhenenergyischeaporexpensiveanditembedsthecostofcongestion,transmission-levellossesand,dependingontheregion,thecompliancecostofvariousemissionsregulations.Capacityvalueisbasedonthewindplant’scapacitycredit(estimatedusingeachISO’srulesinplaceatthetime—seeMillsetal.(2018))multipliedbytheISOcapacityzone’sprices.RECvalueisbasedonmonthlypricingforcompliance-basedRECsineachstatewitharenewableportfoliostandard(RPS),multipliedbymonthlynetgeneration.OffshoreprojectsareassumedtosellRECsintotheRPScompliancemarketofthesamestatewheretheprojectinterconnects,exceptthatifnoRPSexistsintheyearinquestion,theprojectisassumedtosellintothehighest-pricedRECmarketintheISO-definedregion.Weconducta‘marginal’analysis,ineffectassessingthevalueassociatedwiththefirstoffshorewindplants;someofthevaluesestimatedherewouldbeexpectedtodeclineasoffshorewindpenetrationsincrease.WindsitesthatfalloutsideofthethreeorganizedISOmarkets(i.e.,thoseoffthecoastofmostofNorthCarolinaandallofSouthCarolina,Georgia,andFlorida)aremappedtoutilitybalancingareas(basedonstateboundaries)ratherthantospecificwholesalemarketpricingpoints.Intheseinstances,energyvalueisbasedonpublished‘systemlambdas’(i.e.,eachbalancingauthority’sestimateofmarginalgeneratingcostswithinitsbalancingarea)ratherthannodalpricing;capacityvalueisapproximatedbasedoncapacitypricesfromthesouthernmostcapacityzoneinPJMandthecapacitycreditrulesforPJM;andRECvalueisbasedonmonthlyRPS-basedRECpriceswheretheyexist,ornationalvoluntaryRECpricesinthosestateswithoutanRPS(SouthCarolina,Georgia,Florida).Inadditiontoenergy,capacity,andRECvalue(which,collectively,reflectthepotentialtotalmarketrevenueofamerchantoffshoreplant,ortheavoidedcostsforapurchaserofoffshorewind),wealsoestimatetheairemissionsreductionsassociatedwithoffshorewind,aswellasthereductioninnaturalgaspricesresultingfromdisplacedgas-firedgenerationsuppressingnaturalgasdemand.Forbothpurposes,weusetheEnvironmentalProtectionAgency’s(EPA’s)AVoidedEmissionsandgeneRationTool(AVERT).OtherresearchthathasusedAVERTforsimilarpurposesincludesBarboseetal.(2016),

EstimatingtheValueofOffshoreWind│5

Millsteinetal.(2017),andChiangetal.(2016).AVERTassesses—onastatisticalbasis—electricitysystemdispatchregionally(includingforthethreebroadregionsthatencompasstheU.S.eastcoast)and,amongotherthings,tracksboththeemissionsrateandnaturalgasconsumptionofgeneratorsestimatedtobeonthemargin—andhenceabletobedisplacedbyoffshorewind—ineachhour.FollowingpreviousworkbyBarboseetal.(2016)andWiserandBolinger(2007)toestimatethenaturalgaspricesuppressioneffect,wetakethevolumeofgasdisplacementestimatedbyAVERTandapplyaninverseelasticityofsupplyconsistentwiththatusedbytheEnergyInformationAdministration(EIA2017)toestimatethelevelofpricereductionnationally.Totaldollarsavingsnationallyandregionallyarethentheproductofthepricereductionandnationalorregionalgasdemand.Finally,weestimatereductionsinwholesaleelectricitypricesresultingfromthe‘meritorder’effect(i.e.,lowmarginalcostoffshorewinddisplacinghigher-costgenerationfromthebidstack).Specifically,followingNavigant(2011),foreachISOandeachyear,weestimatethehistoricalchangeinpriceswithachangeinsupplyforeachhourusingstatisticalrelationshipsbetweenwholesalepricesanddemandandnaturalgasprices,andthenapplythoserelationshipswhenassessingtheimpactofoffshorewind.Inthenon-ISOregionsouthofPJMweusethesystemlambdasinsteadoftheenergycomponentoftheLMPtodevelopthisrelationship.FollowingChernickandNeme(2015)weassumethatloadsintheISOregionsusecontractstohedge60%oftheirloadandthatverticallyintegratedutilitiesinthenon-ISOregionhedge80%oftheirload.Itisimportanttorecognizethattheselattertwoeffects—i.e.,naturalgasandwholesaleelectricitypricesuppression—aretechnicallywealthtransfersfromgasproducersandelectricitygeneratorstoconsumers.Whilesomedecision-makersconsidertheseeffects,othersdonottreattheseasnetsocietal“benefits”thatcreatetrueeconomicvalueperse(Barboseetal.2016;Felder2011).

FactorsNotConsidered3.3Severalfactorsthatmayinfluencetheperceivedoractualvalueofoffshorewindarenotassessedinthisanalysis.First,wedonotaccountforanycostsassociatedwiththeshort-term(i.e.,sub-hourly)variabilityandforecasterrorofoffshorewind.Thesecostsaregenerallyfoundtobemodest,at$1-7/MWh(EnerNexCorp.2010;Wiseretal.2011;UKERC2017).Second,wecalculatethevalueofoffshorewind‘onthemargin’assumingthattheadditionofoffshorewinddoesnotimpacttherevenuesofwind.Incontrast,wedoaccountfortheimpactofwindonconsumercoststhroughthewholesaleprice‘meritorder’effectsinceevensmalleffectsonpricescanhavelargeimpactsonoverallconsumercosts.Third,thewholesaleprice‘meritorder’effectdoesnotaccountforanylocalpricesuppressionassociatedwithcongestionandlosses,butinsteadfocusesonregion-wideeffects(otherresearchhasfoundamagnifiedlocaleffect,e.g.,CRA(2012),PfeifenbergerandNewell(2010),andEnerNex(2011)).Italsodoesnotaccountforanypotentialreductioninforwardcapacitymarketprices;onestudysuggeststhatthislatteromissionmaybemeaningful,atleastintheconstrainedregionofLongIsland(Tabors,Rudkevich,andHornby2014).Fourth,avoidedairemissionsarequantifiedinphysicalterms,butarenotassessedintermsofhealthoutcomes(forresearchthathasfocusedonthehealthoutcomesofoffshorewind,seeBuonocoreetal.2016,andChiangetal.2016).Instead,these

EstimatingtheValueofOffshoreWind│6

emissionsreductionsarevaluedtosomeextentthroughpollutionpermitpricesembeddedinLMPs,andthroughRECs.Fifth,avoidedtransmissioncostsareonlyaddressedthroughthecongestioncomponentoftheLMPprices.Finally,theanalysisdoesnotestimatetheeconomicvalueorcostofothercommunity,economicdevelopment,andenvironmentaleffects(e.g.,wateruse,employment,tourism,propertyvalues,fishingimpacts,etc.).

4. Results

TheValueofOffshoreWind4.1Westartwithafocusonthosemarketvaluesthatdirectlyinfluencetherevenueearnedbyanoffshorewindproject(ortheavoidedcostsforapurchaserofoffshorewind):energyvalue,capacityvalue,andRECsales.Withthatfocus,wefindthatthemarginalmarketvalueofoffshorewindvariessignificantlybyprojectlocation.Inparticular,Figure1showsthatthetotalmarketvalue(i.e.,energy,capacity,andRECvaluecombined)ofoffshorewindishighestforsitesoffofNewYork,Connecticut,RhodeIsland,andMassachusetts;lowerforprojectsoffofMaine;andlowestelsewherealongthecoast.Whenaveragedovertheentire2007-2016period(lefthalfofFigure1),themarginalmedianvalueforsitesinterconnectingtoISO-NEisroughly$110/MWh,comparedto$100/MWhforsitesinterconnectingtoNYISO,$70/MWhforsitesinPJM,andcloserto$55/MWhforsitesinthenon-ISOregionsouthofPJM.Whenfocusingonjust2016(righthalfofFigure1),thecorrespondingmarginalvaluesaremuchlower(forreasonsexplainedlater),buttherelativedifferencesacrossstatesandregionsisstillsimilar.ThemedianvalueforsitesinISO-NEis$70/MWhin2016,andforNYISOisnearly$65/MWh.ThemedianvalueofsitesinPJMis$45/MWh,whileitislessthan$40/MWhforsitesinthenon-ISOregionsouthofPJM.

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Figure 1. Total market value at each site, averaged over 2007-2016 (left) and for 2016 only (right), considering the combined value of energy, capacity, and RECs Furtherinvestigationfindsthatthehistoricalmarketvalueofoffshorewindhasresembledthatofa24x7flatblockofpower.Inotherwords,thelocationalvariationinthemarketvaluehasbeendrivenprimarilybydifferencesinaverageenergy(andREC)pricesacrosspricingpoints,statesandregions,ratherthanbydifferencesindiurnalandseasonalwindgenerationprofilesacrossprojectsites.Thisinsightisrevealedbycontrollingforlocationaldifferencesinpricing,accomplishedintheleftpaneofFigure2bydividingthetotalmarketvalueofoffshorewindateachsite(averagedover2007-2016—i.e.,thevaluesfromtheleftpaneofFigure1)byeachsite’saverageenergy,capacity,andRECpricesacrossallhours.Inotherwords,Figure2comparesthemarginalrevenueearnedbyeachoffshorewindprojecttotheamountofrevenueitwouldhaveearnedifgeneratingthesametotalamountofannualenergybutwithnotemporalvariationinoutput.Theresulting‘normalized’marketvalue(total,energy,andcapacity,respectively,fromlefttoright)ofoffshorewindshowninFigure2indicateswhetheroffshorewindismoreorlessvaluablethana24x7flatblockofpower;variationinthismetricacrosssitessolelyreflectsdifferencesindiurnalandseasonalgenerationprofiles.AsshowninFigure2,thenormalizedtotalmarketvalueofoffshorewind(leftpane)rangesfrom95%-105%,withthelargestratiosfoundinNYISO,ISO-NE,andoffthecoastofNorthCarolina.Theenergyvaluecomponent(middlepane)tellsasimilarstory,andwithasimilarlymodestrange(98%-108%).Incontrast,thenormalizedcapacityvaluecomponent(rightpane)variesmoresignificantly,from50%-120%(capacityvalueisexploredinmoredepthbelow).Therathermodestrangesforbothtotaland

2016$/MWh

2007-2016Average 2016Only

EstimatingtheValueofOffshoreWind│8

energyvalueindicatethatvariabilityinwindgenerationprofilesacrosssitesisnotastrongdeterminantofmarginaloffshorewindmarketvaluealongtheEastCoast;instead,thesignificantvariationinmarketvalueseeninFigure1isdrivenmuchmorebylocalenergy(andREC)prices.Inotherwords,themarketvalueofoffshorewindisroughlysimilartothatofasimilarlylocatedflatblockofpower,atleastonamarginalbasisforthefirstoffshorewindplants.

Figure2.Normalizedtotalmarketvalueanditsenergyandcapacitycomponents

Tobeclear,diurnalandseasonalgenerationprofilesdodistinguishamongoffshoresites,butmostlyforcapacityvalue,whichisasmallcomponentofoverallvalue.Therelativelywiderange(50%-120%)innormalizedcapacityvalueshownintherightpaneofFigure2solelyreflectsdifferencesinwindgenerationprofilesacrosssites(aswellastherulesbywhichwindplantsearncapacitypayments),withsitesoffofRhodeIslandandMassachusettshavingthemostadvantageousprofilesintermsofaligningwithcapacitymeasurementperiods.Similarly,wintercapacitycreditsarehighestfortheareasoffofRhodeIslandandMassachusetts(seeFigure3).Figure3alsoshowsthedistributionofsummercapacitycreditalongtheentireeastcoast.NotethatwintercapacitycreditsareshownforNYISOandISO-NEsitesonly,asPJMdoesnotassesscapacitycreditsinthewinter(wealsoassumethatPJMcapacitymarketrulesapplytoallstatessouthofPJM).ThecapacitycreditofoffshorewindintheNYISOandISO-NEmarketsissignificantlyhigherinwinterthaninsummer;offshorewindintheseregionsbenefitsfromhavingcapacitycreditassessedinbothseasons.Despitethesignificantvariationincapacitycredit(Figure3)andnormalizedcapacityvalue(Figure2)acrosssites,however,capacityvalueisarelativelyminorcomponentofthetotalmarketvalue,asshownlaterinFigure4.

EstimatingtheValueofOffshoreWind│9

Figure3.Capacitycreditofoffshorewindinsummerandwinter

Inadditiontovaryinggeographically,themarketvalueofoffshorewindalsovariessignificantlyfromyeartoyear,drivenprimarilybychangestoenergyandRECprices.Themarketvalueofoffshorewindislowestin2016,themostrecentyearevaluated.Thisinter-yearvariationwasfirstseeninFigure1,wherethetotalmarketvalueofoffshorewindin2016wassignificantlylowerthanthevalueaveragedover2007-2016.Figure4showsthatthissignificantdeclineintotalmarketvalueisattributableprimarilytolowerelectricitypricesin2016,whichreducedthemedianenergyvalueofoffshorewindto~$30/MWhacrossallfourregions.Figure4alsoconfirmsthatthecapacityvalueofoffshorewindisonlyasmallcomponentoftotalvalue.VariabilityintotalmarketvalueovertimehasbeendrivenbybothelectricityandRECprices(withtheformerheavilyinfluencedbynaturalgasprices).ThetotalmarketvalueishighestinISO-NE,inpartduetohigherRECprices,whileenergyandcapacityvalueishighestforNYISO,particularlyfortheLongIslandregion.

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Figure4.Medianenergy,capacity,andRECvaluebyyearforsiteswithineachregion.Thelinesshowthe10th(dashed)and90th(solid)percentileofthetotalmarketvalueacrossallsiteswithineachregion.

Confirmingearlierwork,thehistoricalenergyandcapacityvalueofoffshorewindinallthreeISOsisfoundtohaveexceededthevalueofonshorewind.Specifically,weusetheactualhistorical,ISO-widehourlyoutputofonshorewindtoestimatetheenergyandcapacityvalueofonshorewindineachISO,andcomparethosefigurestothevalueofthemedianoffshorewindsiteineachISO.In2016,thetotalenergyandcapacityvalueofoffshorewindwouldhaveexceededthevalueofexistingonshorewindby$6/MWh(or21%)inISO-NE,$6/MWh(or24%)inPJM,andbymorethan$20/MWh(112%)inNYISO(Figure5).Thedifferencesinenergyandcapacityvaluebetweenonshoreandoffshorewindareduebothtodifferencesinlocationanddifferencesinhourlyoutputprofiles:locationappearstoplayasomewhatlargerrolethanoutputprofile,inmostcases.TheestimatedsummerandwintercapacitycreditforoffshorewindinthethreeISOsisroughlydoublethatforonshorewind.

EstimatingtheValueofOffshoreWind│11

Figure5.Comparisonof2016energyandcapacityvalueforoffshoreandonshorewind

Inadditiontoitsmarketvalue,offshorewindreducesairemissionsthatareharmfultohumanhealthandtheenvironment.Figure6showsthatavoidedemissionsattributabletooffshorewindvarybyregion,basedonthedegreetowhichcoalornaturalgasisdisplaced—highestintheMid-Atlantic,lowerintheSoutheast,andlowestintheNortheast—andhavegenerallydeclinedovertime,astheemissionsrateofthemarginalgeneratorhasimproved.ThedeclineovertimehasbeenparticularlysteepforSO2(topleftgraph),ascoalplantshaveeitherretiredorinstalledpollutioncontrolequipment.Althoughavoidedemissionsisameasurablebenefitofoffshorewind,theeconomicvalueofavoidedemissionsisnotnecessarilyfullyadditivetotheenergy,capacity,andRECvaluediscussedearlier.Thisisbecausesomeofthisvalueisalreadyembeddedinenergyvalue,sincepollutionpermitprices,totheextentthattheyaffectthevariablecostsofmarginalplants,arereflectedinLMPs.Additionally,onecouldarguethatRECvaluepartiallyreflectsthebenefitsofavoidedemissions.Thatbeingsaid,otherresearcheffortshavefoundsubstantialvaluetotheairqualitybenefitsfromwindpowerproductionintheseregions.Forexample,Buonocoreetal.(2016)findthatoffshorewindintheMid-Atlanticwouldprovidebetween$54/MWhto$120/MWhofhealthandclimateinbenefitsin2017andMillsteinetal.(2017)findcentralestimatesofairqualitybenefitsfromexistingonshorewindworth$26/MWh,$110/MWh,and$44/MWhintheNortheast,theMid-Atlantic,andtheSoutheastregions,respectively,in2015.

EstimatingtheValueofOffshoreWind│12

Figure6.AvoidedSO2(topleft),NOx(topright),PM2.5(bottomleft),andCO2(bottomright)emissionsratebyyearforaverageoffshorewindprofileineachregion

Whenthemarginalgenerationunitdisplacedbyoffshorewindisagas-firedgenerator,offshorewindnotonlyavoidsemissionsbutalsoreducestheconsumptionofnaturalgas.Becausenaturalgassupplyisrelativelyinelasticintheshortterm,reductionsinnaturalgasdemandcanleadtopricereductions,resultinginflow-throughconsumerbenefitsintheformorlowernaturalgasexpendituresthroughouttheeconomy.1Forexample,weestimatethatnaturalgaspricesavingsnationwidecouldhaveanequivalentvalueper-MWhofoffshorewindof$30-$80/MWhofoffshorewindwhenaveragedover2007-2016,dependingoninwhichregiontheoffshorewindislocated.Localregionalpricesavingswithintheregioninwhichtheoffshorewindplantinterconnectsaremuchlower,butstillsignificant,atlessthan$6/MWhofoffshorewind(Figure7).Similarly,low-marginal-costoffshorewindalsoreduceswholesaleelectricitypricesbydisplacingthehighest-costmarginalgeneratingunitsfromthebidstack.Whentranslatedtoanequivalentconsumerbenefitper-MWhofoffshorewind,weestimatethis‘merit

1Thesameeffectcouldoccurwithcoalandotherfuelsdisplacedbyoffshorewindgeneration,butlikelyatamuchsmallermagnitudegivenpricesthataregenerallyless-responsivethannaturalgaspricestochangesindemand,coupledwiththefactthatcoalandotherfuels(e.g.,nuclear)arenotaswidelyusedasnaturalgasinothersectorsoftheeconomyoutsideofthepowersector.

EstimatingtheValueofOffshoreWind│13

ordereffect’tobemorethan$25/MWhaveragedover2007–2016inallthreeISOregions,andsignificantlylowerinthestatessouthofthePJMregion.Thenaturalgasandwholesaleelectricitypricesuppressioneffectsarelowestin2016.Asmentionedearlier,thesenaturalgasandwholesalepricereductionsrepresentatransferofwealthfromnaturalgasproducersandelectricitygeneratorstogasandelectricityconsumers,respectively.Moreover,thesepricesuppressioneffectsareanticipatedtodeclineovertime,assupplyadjuststothenewdemandconditions(Barboseetal.2016).

Figure7.Medianenergy,capacity,andRECvaluealongwiththein-regionnaturalgaspriceeffectandwholesaleelectricitypriceeffectaveragedover2007-2016

ApproachestoIncreaseValue4.2

Inadditiontothecoreanalysesdescribedabove,wealsoexploredseveralwaystoenhancethevalueofoffshorewind(seeMillsetal.2018foradditionaldetails).Forexample,wefoundthatinterconnectingtoamore-distantbuthigher-pricedinterconnectionpoint—e.g.,switchingfromPJMorISO-NEnodestoNYISOnodesaroundLongIsland—canincreasethenetvalueofoffshorewindbyasmuchas$25/MWh-wind,evenwhenconsideringtheadditionalcostoftransmission.Similarly,havingmorethanoneinterconnectionpointandarbitragingbetweenthemcanalsoenhancevaluebyenablingopportunisticsalesintohigher-pricedinterconnectionpoints.SellingRECsintoadifferentstatethantheoneinwhichtheprojectinterconnectscanalsoboostvalue,byasmuchas$20/MWhdependingonthelocation.Addingbatterystoragesized(inMWhterms)atroughlyonefourthoftheoffshorewindproject

EstimatingtheValueofOffshoreWind│14

capacity2canboostvalue(mostlyenergyvalue,butsomecapacityvalue)byupto$3/MWh-wind(withabreakevencostofstorageof$250/kWhinsomeregions,whichisbelowtherecentcostofstorage),withstill-greaterincrementalvalueasbatterysizeincreases.Finally,windturbinedesign(i.e.,rotorsizeandtowerheight)isfoundtohaveaminoreffectonmarketvalue,atleastforthishistoricalmarginalanalysis.3

ComparingValuetoCost4.3WithlittleoffshorewinddeploymentintheUnitedStates,costestimatesare—toadegree—speculative.TheNationalRenewableEnergyLaboratoryestimatesthelevelizedcostofenergy(LCOE)ofareferenceoffshorewindprojectinstalledintheU.S.in2015at$180/MWh(Moneetal.2017),comparabletoearlycostsignalsfromU.S.projects(Musialetal.2017).Thehistoricalmarketvalueestimatespresentedearlier—ifrestrictedtoenergy,capacityandRECs,andexcludingnaturalgasandwholesaleelectricitypricesuppression—arebelowthislevel.RecenttendersinEurope,however,suggestrapidandsteepcostreductionsforprojectsplannedforinstallationinthe2020to2025timeframe,withpricesatroughly$70/MWhinclusiveofneededtransmissionexpenditure(Musialetal.2017).Thehistoricalmarketvalueestimatespresentedearlier,dependingonthelocationandtimeframe,spanthisfigure.Ofcourse,justasthemarketvalueofoffshorewindvariesspatially,sotoodoesLCOE,affectedbywindspeed,oceandepth,distancefromshore,andmanyotherconsiderations.Intwolinkedstudies,Beiteretal.(2017)andBeiteretal.(2016)estimatetheLCOEofpotentialoffshorewindprojectsalongtheeasternseaboard,takingsuchconsiderationsintoaccountandprojectingfuturecostsin2022and2027.Figure8comparestheseLCOEestimatesfor2022withthehistoricalmarketvalueestimatespresentedearliertohelpidentifyprojectlocationsthatbest-balancecostandsystemvalue.WefindthatthemostattractivesitesfromthisperspectivearelocatednearsoutheasternMassachusettsandRhodeIsland,whiletheleastattractivearefaroffshoreofFloridaandGeorgia(Figure8).

2Thesizeofthebatteryinthisanalysisisbasedonarecentannouncementofapartnershipbetweenanoffshorewinddeveloper(DeepwaterWind)andTeslatoinstalla40MWhbatteryalongsidea144MWwindplant.BasedonotherTeslabatteries,weassumethatthisbatterycouldbeoperatedatfullcapacityforfourhours(i.e.,a10MWnameplatebatterywith4hoursofstorage).https://www.utilitydive.com/news/deepwater-tesla-to-pair-offshore-wind-farm-with-40-mwh-battery-storage-sys/448364/3Alteringtherotorsizeandincreasingthetowerheightcanleadtoaflatterproductionprofilerelativetowindwithasmallerrotorandlowertower.Withhighwindpenetration,flatteningtheproductionprofileofwindincreasesthevaluebyshiftingpowerawayfromperiodsthatwouldotherwisehavehighwindandlowprices(HirthandMüller2016).Atlowpenetration,theeffectofflatteningtheprofileisambiguous,asitmayeithershiftwindpoweroutofhighpricedperiodsorshiftitoutoflowpricedperiods.Overall,wefoundnosubstantialsensitivityofthevaluetorotorsizeandhubheight,thoughouranalysiswasconductedonamarginalbasisfor,ineffect,thefirstoffshorewindplants.

EstimatingtheValueofOffshoreWind│15

Figure8.Netvaluemeasureofoffshorewind(tobeusedonlytoranksites)

5. ConclusionsandFutureOutlook

Wefindthatthehistorical,marginalmarketvalueofoffshorewindvariessignificantlybyprojectlocation,andishighestforsitesoffofNewYork,Connecticut,RhodeIsland,andMassachusetts.Thehistoricalmarketvalueofoffshorewindcanbeapproximatedbythevalueofaflatblockofpower:locationalvariationsaredrivenprimarilybydifferencesinaverageenergy(andREC)prices.Diurnalandseasonalgenerationprofilesdomatter,butmostlydifferentiateoffshoresitesbasedontheircapacityvalue,whichis,atleasthistorically,asmallcomponentofoverallvalue.Themarketvalueofoffshorewindalsovariessignificantlyfromyeartoyear,drivenprimarilybychangestoenergyandRECprices,andislowestinthemostrecentyearanalyzed,2016.Offshorewindreducesairemissionsthatareharmfultohumanhealthandtheenvironment;emissionsreductionsvarybyregion,andhavedeclinedovertime.Wholesaleelectricityandnaturalgaspricereductionsattributabletooffshorewindcanbesubstantial,thoughthesepricereductionsrepresentatransferfromproducerstoconsumersandaregenerallyexpectedtodeclineovertime,assupplyadjuststothenewdemandconditions.TheenergyandcapacityvalueofoffshorewindinallthreeISOsexceedsthatofonshorewind,confirmingpreviousresearch.Thesevaluedifferencesareduetooffshorewindbeinglocatedmore

EstimatingtheValueofOffshoreWind│16

favorablyintermsofpricingpoints,andalsotoamore-favorabletemporalprofileofelectricityproduction.Yet,thecostofoffshorewindisalsohigherthanonshorewind,requiringimportanttradeoffs.CostreductionsthatapproximatethosewitnessedrecentlyinEuropemaybeneededforoffshorewindtoofferacredibleeconomicvaluepropositiononawidespreadbasis.Finally,wefindmultiplewaystoenhancethevaluepropositionforoffshorewind,includinginterconnectingtomore-distantbuthigher-pricedlocations,havingmorethanoneinterconnectionpointandarbitragingbetweenthem,sellingRECsintoadifferentstatethantheoneinwhichtheprojectinterconnects,andaddingstorage.Thoughthehistoricalperspectivetakeninthisstudyisinstructiveinidentifyingkeyvaluedriversforoffshorewind,thedecisiontobuildoffshorewindgoingforwardwilldependonexpectationsoffuturebenefits,whichmaydifferfromrecenthistoricalexperience.Additionalresearchtoexplorehowvariousvaluefactorsmaychangeinthefutureiswarranted,yetanysuchfindingswouldbehighlyuncertain.Energyvalue—thelargestvaluecomponentwithinouranalysis—willpartlydependonthefuturedirectionofnaturalgasprices,whichisuncertain:EIAprojectsgaspricestodrifthigheroutto2050(EIA2017),whileNYMEXnaturalgasfuturessuggestflatpricesoutto2030.Increasingwindpenetrationovertimecoulddrivedownwind’senergyvalue,asthemarketbecomessaturatedwithlowmarginal-costgenerationduringwindytimes;suchavaluedeclinehasbeenobservedinhigh-penetrationwindmarketsandstudiesinternationally(Hirth2013;MillsandWiser2014;Ederer2015).RECprices—anothersignificantcontributortooffshorewind’svalue—willdependinpartonthecostandvalueofalternativemeansofcomplyingwithRPSrequirements,aswellasonanyspecificoffshorewindpolicyobligations.Offshorewind’scapacityvaluedependsoncapacityprices,therulesforhowcapacitycreditisdetermined,andwhetheroffshorewindiseligibletoparticipate.Capacitypricesaregenerallyexpectedtoincreaseinthefuture(Exeter2014;FrayerandRoumy2015;Hibbardetal.2015;Hornbyetal.2015;Exeter2016;NYDPS2016;PJM2016;Dominion2017;SchatzkiandLlop2017),butseveralproposedwholesalemarketreformsmaymakeitmoredifficultforoffshorewindtoparticipateincapacitymarkets(Graceetal.2017).Finally,avoidedemissionsmayvarybasedonfuturefossilfuelpricesandchangestoemissionsregulations.Giventheseuncertainties,futureresearchshouldtargetimprovedunderstandingofthefactorsdrivingvaluedifferences,withrelativelylessfocusontheexactmagnitudeofanyparticularresult.Ultimately,energymarketsareuncertain.Researchcaninformmarketandpolicydecisions,butcannoteliminatefundamentaluncertaintiesonhowthefuturewillunfold.

EstimatingtheValueofOffshoreWind│17

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