United States

United States

Analysis: Dong enters US offshore

UNITED STATES: Dong Energy announced it is taking over development rights from RES Americas to a 1GW-plus offshore wind lease area located about 90 kilometres from shore.

Dong Energy owns the majority share of the 630MW London Array project
Dong Energy owns the majority share of the 630MW London Array project

For the fledgling US offshore wind energy industry, the fact that Dong chose the waters off the Massachusetts coastline to take its first step away from Europe is a huge confidence boost.

But the entry of the offshore sector's dominant player into the US market is unlikely to start a wind rush to America's Atlantic coast. Nor does it signal an end to the significant uncertainties still facing the industry.

"It is very refreshing, it's a very positive sign," said Amy Grace, chief wind analyst at Bloomberg New Energy Finance (BNEF). "For the industry in general, it's good news that the most experienced developer in the world thinks there is an opportunity here."

There is no doubt Dong, whose majority shareholders are the Danish government and Goldman Sachs, is in a good position to make that judgment. The company has built about one-third of the world's offshore wind capacity, with 2.5GW in operation and another 1.3GW under construction.

The Massachusetts site has wind and seabed conditions very similar to those in northwest Europe where the company has honed its expertise, said Thomas Brostrom, Dong's head of markets & pipeline. The 760-square-kilometre parcel also provides potential for the kind of large-scale development need to drive costs as low as possible, he said.

"It makes a pretty strong case for us to move into the US."

Although Brostrom emphasises it is still early days, he said Dong is looking at a potential project size of 600-800MW to come online in the post-2020 timeframe. "That is the earliest we can do it," he said.

Getting to that point will be a challenge even for a company with the strengths Dong brings to the table, given the many question marks about the future of offshore wind in the US.

There is no long term visibility when it comes to policy support for onshore wind, much less its more expensive offshore cousin. Any offshore project faces stiff competition from onshore renewable resources, including the fast-growing solar market, and efforts to expand infrastructure to bring in hydropower from Canada and increase the supply of low-priced natural gas to the region.

"You never want to be in the position of being the highest cost energy provider, and I think that is one of Dong's challenges. It is still very expensive to build offshore anywhere, let alone the US where we simply don't have the infrastructure that Europe does," notes Grace.

There may not be the same kind of need to go offshore in the US as there has been in European markets, either. "It's just not clear yet that ratepayers in Massachusetts or New England will get on board with the types of subsidies needed to make it possible," she said.

Finding a buyer for the electricity is likely to be the toughest challenge Dong will face. Cape Wind, the country's highest profile offshore wind project, only managed to sign power purchase agreements for 77.5% of its 468MW of output. And when its two customers — reluctant buyers from the beginning — terminated those contracts earlier this year, it essentially left Cape Wind on life support.

There is some hope that a clear path to market will emerge. Patricia Haddad, a top-ranking Democrat in the Massachusetts House of Representatives, introduced a sweeping energy bill in February that would require utilities to solicit competitive bids from offshore projects with a target of acquiring 8.5 million MWh a year by 2030. The bill is in committee and seen as a starting point for negotiations, but it is one of the things that attracted Dong's attention.

"We are not quite there yet, but there are some good initiatives underway," said Brostrom.

Given that RES paid just $281,285 (about $1.50 an acre) for the Massachusetts lease in a federal auction in January, it is a fairly inexpensive way for Dong to gain exposure to a market with potentially significant upside.

The hurdles it presents, notes Brostrom, are similar to those Dong has encountered elsewhere. He said: "It's not that different from markets in Europe. Things can take time and then suddenly take off, and that is what we believe and hope will happen in the US.

"We would not come here if we didn't think that."

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