Offshore Wind Interconnection Process And Cost Considerations - Utilities

The U.S. offshore wind industry continues to mature, but for now developers, utilities, and investors should expect lengthy interconnection processes and high costs when planning their offshore wind projects, say members of Mayer Brown's global projects and infrastructure group. They explain the basics and what to consider.

As the Biden administration pushes full steam ahead with offshore wind development in the U.S., the burgeoning industry now confronts an issue of growing importance: How to deliver the power from offshore projects to the onshore grid. The interconnection of utility-scale offshore wind projects to the transmission grid will produce both process and cost risks that developers, utilities, and investors must consider early in their planning process.

Interconnection Requires Intricate Lengthy Processes

Sponsors seeking interconnection for offshore wind projects must complete intricate and lengthy processes. In the New England, New York, Great Lakes, and California markets, independent system operators and regional transmission organizations (ISOs) control interconnection.

The Federal Energy Regulatory Commission (FERC) in turn regulates the ISOs. Each offshore wind project, located in these most wind-feasible US coastal waters, must apply for interconnection; undergo feasibility, system impact, and facilities studies; and accept cost estimates, long before any interconnection engineering, procurement, or construction work can begin.

FERC generator interconnection requirements are embedded into every ISO and FERC-regulated utility tariff, and ISOs and utilities typically have no right to self-waive the resulting extensive, granular process requirements. Study processes, deadlines, and technical requirements are addressed in FERC interconnection rulemakings.

Each phase of the study process lasts several months. Even relatively minor modifications to electrical size or generator physical characteristics can trigger re-study requirements.

A project sponsor typically must study all its potential landfall and point-of-interconnection options before deciding about where to interconnect, because even insignificant changes can re-start the interconnection process, resulting in even more process and cost risks.

While many offshore wind projects are supported by various regulatory incentive programs, such as state-sponsored build-out and offshore wind purchase policies and contracts, no federal or state program provides for any waiver or even simplification of applicable FERC interconnection processes.

In addition to these lengthy processes, the interconnection costs for offshore wind projects are expected to be high. The interconnecting generator must, in the first instance, pay the entire incremental cost of interconnection, for both its own interconnection work and for the utility's work.

Grid upgrades and equipment installation can extend far beyond the local wires and meter at a generation site, landfall point, or substation. Costs typically include application fees, study costs for each layer of studies, construction materials and contractor costs, and auxiliary equipment, such as metering and protective gear.

While the costs of those "network" upgrades that are intended to protect and improve the utility's backbone transmission system are sometimes refundable to the generator over time, the overall cost of interconnection can still be high.

Because interconnection relies on standardized processes and rigid marginal-cost allocation principles, interconnection matters are seldom negotiated robustly. In effect, cost-allocation and process requirements help ensure that a new project will not disrupt the existing interconnection queue nor impose costs on the interconnecting utility.

An ISO or utility is normally required to render interconnection service on a "comparable service" basis that is non-discriminatory, and typically will not agree to vary materially from its pro forma FERC-accepted baseline interconnection agreement.

And, an ISO or utility cannot allocate the costs of a generator's interconnection facilities to other ISO or utility customers, thus the generator should effectively always be prepared to pay the full marginal cost of its interconnection.

Fundamentals of Interconnection Increase Costs

In addition, the physical fundamentals of offshore wind interconnection can increase costs and delay construction timelines. For example, the interconnection cable must be fabricated and transported to cable-laying ships, often reserved months in advance.

Placing cables on the sea floor can be a slow process, considering, among other things, weather, environmental factors, and the ocean's multiple uses. The cable must be pre-sited using costly hydrographic surveys, and the cable length must match the seabed-floor distance (not the mapping distance) that the cable will need to travel.

A landfall point must be carefully selected for cost (e.g., beachfront property that can be used to drop cable is pricey on the Northeast corridor and California) and electrical location (that is, a remote landfall point could involve many miles of above-ground travel to a transmission facility or substation, which involves further land and equipment costs and possible land-access and construction delays).

Within an ISO market, different locations on the electric grid produce different locational-marginal prices for electricity. Those prices are highly market-sensitive and can change frequently; longer-term capacity prices can change with each capacity auction.

As a result, an offshore generator may need to consider power pricing locational features, landfall cost and availability, environmental and permitting issues associated with landfall points, access to high-voltage lines, and associated costs, all before even submitting an interconnection application.

As the U.S. offshore wind industry matures, these lengthy interconnection processes and costs may continue to evolve. But, for now, developers, utilities and investors should expect lengthy interconnection processes and high interconnection costs when planning their offshore wind projects.

Originally published by Bloomberg Law.

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