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Virginia bets the farm on Dominion to deliver offshore wind

Governor places the US state's offshore wind future entirely in the hands of its largest utility

Virginia is taking a very different development path than other states in the fast-emerging US offshore wind sector, with plenty riding on the outcome of what has emerged as the nation's most ambitious offshore wind plans.

In a 16 September executive order, Governor Ralph Northam set a more aggressive 2.5GW offshore target by 2026 than the 2GW for 2028 goal in Virginia’s 10-year energy plan that he adopted a year ago. The US offshore wind industry is on the “cusp of a major boom”, he declared.

He also placed the mid-Atlantic state’s offshore wind future entirely in the hands of Dominion Energy, its dominant and politically-influential electric utility. All electrons will flow from a large zone in federal waters roughly 43km (27 miles) east of Virginia Beach that Dominion leased in 2013 but has yet to commercially develop, according to the document.

As if on cue, Dominion three days later unveiled plans for a 2.6GW project there that would easily be the nation’s largest, with a phased start of operations planned between 2024 and 2026. Second in size is Orsted's planned 1.1GW array off the coast of New Jersey.

Northam’s moves drew national attention for several reasons. In the absence of legal mandates, it’s uncommon to find a US governor and a major, investor-owned electric company moving lockstep to jump-start a new clean energy sector at such scale. Even more so for Dominion, which has been slower in adopting renewable energy versus many of its peers.

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Virginia also would seem an unlikely offshore wind incubator, given its heavy and historical reliance on fossil fuels for power generation. Today, it doesn’t have a single onshore wind farm and ranks eighteenth among states in solar PV capacity compared to neighbour North Carolina at number two.

Since taking office in January 2018, Northam, a Democrat, has sought to move Virginia in a different direction. Four months later, he signed into law Senate Bill 966 that declares 5GW of wind and solar development in the “public interest” within a decade, and to achieve at least 3GW of that goal by 2022.

As part of negotiations leading to passage of the Grid Transformation and Security Act, Dominion committed to procure 500MW of utility-scale solar PV and onshore wind capacity annually and to create a smarter, stronger and more environmentally responsible electric system. Notably absent was utility-scale offshore wind.

SB 966 did declare Dominion’s two-turbine, 12MW Coastal Virginia Offshore Wind pilot, which began construction this summer adjacent to the larger zone, to be in the public interest. Northam views the pilot as a R&D laboratory, a stepping-stone toward the big project.

No 'Plan B'

A 2.6GW array would be a big challenge for any developer making an offshore debut – even Dominion, a well-managed and conservative vertically-integrated utility with decades of experience of planning, building and operating conventional power plants, natural gas pipelines and storage facilities.

At stake for Virginia are potentially billions of dollars in private investment and thousands of supply chain jobs, and the opportunity to tap an unlimited amount of low-carbon renewable resource to help it address climate change.

Dominion will likely partner with an experienced offshore wind developer, as it did for the pilot array where Orsted is acting as engineering, procurement and construction contractor. Still, the utility will be the one to answer to regulators and its shareholders. It will want to get the large project done right and within budget to retain their support as well as elected officials and public opinion.

Northam appears confident it will. His administration apparently has no backup plans to promote competitive offshore wind power supply.

Massachusetts, New Jersey, New York and Rhode Island did this by working with the Department of Interior (DOI) to enable auctions of additional lease areas in federal waters off their coasts. Or to hold open solicitations to procure offshore wind power from elsewhere, a model used by Connecticut.

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Northam in his executive order wants Dominion to submit a Construction and Operations Plan (COP) to DOI by 2021 to enable project construction in 2024. He pledged his administration’s collaboration as the utility navigates the difficult federal permitting process.

Dominion’s project will benefit from Virginia’s close ties with the Navy, which has a massive base in the Norfolk region and is the biggest presence off the state’s southern coast. This will ease, if not eliminate, the most obvious potential conflict over ocean use. There are no burning commercial fishing industry conflicts such as those that have delayed Vineyard Wind in Massachusetts.

The administration can also ensure the state’s own regulatory processes are predictable, responsible and transparent for the project – no small consideration for a developer.

All this, along with Virginia’s traditional political influence in the nation’s capital nearby, should help with development and regulatory costs on the project’s front-end.

Will project make economic sense?

The critical question is whether the massive project – likely the country’s most expensive wind farm to date – will make economic sense for Dominion’s 2.5 million customers. The utility has not said how much it will cost. For comparison, Vineyard, at less than one-third the size, is budgeted at $2.8bn.

Unlike ratepayers in New England, New Jersey and New York, those in Virginia are accustomed to retail electric rates below the national average – 9.74 cents/kWh versus 11.06 cents/kWh in July, according to the US Energy Information Administration. In Massachusetts, for example, they paid an average 18.05 cents/kWh.

Vineyard won bulk energy supply contracts there at 7.4 cents/kWh ($74/MWh) price for the initial 400MW capacity and 6.5 cents/kWh for the balance – both levelised in the first year. After adjusting for contract type, transmission, policy, and access to external revenue, the all-in price is reportedly 9.8 cents/kWh.

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That’s the industry marker. Those prices assume Vineyard can qualify for the federal investment tax credit worth a “blended” 21% of total Capex. It isn’t clear at what level Dominion’s array could benefit from the ITC which expires at the end of this year.

A big difference is who bears the financial risks. With Vineyard, it is largely co-owners Avangrid and Copenhagen Infrastructure Partners. In Virginia, it is the rate base where Dominion will seek to recover costs with approval from the independent State Corporation Commission (SCC) whose commissioners are elected by the Legislature. That doesn’t mean they would necessarily allow full recovery of any costs resulting from construction delays.

High expense led Dominion to delay work in recent years on the pilot, whose price tag has ballooned to $300m excluding financing costs. After SB 966 became law, the SCC last November reluctantly approved it, citing the public interest clause. In their decision, commissioners noted ratepayer exposure to “essentially all” risk includes cost overruns and production and performance failures.

As recently as August, Dominion executives were saying that life-cycle costs today were too high to economically justify construction of a 2GW-plus facility. In their view, those costs would come down enough for a green light only after the US is able to stand up a supply chain and turbines 11MW or larger become widely available. Evidently, they now see this occurring within five years.

Northam will be gone from office by then. State law prohibits consecutive four-year terms by governors.

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