Dismukes op-ed piece on recent Gulf of Mexico Offshore Wind lease sale

Article appearing in The Advocate

Guest column: Disappointing offshore wind sale is first step | Opinion | theadvocate.com

The long-anticipated offshore wind lease sale for the Gulf of Mexico has finally concluded and the resulting bids are relatively disappointing, particularly for advocates who have been arguing that positive results from the Gulf auction would almost certainly lead to the inevitable “next step” of thousands of megawatts of new OSW capacity development for the region.

The current bid results, with only one winning bidder for the Lake Charles region and no bidders for the Texas region, could be considered abysmal. However, not all is lost, and Louisianans need to consider the following facts in order to assess this recent turn of events for offshore energy production in the Gulf.

First, this lease sale is just one event in what will likely be a long journey for the Gulf. It is true that the bids were horrible in both number of offers and in total dollars. Consider that the average lease bid in past Atlantic sales was around $2,500 per acre, or $144,363 per megawatt of anticipated OSW capacity developed. This is considerably higher than the recent Gulf bids of only $55 per acre and $4,502 per megawatt of capacity.

However, most analysts have observed that these prior Atlantic bids were likely a little to the “rich” side, and many developers likely wish they could go back and rethink those relatively high-priced offers. The outcome is not too dissimilar to early unconventional natural gas development in the Haynesville Shale, where initial bonus bids were as high as $65,000 per acre on state leases alone.

Second, the Gulf is a tougher environment for offshore wind development than the Atlantic seaboard for a variety of reasons. Technically, wind speeds along the Atlantic, particularly its northern reaches, are considerably more effective for development than in the Gulf.

More importantly, the mid-Atlantic and New England have some of the more organized power markets in America. The purpose of an OSW facility is to generate electricity, so the greater the options for selling that electricity, the more profitable a project. Couple this with the fact that many states in New England and the mid-Atlantic have mandatory OSW long term contract requirements or tradable credits that clearly make a project more financially attractive.

There’s only so much capital that can go around in this business, and that capital is going to migrate to those areas that have lower development risk and higher potential profitability. The Gulf is just not there yet, and likely will not be for some time.

Third, the current, short-term business environment for OSW is very, very challenging. Over the past 12 months, the U.S. has seen consistent and meaningful interest rate increases that negatively impact capital-intensive industries like energy, and particularly wind energy. Further, supply chain constraints arising from the pandemic have been particularly problematic for the industry. Many projects along the eastern seaboard participated in competitive bidding processes offered by states like New Jersey, New York and Massachusetts when supply chain constraints did not exist and were not really anticipated. Developers are finding that the original bids they made in these competitive procurement processes are out of sync with these new realities, placing them in a financially serious predicament.

Fourth, the real key for offshore wind development in the Gulf is the willingness of a large buyer with good credit to execute a long-term off-take agreement with a developer, not too dissimilar to the development hurdle facing liquefied natural gas facilities. This entity could be a regulated utility that needs renewable electricity or, alternatively, it could be a large industrial hydrogen or ammonia producer that needs renewable energy for a green classification.

Right now, there is no indication that there is such a big buyer out there, particularly when there are a host of other lower-cost, less-risky renewable energy options (such as onshore, grid-connected solar).

This is no easy process and outcomes are not guaranteed, but the recent lease sale is an important first step for Louisiana and the Gulf, since it moves the region one step closer to potentially meeting its technical development potentials.

Markets recognize that the future for offshore wind is promising, but they also recognize the realities of these near-term constraints and will change and adapt to them. The recent lease sale is evidence of this.

Thus, continuing to monitor industry trends and region-specific opportunities through a clear, non-rose-colored set of spectacles is likely the best advice. This is just the beginning of a story that will continue to unfold over the next several years.

David E. Dismukes is professor emeritus at LSU's Center for Energy Studies.