On November 9, 2015, the federal Bureau of Ocean Energy Management (“BOEM”) will hold the fifth auction of leases for space on the Outer Continental Shelf in the Atlantic Ocean, this one offshore New Jersey.  BOEM will offer 342,833 acres in two lease blocks, enough space to support at least 3,400 megawatts (“MW”) of commercial wind generation, which – according to BOEM -- could power approximately 1.2 million homes. 

Thirteen energy development companies have expressed interest and qualified to participate in the auction.  As described in the Final Sale Notice, which BOEM published in the Federal Register , winning bidders will be determined using monetary and nonmonetary factors, such as whether the bidders have previously obtained power purchase agreements (“PPAs”) for the sale of the wind energy or are eligible for renewable energy credits.  The interesting thing about New Jersey is that, though it was the first state to enact legislation providing for eligible offshore wind (“OSW”) energy projects to qualify for ratepayer-based financing and the state’s aggressive renewable portfolio standard (“RPS”) has a carve-out for up to 1,100 MW of OSW-generated energy, none of the pre-qualified bidders have PPAs or been deemed eligible for New Jersey OSW renewable energy credits (“ORECs”).  Developers may not need PPAs or ORECs; in the recently released Clean Power Plan (“CPP”), the Environmental Protection Agency (“EPA”) announced the use of emissions reduction credits (“ERCs”) to finance or otherwise support investments in the reduction of greenhouse gas emissions,

New Jersey Governor Chris Christie signed the landmark, bi-partisan Offshore Wind Economic Development Act (“OWEDA”) in 2010 and his administration moved quickly to implement regulations for the application and review process for OSW projects.  To date, only a single project, designed for development in state waters offshore Atlantic City, has been reviewed under OWEDA and was unable to meet the stringent criteria for “net economic and environmental benefits.”  Even so, the Christie Administration has come under criticism for delays in issuing regulations for the financing mechanism (more simply, OREC regulations).  Developers claim that without an assurance of ORECs, they are unable to secure financing for proposed OSW projects and, alternately, that the state risks BOEM awarding leases to developers who would later be deemed ineligible for ORECs by the state.  

The electric power industry is familiar with the use of ERCs and ERC-trading platforms.  Since the 1980s , to meet EPA’s ambient air quality standards, states have been using ERC trading programs to control emissions of a number of pollutants.  Although much of the details have yet to be announced, generally, the Clean Power Plan ERC program will allow fossil-fuel generating units to meet their required emissions limits by reducing emissions directly or by purchasing ERCs generated by new investments in low or zero emissions power generation (such as an OSW project).  For OSW developers, the ERC program should provide  a new revenue stream through the sale of ERCs on an exchange or by negotiating long-term ERC agreements (and possibly energy sales) from owners of high-emissions power plants or third parties. Early discussions between developers and New Jersey regulators suggest that the OREC program would operate in much the same way.  (Consider too that New Jersey already has a successful market for solar renewable energy certificates.) 

Some may be hard pressed to argue that New Jersey needs the OREC program when the ERC option, or obligation, may be in place by about the same time as the first New Jersey OSW project starts generating electricity (sometime after 2020).  The argument for ORECs is further complicated when you consider this key provision of OWEDA:

“An entity seeking to construct an offshore wind project shall submit an  application to the board. . . which shall include. . . documentation that the entity has applied for all eligible federal funds and programs available to offset the cost  of the project[.]”  N.J.S.A. 48:3-87.1(a)(4).

Questions remain:

  • Will New Jersey adopt a mass-based or rate-based compliance program;
  • are ERCs “federal funds”;
  • is a federal program that provides revenue through ERCs intended to “offset the cost” of OSW projects;
  • can a state get ERC credit for the cost of maintaining an OREC program; and most importantly
  • will ERCs provide sufficient revenue to cover the multi-billion dollar investment required to construct, operate and maintain an OSW facility.

Two things are certain: substantial uncertainty was created by the CPP and may make it more difficult to settle on an OREC financing program without knowing if it will be needed; and  ultimately, whether it is through ORECs or ERCs, financial support for the development of OSW in federal waters outside of New Jersey will come from New Jersey ratepayers.