Dominion thinks $400 million is too much to pay for two experimental offshore wind turbines. The utility is exploring ways to drive the cost down.
by James A. Bacon
When Dominion issued a request for bids this spring to erect experimental wind turbines off Virginia Beach, senior executives knew the project would be expensive. Offshore wind farms are built most economically on a scale of dozens or hundreds of turbines. But this project would have only two, and both would incorporate untested technologies. Moreover, there was no supporting maritime infrastructure on the East Coast of the United States. Key components and construction vessels would have to be imported from Europe.
Internal estimates put the cost around $230 million. The cost per kilowatt of power generated would be so expensive that Dominion executives expected the project to be a tough sell to the State Corporation Commission. But they figured they could make the case that the company would learn enough from the turbines that it could bring down costs for large-scale wind development — some 300 turbines — down the road.
So it was an unpleasant surprise when only two companies bid to build the project, and only one of them in full compliance with the contract specifications. And it was even more discouraging when the sole compliant bid came in at more than $375 million.
“We thought we’d have a challenging [approval] process at $230 million,” said Thomas Wohlfarth, vice president for regulatory affairs at a stakeholders meeting Friday to discuss the future of offshore wind in Virginia. “When the cost went to $375 million, we went, “Whoah!’ We like to show a positive net present value to customers. This would be very challenging.”
Until that point Dominion had moved steadily, if ploddingly, ahead with plans to exploit Virginia’s offshore wind resources as a source of renewable carbon-free energy. The company had conducted a cost-reduction study in 2011, completed two internal transmission studies — finding that it could bring in up to 45 megawatts of offshore electricity to its Virginia Beach power grid without significant cost — spent $1.6 million in a blind auction to acquire offshore wind rights, and successfully solicited Department of Energy grants to help underwrite preliminary engineering and design on the two experimental turbines.
The disappointing $375 million bid threw a monkey wrench into Dominion’s rotor. Putting wind development on hold, the company convened in Richmond a gathering of dozens of stakeholders — from business vendors and partners to government officials and environmentalists — to deconstruct what went wrong and to plot a more cost-effective path to full-scale development.
“Dominion really wants to see his project move forward ,” said Mary Doswell, senior vice president of energy solutions, told the stakeholders. “We need to push our way through, and we need your help to do that.” While she did not say development of the larger offshore wind project would be stymied if the experimental turbines weren’t built, she didn’t deny it either. It’s not something she had thought about, she responded to a question. “We’ve been so laser-focused on this project that we haven’t considered what might happen.”
The experimental turbines would incorporate state-of-the-art technologies, never tested before anywhere else, that would affect the cost efficiency of a subsequent, large-scale wind development off the Virginia coast. The most feature important would be a hurricane-resilient design affecting the interaction of rotors and blades in high winds. While wind turbines operate in harsh weather conditions in the North Sea, where winds have been known to reach 90 miles per hour, turbines off the Atlantic Coast would be at risk of exposure to Category 3 hurricanes which generate wind speeds of up to 129 miles per hour. “It’s a very robust design,” said Mark Mitchell, the project construction manager.
The experimental turbines also would incorporate a new Alstom design for the drive train, and a twisted jacket foundation for the turbine. The turbines would be placed in a configuration that would enable Dominion to measure what kind of wind wake one turbine creates for another another — critical for determining layout in a wind field of 300 turbines. Additionally, Dominion would test remote monitoring technologies that would allow for predictive maintenance, such as replacing fatigued parts before they wore out.
Dominion expects to learn much else that would help it advance the 300-turbine project. For example, what are the seabed conditions? “You can’t just run a cable out there,” Mitchell explained. Hampton Roads is a major naval base. Is there unexploded ordinance on the sea floor? How hard is the seabed? What are the sand migration patterns? Ideally, the cable is buried a couple of meters underground. Dominion doesn’t want the sand to drift away and leave it uncovered. In a related matter, Dominion needs to know how deep to drive the steel piles underground to provide the needed stability for the turbine. More steel translates directly into higher costs.
Most of the feedback came from Dominion’s contractors and suppliers who helped put the bid together. Several main themes arose from the conversation.
Supply chain. Building cost-effective wind farms requires a large supply chain of companies providing engineering expertise, components, specialized construction vessels and other critical capabilities. That supply chain does not exist on the East Coast of the United States. In Europe, the offshore wind industry grew out of the North Sea oil & gas industry’s experience in working offshore, said Rudolph A. Hall, managing principle of Keystone Engineering in Louisiana. With many years of experience in offshore wind, the Europeans have developed specialized capabilities that drive down the cost. “It’s much cheaper to build in Europe for that very reason.”
The underground cable would come from Europe. So would the turbine — and so would the ship-crane that would install the massive rotors with a nearly 500-foot diameter. “Literally only five or six ships in the world can do that work,” said Gary Oakley, a senior project manager with engineering firm KPR. “You need a crane 120 meters high” set on a jack-up vessel that can sprout legs down to the seabed. It takes 12 to 14 days to cross the Atlantic Ocean, a couple of days to install the rotor, and more time to head back to Europe — and that doesn’t count down time during bad weather. Ship and crew can cost between $100,000 to $200,000 per day.
Another complication is the Jones Act, which restricts non-American vessels from moving cargo from one port to another within American waters. Work on a wind turbine would count as a “port.” That creates the necessity of devising expensive work-arounds.
Hampton Roads, which has a significant shipbuilding and ship repair industry, potentially could become the center of an East Coast offshore wind industry. But it will take more than a couple of experimental turbines to lure leading European firms to Virginia. The prospect of a large, assured offshore wind market is critical. “Predictability would be the most important thing,” said one Alstom executive. To expedite the process, he added, Dominion executives could start cultivating personal relationships with high-ranking industry players.
It is highly unlikely that such a supply chain could be built in time, however, to bring down the cost of the experimental turbines.
Cost versus innovation. In theory Dominion could shave some costs from the project by foregoing some state-of-the-art technology. “How much do we give up on the innovation?” asked Doswell in a rhetorical question. The company could rely upon computerized models and simulations for the engineering of its 300-turbine wind farm. Then, answering the first question with another: “Do we want to take that risk? This is R&D. You’re not going to get this to a cost-competitive level.”
Cost versus risk. Another way to drive down the cost would be to take on more risk. “Bad weather can cost hundreds of thousands of dollars a day when you’re leasing an expensive ship,” said Mitchell, the contract manager. In ten-day job, how many days of downtime do you factor in? How much uncertainty can you stand?”
Actually, the more relevant question is how much risk can the SCC stand? “We must provide certainty of outcome — cost, service and performance,” said Mitchell. “When [the SCC makes] a decision to go through with a project, we have to deliver on time and at cost.” Credibility with the SCC is not an asset Dominion can squander lightly.
Restructure the contract. Another idea is to restructure the contract to divide it into more discrete components allowing companies performing performing specific tasks to assume the risks associated with those tasks. As Mitchell put it: “The person who can best control the risk should hold the risk.” But even that approach has a potential downside. “As you divide the project, you create seams,” he says. That creates the potential for risks to fall between the cracks.
Doswell made the case that other stakeholders could consider sharing the cost. The Department of Energy contributed $4 million for engineering analysis of the test turbine, and has pledged to cost-share $47 million for more detailed work over three phases. But that’s it. Is it fair, she asked, to insist that Virginia ratepayers to pay for the cost of Research & Development that will widely shared, benefiting the larger wind power industry as well as other states along the Atlantic Coast?
If stakeholders aren’t willing to pony up money, maybe they can contribute their ideas. Dominion is openly soliciting analysis and advice from the project stakeholders. Participants will convene in discrete groups and present their thinking in October. The fate of offshore wind power in Virginia could well depend upon what they come up with.
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