Republicans press administration to defend economics of offshore wind

Two Republican senators are pressing the Obama administration to explain the math behind a decision to allow an offshore wind facility in leased waters off Delaware’s coast while blocking oil drilling in the same region.

Sens. David Vitter, R-La., and Lamar Alexander, R-Tenn., made their skepticism known in a letter to Interior Secretary Ken Salazar that questions “the underlying economics of this lease sale” and seeks info on “the value of a similar lease sale for oil and gas on equivalent acreage.”

In October, NRG Bluewater Wind won a federal lease and the exclusive right to place an offshore wind farm in nearly 100,000 acres about 11 miles from the Delaware coast, but the project is on hold amid financing concerns and other issues. NRG Bluewater Wind scrapped its power purchase agreement between with Delmarva Power & Light Co. last December, after it failed to secure financing for the project.

Obama’s Interior Department has ruled out oil and gas drilling along the Atlantic Coast until mid 2017 at the earliest, as part of a five-year plan for selling offshore leases nationwide. However, the Bureau of Ocean Energy Management is preparing to permit seismic research that could help identify possible hidden pockets of oil and gas along the East Coast.

Vitter said that the decision to permit an offshore wind farm — while still ruling out oil and gas development in the area — is evidence that the Obama administration is “picking energy industry winners and losers.”

“Sec. Salazar should at least be able to defend the economics of the lease sale for wind energy,” Vitter said in a statement. “For example, the federal government receives significant revenue from royalties for offshore oil and gas production in the form of rents, royalties, bonus bids and taxes. Can the same be said for this offshore wind project?”

Vitter and Alexander pressed Salazar to detail the anticipated revenue to be raised from the NRG Bluewater Wind project over the next decade and the effective royalty rate for the project. Oil and gas companies generally pay a royalty rate of 12.5 percent to 18.75 percent on energy extracted from federal offshore leases.

Interior Department spokesman Blake Androff noted that “the administration is pursuing an aggressive all-of-the-above energy strategy” that “includes not only investing in advanced technologies and renewable energy production, but also safe and responsible production of domestic oil and gas.”

The ocean energy bureau is set to sell drilling leases in the western Gulf of Mexico on Nov. 28.

A copy of the senators' letter is below.

November 9, 2012

The Honorable Ken Salazar
Secretary
U.S. Department of Interior
1849 C Street NW
Washington, DC 20240

Dear Secretary Salazar:

We write in interest of your press release dated Tuesday, October 23, 2012, titled “Interior Announces Commercial Lease for Renewable Energy Offshore Delaware, First Lease under Administration’s ‘Smart from the Start’ Offshore Wind Strategy Part of Effort to Expand American Made Energy.” A strong mix of different types of energy in our energy portfolio is necessary, but under this Administration, we’ve seen policies that pick and choose preferred energy technologies such as wind energy and implement policies that favor a chosen technology without any evident regard to economic impacts. This situation seems further apparent with the October 23, 2012 announcement of exclusive commercial leases in the Atlantic Outer Continental Shelf (OCS) for wind energy development with no competitive bidding process.

We favor development of energy in the Atlantic OCS, including renewable and oil and natural gas development. Unfortunately, the same cannot be said for the Department of Interior. We note that there has not been a single competitively bid lease for any energy in the Atlantic OCS under your leadership, and further, your department continues to ignore strong bipartisan support for developing all of our nation’s energy resources on the OCS.

In fact, lifting of the moratorium on leasing in the Atlantic OCS was a result of decisions made by the President and the U.S. Congress, then controlled by a Democrat majority in 2008. In 2009, the Department of Interior rejected a lease plan that would have provided for oil and natural gas leasing offshore Virginia. As well, you have elected to block oil and gas leasing off the vast majority of the OCS for at least the next five years, effectively negating the bipartisan decision.

Given the current Administration’s propensity to choose energy winners and losers -- a policy we would note that is failing in multiple countries in Europe -- we request your help in better understanding the economics of the lease sale for wind energy you have approved. Specifically, we would appreciate answers to the following:

1. The Federal Government derives significant revenue from royalties for offshore oil and gas production, on top of substantial up-front competitive bids for the rights to explore and produce energy (these bids alone totaled nearly $10 billion in FY 2008). The current royalty rate companies must pay is between 12.5 percent and 18.75 percent. This, when combined with bonus bids, constitutes a substantial tax right on all energy produced by an oil and gas company working on federal offshore or onshore resources. What is the effective royalty rate Interior has contracted with NRG Bluewater Wind Delaware LLC for this lease for the energy it produces? What is the anticipated revenue to be raised from this development over the next 10 years?

2. If NRG Bluewater Wind Delaware LLC received the wind energy production tax credit (currently a 2.2 cents per kilowatt hour payment regardless of demand at the time of production) does the contract stipulate that the royalty rate be adjusted to ensure there won’t be a net payout of federal tax dollars to NRG Bluewater Wind Delaware LLC? In other words, will this company get paid by the federal government to produce wind energy so they can in turn pay any royalty they might owe to the federal government? Will the total value of any production or other renewable tax credits exceed the price paid for the lease?

3. In Interior’s November 23, 2010, press release for the “Smart from the Start” initiative, it was indicated that “a revision to its regulations that will simplify the leasing process for offshore wind in situations where there is only one qualified and interested developer” was in our national interest. Given that there was no competitive bidding for this lease, what was the actual bid for this lease, and how does that compare to the average bonus bid that was paid in the last OCS lease sale for an oil and gas lease on equivalent acreage?

4. Who are the intended customers for the electricity to be sold by NRG Bluewater Wind Delaware LLC, and what rate have they indicated they will be able to charge utilities for bringing electricity on to the grid? After all, according to the Energy Information Administration , offshore wind generation is estimated to be over three times as expensive to build and operate as onshore wind generation.

5. What utility companies have indicated they are interested in purchasing electricity from NRG Bluewater Wind Delaware LLC, and what states are within the potential service area where consumers will be paying the additional costs of this electricity?

6. What has been the environmental review process in awarding NRG Bluewater Wind Delaware LLC this lease? Did this process take into consideration threats posed by the development to avian species that could be impacted by wind turbines?

In the context of job creation and strengthening our economy, it would be helpful to understand the underlying economics of this lease sale, and in turn be able to compare it to the value of a similar lease for oil and gas on equivalent acreage, including revenue stream comparisons. Particularly, in light of the multiple failures from the Stimulus (Solyndra, Evergreen Solar, First Solar, Mountain Plaza Inc., Fisker, etc.) and the current criminal investigation of Abound Solar, it would be useful to know what kind of return on investment the Department of Interior expects from this venture, as well as the anticipated price impact for electricity relative to current rates.

We look forward to your prompt response.

Sincerely,

_________________ _________________
David Vitter Lamar Alexander
United States Senate United States Senate

Obama's Interior Department has laid out a five-year plan for selling oil and gas leases