Ocean and Offshore Renewable Energy Policy
Ocean and Offshore Renewable Energy Policy in the United States After the Energy Policy Act of 2005. This document examines the Energy Policy Act of 2005, which was signed into law by President Bush on August 8, 2005. With the enactment of the Ocean Thermal Energy Conversion (OTEC) Act, ocean renewable energy obtained recognition in a federal statute. Among other things, the Energy Policy Act extends certain financial incentives to ocean renewables that are already accorded to other renewables and authorizes the Secretary of Interior to lease the outer continental shelf for alternative energy uses such as ocean, solar and offshore wind.
» Resource: 2005 Energy Policy Act
Written by Carolyn Elefant, of the Law Offices of Carolyn Elefant, Washington, D.C.
On the surface, the provisions in the Energy Policy Act relating to ocean energy seem like a promising step towards advancing the commercialization of ocean energy in the United States. But then again, so did the OTEC Act, which for various reasons, including not-yet-ready for primetime technology, declining oil prices and a new administration that sought to eliminate government sponsored programs, failed to create a successful OTEC program. This article will discuss the provisions of the Energy Policy Act that relate to ocean energy and will identify areas where more work is needed. Finally, the article will conclude with strategies by which the ocean energy industry can ensure steady movement forward in the industry.
II. ENERGY POLICY ACT OF 2005: AN OVERVIEW
A. Energy Policy Act of 2005
The Energy Policy Act of 2005 is a massive piece of legislation, a product of several years effort. The Act was intended to establish a comprehensive national energy policy. To this end, the Act provides incentives for traditional energy production as well as newer more efficient technologies.
B. Provisions of the Energy Bill Relevant to Ocean Energy
The provisions of the energy bill that relate to ocean energy represent a minuscule portion of the 1724 page piece of legislation. And yet, for an industry which previously had been overlooked, the provisions are enormous and represent a promising start to the evolution of an ocean energy industry in the United States. As this section discusses, the legislation (1) provides a variety of financial incentives to the ocean energy industry with the exception of a production tax credit and (2) authorizes the Department of Interior to lease the outer continental shelf for ocean projects.
1. Federal Recognition and Financial Incentives
a. Section 201 – Inventory of Renewable Resources
Section 201 of the Act requires the Secretary of Energy to review existing assessments of renewable resources in the United States, including ocean energy. The Secretary has six months to prepare a report with an inventory describing existing renewables as well as identifying other information in developing those resources such as proximity to load or access to the transmission grid.
b. Sec. 202 – Renewable Energy Production Incentive
The Renewable Energy Production Incentive (REPI) gives a credit to state, municipal and other public power utilities that develop eligible renewable projects. In essence, the REPI replicates the Production Tax Credit (PTC), discussed infra, whereby developers receive a 1.9 cents/kwh tax credit for each kilowatt hour generated by ta qualifying renewable project. Because public power entities do not pay taxes, the REPI provides a payment to them from the federal government in lieu of a tax credit.
For the first time, ocean energy was included in the Tier I section of the REPI provisions, along with solar, wind, geothermal, and biomass. Tier I mandates that 60% of the funds in the REPI program be used to pay utilities for renewable projects. It is expected that roughly $3 million in funding will be available for Tier I REPI funding for FY06. This means that publicly-and cooperatively owned electric utilities can apply to the Department of Energy (DOE) for direct payments at the rate of 1.5 cent per kWh (adjusted for inflation) for electricity generated from ocean energy projects.
c. Sec. 203 – Federal Purchase Requirement
The Energy Policy Act mandates that the Federal government supply at least 7.5 percent of its energy needs through renewable energy purchases by 2013. Beginning in 2007, the federal government must purchase at least 3 percent of its power from qualifying renewable sources which will ramp up gradually to the 7.5 percent goal. Ocean energy is categorized as a qualifying renewable source which the federal government can use to meet the mandatory purchase requirements.
d. Section 209 – Rural and Remote Community Electrification Grants
Section 209 of the Act authorizes local governments to apply for grants to use renewable energy sources, including wave power to increase energy efficiency. The grants are authorized to be appropriated based at $20,000,000 for each fiscal year 2006-2012. This program will be administered by the Department of Agriculture’s Rural Utilities Service. It is expected that during the corrections process for the bill that ‘wave power’ will be broadened to include other sources of ocean renewables such as tidal or current power.
e. Insular Areas Energy Security
The Act directs the Secretary of Energy to identify and evaluate strategies or projects with the greatest potential for reducing the dependence on imported fossil fuels, including the increased use of renewable energy, including wave energy, but not any other ocean energy source. In assessing the potential of the projects, the Secretary will evaluate the estimated cost, manageability and any other factors deemed appropriate. The Secretary will give priority for grants to projects which will have the greatest impact on reducing future disaster losses and seem to be the best fit the region where it will be carried out. The grants are authorized to be appropriated at $6,000,000 for each fiscal year beginning 2006. This program will be administered by the Department of the Interior.
f. Technology Demonstration Projects
This section directs DOE, the State Department and the U.S. Agency for International Development to promote the adoption of technologies and practices that reduce greenhouse gas intensity in developing countries. It authorizes these agencies to plan, coordinate and carry out or provide assistance for the planning, coordination, or carrying out of, at lease 10 demonstration projects in eligible countries, as determined by the Secretaries and the Administrator. Demonstration projects may include renewable projects.
g. Section 931 – Renewable Energy Demonstration Grants
Under Section 931 of the Act, programs based on renewable energy research, development, demonstration and commercial application will be conducted under the leadership of the Secretary of Energy. These programs will be based on increasing the conversion efficiency of all forms of renewable energy, decreasing the cost of renewable energy generation, promoting the diversity of the energy supply, decreasing the dependence of the United States on foreign energy supplies, improving energy security and decreasing the environmental impact of energy-related activities. Ocean energy is listed under miscellaneous projects. All renewable energy research, development, demonstration and commercial application projects are authorized to be funded at $632 million in FY07, $734 million in FY08 and $852 million in FY09.
h. Sec. 1703 – Eligible Projects
This section defines eligible projects as renewable energy systems that employ new or significantly improved technologies as compared to commercial technologies in service at the time. Thus, ocean energy is eligible to receive loan guarantees established in Section 1702. Section authorizes the appropriation of funds necessary to provide loan guarantees for innovative technologies, subject to Congressional appropriations.
i. Sec. 1835 Renewable Energy on Federal Land
Three months after the passage of the Energy Act, the Secretary of the Interior shall enter into a contract with the National Academy of Sciences under which the National Academy of Sciences will study the potential of developing wind, solar and ocean energy resources on Federal land available. This study must be completed within two years of the completion of this act.
j. Ocean Energy Not Eligible for the Production Tax Credit (PTC)
Section 1301 of the Energy Policy Act extends the currently 1.9 cents/kwh PTC through the end of 2007 for qualifying renewables. Although ocean energy was included in the PTC provisions of the Senate version of the Energy Bill, it was omitted from eligibility in the final version of the conference bill signed into law. Because the PTC benefits operating projects that generate electricity, ocean developers likely would not have been able to avail themselves of the credit over the next two years since the first ocean projects in the nation will just be coming on line at that time.
k. Summary of Financial Benefits for Ocean
As described above, the Energy Policy Act creates many funding possibilities for ocean energy projects, through the REPI, loan guarantees, R&D and demonstration project development and programs for rural and remote areas and insular security. But appropriations for ocean are far from guaranteed; while ocean is eligible for funding (which is a substantial change from past years when it did not qualify at all), it must also compete with other renewables for a share of the pie. Thus, the ocean industry cannot rest on its laurels but must continue to track these provisions as they are implemented by the appropriate agencies.
In addition, as just discussed, ocean energy did not qualify for the PTC in the Energy Policy Act. This represents a loss not because ocean developers could have actually used the PTC (in the short term, they probably cannot), but rather, because the availability of a PTC makes projects more appealing to private investors. Thus, ocean developers have another task on their plate, i.e., to continue to fight for the PTC.
This challenge may be increasingly difficult in future years as more mature renewables like wind and solar wean themselves off a need for the PTC. It may be that in future years that ocean and offshore wind, as well as other emerging renewables will be left to fight for the PTC on their own, which could make the fight more difficult.
2. Provisions Relating to Alternative Energy on the Outer Continental Shelf
Section 388 of the Act authorizes the Secretary of Interior to grant leases on the Outer Continental Shelf (OCS) for development of alternative energy sources such as offshore wind and wave. Prior to the Energy Policy Act, the Secretary only had authority to lease the OCS for oil, gas and mineral development. Thus, the Energy Policy Act fills a gap in the Secretary’s authority and eliminates the uncertainty that has plagued projects like Cape Wind as to whether they can acquire sufficient property interests to be developed.
The Act does not give many specifics on the criteria that the Secretary must apply in issuing a lease for an offshore wind or ocean energy project. The Act states provides that a competitive process will apply for issuance of leases and that lessees will pay royalties for use of OCS lands. The Act also directs the Secretary of Interior to engage in inter agency mapping of the OCS to assist in decision making about siting of activities.
The OCS leasing provisions have been the ‘sleeper’ of the energy bill in that they have not attracted much attention of the ocean energy industry. Yet the way in which these provisions are implemented will directly impact the way in which ocean projects are developed in this country. For example, a lengthy or costly process for obtaining rights to use the OCS will slow the development of ocean energy projects, as will substantial royalty payments. DOI should be encouraged to grant waivers to ocean developers in need of an OCS lease. In addition, if not properly implemented, developers with no funding or research background can attempt to scoop up sites, sit on them and then sell them later on. Ocean and offshore wind developers must ensure that they are part of the DOI’s rule making process for leasing of the OCS.
III. WORK LEFT TO BE DONE
The Energy Policy Act provides a good start for the emergence of ocean energy development in this country, but much work remains. As discussed earlier, while the Act makes the possibility of various financial incentives available, the agencies implementing these programs retain discretion over allocation of funds and there is no guarantee how much, if any money will be directed for ocean projects. In addition, the ocean energy industry still does not qualify for the PTC; this benefit will become increasingly important as projects near the commercial stage.
The provisions relating to leasing of the OCS is another unknown in the Energy Policy Act. Depending upon how the Department of Interior carries out its authority over alternative energy use on the Outer Continental Shelf, ocean energy developers may find themselves subject to additional regulatory onerous regulatory requirements.
In addition, the Energy Act does not remove other hurdles that have plagued ocean energy development, such as overly rigorous permitting regimes which force developers to spend more money on placating project opponents than developing technology. Implementing a system of waivers or exemptions for new ocean technologies would speed commercialization by allowing developers to construct and test projects more expeditiously. Without actual demonstration projects, private investors will lose interest in ocean energy.
In the wake of the Energy Policy Act of 2005, exciting opportunities exist for ocean developers. Whether developers will have the ability to keep moving forward to capitalize on these new opportunities or whether the industry will endure a repeat of the OTEC disappointment remains to be seen but ultimately, lies in the hands of the ocean energy industry.
Written by Carolyn Elefant, of the Law Offices of Carolyn Elefant, Washington, D.C.