Ocean Energy: Whose approval is needed?

Ocean Energy: Whose Approval is Needed?

August 01, 2005

By Roy Belden, Robin Schafer and Tracy Horton

Energy projects in the oceans off the coast of the United States raise interesting questions about whose permission one needs to build. It can also be challenging to work through US environmental laws and figure out how they apply to such projects.

In general, US territorial waters extend 200 miles offshore. The same federal laws that apply to projects on land usually apply to projects in US waters. Except in the Gulf of Mexico, states claim jurisdiction up to three miles offshore.

Investor interest in ocean energy projects is increasing. The industry held its second annual conference in the US last spring in Washington. Of the various types of projects, offshore wind farms are the most advanced. Various developers are moving to build prototype facilities to harness the tides, waves, currents or the heat in ocean waters. Most of the developers of these projects are still at the venture capital stage.

There is no one government agency in the United States with jurisdiction over all or even most of the permits that a developer needs to do a project. Ocean waters within 200 miles offshore and major rivers, lakes, and other bodies of water in the United States are considered public resources that are overseen by the federal government or the applicable state government as stewards for the general public. Numerous federal, state and local agencies can have jurisdiction over permitting for different aspects of a single project.

Types of Projects

The US has lagged behind other countries in turning to the oceans for energy. There are five main types of technologies: tidal, wave, subsurface current, ocean thermal energy conversion and offshore wind turbines. Operating projects using most of the technologies can be found in other countries.

US developers are moving to catch up. Ocean energy projects under development in the United States include two significant offshore wind farms along the east coast, a demonstration wave energy project in Hawaii, a prototype tidal current project in New York, and a prototype subsurface current project off Florida.

Tidal power: To harness tidal power, a dam is typically built across a river estuary or tidal basin. The tide flows through tunnels or channels in the dam, and the water is captured so that traditional hydropower technologies can be used to turn a turbine as the water level drops. The ebb and flow of the tides can also be used to push air through a pipe, which then turns a turbine. Large lock gates, like the ones used on canals, allow ships to pass. A major drawback of tidal power stations is that they can only generate when the tide is flowing in or out, which is usually only for about 10 hours each day. A large increase between high and low tides is also generally required. Nevertheless, tides are predictable; thus, utilities can plan to have other power stations generating at those times when the tidal station is unavailable.

Changing tidal flows by damming a bay or estuary could do harm to aquatic and shoreline ecosystems, as well as restricting navigation and recreation due to reduced tidal flow and silt buildup. There are three operating tidal plants. The La Rance plant in France installed in 1966 generates approximately 240 megawatts of power from 24 turbines. A 20-megawatt tidal power plant installed in 1984 is situated in the Bay of Fundy off the shore of Nova Scotia, and a small 0.5-megawatt tidal energy plant is located on the White Sea in Russia.

Wave energy: Wave energy can be used to generate electricity using various technologies that are still in the development stage. The Electric Power Research Institute, or EPRI, reported on an “offshore water power feasibility demonstration project” on January 14 this year. The report identifies eight wave energy conversion devices that will probably be ready for demonstration projects in the next few years. The devices include a floating cylinder system using hydraulic power conversion modules, an oscillating water column where air flows generated by the waves drive a turbine, a swinging pendulum system, and a floating buoy system. The energy in waves comes from the movement of the ocean and the changing height and speed of the swells. Though the kinetic energy in waves varies in intensity, it is available 24 hours a day and 365 days a year. Wave energy typically works best in ocean depths of at least 50 meters before waves lose energy to the friction of a shallow sea bottom. A prototype 50-kilowatt floating buoy system was recently tested off the shores of Hawaii.

Wave devices raise potential environmental issues, including possibly effecting a change in the flow patterns of sediment and serving as artificial habitats for aquatic organisms. Many of the wave energy systems must be anchored to the sea bed, and undersea cables are needed to bring power to the mainland.

Subsurface current energy: Areas that typically experience high marine current flows are in narrow straits, between islands and around headlands, and energy can be generated by using submerged turbines comprised of rotor blades and a generator. Verdant Power is developing a 10-megawatt tidal current project that will be located in the East River off Roosevelt Island in New York City. The project will consist of approximately 494 underwater free-flow hydro turbine-generating units that will be deployed below the water surface. The tidal current would turn rotor blades that are similar to a wind turbine blade and a generator in each unit would produce electricity. Earlier this year, Verdant Power received approval from the Federal Energy Regulatory Commission to install a temporary demonstration project of six units to test the technology and determine the feasibility of going forward with the large scale project.

Underwater current projects may affect aquatic organisms and ecosystems within the project footprint, and because the rotor blades would be about eight feet under the surface, navigation and recreational activities in the area would generally be prohibited.

Ocean thermal energy conversion: OTEC taps the difference in temperatures between different layers of water to produce steam to drive a turbine that produces electricity. OTEC plants can be land-based, near shore or floating. Floating plants have the advantage that the cold water pipe is shorter, reaching directly down to the cold water, but the electricity generated must be brought to shore using an undersea cable, and moorings for the OTEC plant are likely to be in water depths of approximately 2,000 meters.

Land-based OTEC plants have the advantage of not needing a power transmission cable to shore, and there are no mooring costs. However, the cold water pipeline must cross the surf zone and then follow the seabed until the depth reaches approximately 1,000 meters. The use of a much longer cold water pipe generally has greater friction losses, and the cold water may warm up before it reaches the heat exchanger, which makes such plants less efficient. No large-scale OTEC projects have been built to date, but the US Department of Energy funded small-scale OTEC demonstration projects in waters near Hawaii in the late 1970s and early 1980s.

Offshore wind energy: Offshore wind technology is the most advanced of the ocean energy technologies. According to the British Wind Energy Association, wind turbines with a capacity of 587 megawatts have been installed off the coasts of Denmark, Holland, Ireland, Sweden and the United Kingdom, and several large-scale offshore wind projects are under development in Europe and the United States. To date, the largest offshore projects are the 158-megawatt offshore wind farm in Nysted, Denmark, and the 160 megawatt offshore wind farm in Horns Rev, Denmark.

Offshore wind turbines are similar to onshore wind turbines with a few design modifications, including strengthening the tower to handle wave action and protecting the nacelle components from sea air. Most offshore wind turbines are anchored to the seabed using steel monopoles or concrete gravity foundations. There are two large offshore wind farms under development in the United States: the 420-megawatt Cape Wind project off Nantucket Sound and a 140-megawatt project proposed by the Long Island Power Authority off the south shore of Long Island.

Because offshore wind turbines are anchored to the seabed, potential environmental impacts include possible effects on marine mammals, marine birds, fish and shellfish. Potential visual impacts may also need to be evaluated.

Right to Use Seabed

In the United States, there is no one federal law that encompasses all types of ocean energy projects. Every ocean energy project is different and the necessary permits and approvals depend on the location, size, and potential environmental impacts of the project.

Key considerations in developing an ocean energy project are the following: what real property interests, such as a lease, easement, right of way or license, are required to install structures or cables in the seabed or in coastal waters, what environmental impact reviews are necessary, and what federal, state and local permits or other approvals are needed. Another consideration is whether there are streamlined procedures available for testing prototype ocean energy technology before entering into a full-scale development.

Regulation of property rights differs by jurisdiction. Under the Submerged Lands Act, states have jurisdiction over submerged lands for up to three nautical miles offshore, except for Florida and Texas, which have jurisdiction beyond three miles into the Gulf of Mexico. State jurisdiction makes it likely that a lease, easement, right of way or license from a state agency will be required for any ocean energy project within three miles from the shore. For example, in New York, the New York Office of General Services is charged with issuing easements for the use of submerged state lands. In New Jersey, the Tidelands Resource Council in the Department of Environmental Protection is authorized to approve grants, leases, licenses and easements for lands that are now or formerly under tidal water. In Washington state, the Department of Natural Resources will issue an aquatic lands lease. Other states have created similar programs to grant property rights in submerged lands.

Some states are taking a more active role in reviewing offshore energy projects. In March 2005, Massachusetts Governor Mitt Romney asked the state legislature to consider legislation that would prohibit certain ocean projects unless they conform to an “ocean use management plan” to be developed by the Massachusetts secretary of environmental affairs. In developing the plan, the secretary must take into account the “existing natural, social, and economic” characteristics of the ocean planning area. New Jersey imposed a 15-month moratorium on offshore wind farms last December by executive order of the governor while a state panel studies the issue more thoroughly. The order stops projects from obtaining permits or financing from the state during the moratorium.

The federal government has jurisdiction over the outer continental shelf beyond three nautical miles. Before the US enacted a new energy bill in August, there was no clear federal statutory regime for the use of submerged lands for ocean energy projects, other than the authority for the Minerals Management Service in the US Department of Interior to issue leases for oil and gas projects. A US appeals court in New England held earlier this year that one temporary offshore wind data tower placed on the outer continental shelf was not an infringement on federal property rights in the submerged lands, but the question of a larger-scale project was not before the court.

The new energy bill authorizes the US Interior Department to grant leases, easements and rights-of-way for activities that produce or support production, transportation or transmission of energy from sources other than oil and gas. The department can now grant formal property rights to develop ocean energy projects on the outer continental shelf in exchange for a fee, and 27% of the revenue received from a lease, easement or right-of-way will be paid to the state where the project is wholly or partly located within the three-mile state jurisdictional limit. The leases, easements and rights-of-way will be awarded on a competitive basis unless the Interior Department determines that there is no competitive interest. This new statutory program is not exactly a “one-stop” permitting regime for ocean energy projects. The effect is actually to add another federal government approval that must be obtained before developing a project in federal waters. The Department of Interior is directed to issue final regulations implementing the new submerged lands property rights program by late April or early May 2006.

Most projects need transmission lines and cables to move the electricity generated to shore. These require additional permits. For example, the undersea cable may make landfall on state lands, necessitating a separate lease or easement from the applicable state.

Myriad Other Federal Permits

Other federal, state and local permits will also be required.

The Federal Energy Regulatory Commission has jurisdiction over wave, tidal and current projects under the Federal Power Act. The Federal Power Act covers projects that use water to generate electricity. In a 2003 decision in a case called AquaEnergy, FERC decided that offshore ocean energy projects may require federal licenses. The AquaEnergy project involves the installation of a one-megawatt floating wave buoy project in Makah Bay about 1.9 nautical miles off the coast of Washington. AquaEnergy argued that the project did not need a federal license because it is located in water over which the state of Washington has jurisdiction, it is not in a navigable water of the United States, and it is not a hydroelectric project since it does not use surplus water or water from a federal dam.

FERC disagreed. It said that the area within 12 miles offshore is within “navigable waters” as defined by the Federal Power Act and that floating wave buoys are “power houses” under the Federal Power Act because buoys are structures containing equipment for the generation of electric power. The agency concluded that the project had to be licensed as a hydroelectric project.

FERC does not have jurisdiction over OTEC (ocean thermal energy conversion) projects, which are subject to a separate statutory scheme. Nor does FERC have jurisdiction over offshore wind turbines, since they do not involve the use of water to generate electricity.

The Federal Power Act requires FERC to give equal consideration to environmental and energy concerns when it considers whether to grant a license. Section 10 of the Federal Power Act requires that the proposed project must be best adapted to a comprehensive plan for improving or developing a waterway or waterways for the use or benefit of interstate or foreign commerce, for the improvement and utilization of water-power development, for the adequate protection, mitigation, and enhancement of fish and wildlife (including related spawning grounds and habitat), and for other beneficial public uses.

FERC is also required by the National Environmental Policy Act to evaluate the environmental effects of a proposed project before issuing a license. The NEPA review process can be very involved and time consuming. FERC must solicit suggestions from various federal, state and local agencies for how to protect, mitigate and enhance the environment. For example, it will look to the US Fish and Wildlife Service, the National Marine Fisheries Service and state fish and wildlife agencies for suggestions about how to protect aquatic life that might be disturbed by a project.

The Federal Power Act “preempts,” or rules out, any separate review by a state or local siting board. Projects in US navigable waters normally require a “section 10 permit” from the US Army Corps of Engineers. However, projects that come under FERC jurisdiction do not need a separate section 10 permit. The US Army Corps will provide FERC with recommended conditions to be incorporated into the FERC license to address the requirements of the Rivers and Harbors Act of 1899.

Other federal, state, and local permitting requirements are not preempted by a FERC licensing procedure. For example, a “section 404 permit” authorizing the discharge of dredge and fill material into a water of the United States must be obtained from the US Army Corps.

In April 2005, FERC addressed whether an ocean energy demonstration project requires a FERC license. It does not, provided certain conditions are met. The case involved Verdant Power. FERC said that small experimental testing projects do not require a FERC license provided that the test project is installed for a fixed period and that no power generated by the prototype is supplied to, or displaces power from, the grid.

FERC recently clarified that no license is required if there will be no net economic effect from displacing power on the grid. Verdant Power will need to hook its six underwater turbines up to the grid in order to test them. In a clarifying order, FERC acknowledged Verdant Power’s need to supply test power to the grid and agreed that as long as there is no net economic effect from supplying power to the grid, then the experimental project remains exempt from the licensing requirements. Verdant Power committed to providing the power to end users at no charge and agreed to compensate the local utilities for the costs of the power that would have otherwise been supplied to ratepayers but for the power generated by the experimental units. The Verdant Power decision provides some much-needed relief for the permitting of small prototype ocean energy projects because obtaining a FERC license can be a lengthy process. Nevertheless, other federal, state and local permits may be required even for a small-scale demonstration project.

The National Oceanic and Atmospheric Administration, or NOAA, has jurisdiction over ocean thermal projects under the Ocean Thermal Energy Conversion Act. The OTEC Act was enacted in 1980 to establish a comprehensive licensing scheme for OTEC plants. After preparing some initial environmental studies and developing regulations to implement the licensing program, NOAA has not received a single license application for an OTEC project.

NOAA removed the OTEC licensing regulations from the code of federal regulations in 1996. At the time, NOAA said that once interest in OTEC projects more fully develops, it will reevaluate whether the withdrawn regulations are still appropriate or require further updating. Under the OTEC Act, a NOAA-issued license was intended to be largely a one-stop permit. However, the OTEC Act does not preempt the need for a “section 10 permit” from the US Army Corps.

Offshore wind projects need a section 10 permit under the Rivers and Harbors Act of 1899 for installations in a navigable water of the United States. The US Army Corps of Engineers has jurisdiction over artificial islands, installations and other devices located on the outer continental shelf.

The authority of the US Army Corps to issue a “section 10 permit” for a data tower installation on the outer continental shelf was challenged in a case called Alliance to Protect Nantucket Sound, Inc. v. US Department of the Army in early 2005. A citizens group argued that the US Army Corps should not have issued a permit for an approximately 170-foot wind data collection tower to be built off Massachusetts because the Corps had authority only to issue permits for activities associated with minerals extraction. A US appeals court disagreed. However, the decision makes clear that offshore wind farms will require section 10 permits to start construction. Both the Cape Wind project and the Long Island offshore wind park are in the process of obtaining section 10 permits.

A section 10 permit may also be required for installation of an undersea cable to carry electricity back to shore. Also, because laying cable will require dredging, projects may also have to get “section 404 permits” to authorize the discharge of dredge or fill material into a water of the United States. The US Army Corps is responsible for issuing section 404 dredge and fill permits.

All ocean energy projects require approval for navigation markers from the US Coast Guard. In addition, the Endangered Species Act requires a “section 7 consultation” with the Department of Interior before a project is built if the project might affect an endangered or threatened species. To the extent that incidental fatalities of an endangered or threatened species are anticipated, then the project will also need an “incidental take” permit from the US Fish and Wildlife Service. An application for an incidental take permit must include a conservation plan that explains what impact the project is likely to have on endangered species and what steps will taken to minimize harm to such species.

The Fish and Wildlife Coordination Act also requires consultation with federal and state agencies with jurisdiction over fish and wildlife for any project that affects a body of water. The Marine Mammals Protection Act may be triggered if marine mammals will be potentially “harassed” as a result of the project. The National Historic Preservation Act may also come into play if historic sites are affected. For example, undersea cable projects typically require an archeological survey to identify potential shipwreck locations along the cable route.

State and Local Approvals

It goes without saying that the state and local permitting requirements vary considerably from state to state. In general, there are four categories of permits: state siting board approvals, waterfront development and coastal wetland approvals, state consistency determinations with federal programs, and local zoning board approvals and building permits.

Several states have energy generation siting boards, and a “certificate of public necessity and convenience” (sometimes called a “certificate of environmental compatibility and public need”) may be required. Small ocean energy projects would typically fall under the size cutoff for most state siting board approvals. However, a few states even regulate small projects. For example, renewable energy projects over one megawatt in Connecticut must be approved by the state siting council. In contrast, the Massachusetts Energy Facilities Siting Board regulations apply to power projects of 100 megawatts or more, and the California Energy Commission has exclusive jurisdiction to certify sites and related facilities for power plants in California that generate 50 megawatts or more of electricity.

While the power generation components of an ocean energy project may be exempted from a siting board process, the undersea cables or overland transmission lines that connect the project to the grid usually must be approved by a state siting board or public utilities commission.

Ocean energy projects may also need permits under state specific waterfront development acts. For example, projects affecting coastal waters require a waterfront development permit in New Jersey and a “chapter 91” permit in Massachusetts. There may also be restrictions on ocean energy projects under state wetlands laws. The Massachusetts Coastal Wetlands Restriction Act restricts development in selected wetlands in more than 50 communities.

If an ocean energy project will require a section 404 permit from the US Army Corps, then the state agency with jurisdiction over discharges into water bodies will also have to issue a “water quality certificate” under section 401 of the federal Clean Water Act. Under section 401, the state certifies that the discharge will meet applicable state surface water quality standards. Most ocean energy projects also will need a “coastal zone consistency determination” from the applicable state coastal zone agency. The Coastal Zone Management Act gives the US secretary of Commerce authority potentially to overrule any state determination that a project is inconsistent with requirements of the Act. State endangered species acts and state historical and archeological preservation programs may also impose permitting or consultation requirements on ocean energy projects.

Regional and local land use agencies may require zoning approvals, special use permits or building permits for onshore transmission interconnections and substations. Other local agencies have exercised jurisdiction over projects due to potential impacts on waters or coastal areas. For example, the New York City Environmental Protection Agency is involved in evaluating the potential impacts of the Verdant Power subsurface current project in the East River. Where an undersea cable or transmission line will be installed, state or local approval may also be needed for disposing of dredging spoils.

Environmental Impact Statements

All ocean energy projects will require some type of environmental impact review.

The National Environmental Policy Act requires an environmental assessment or environmental impact statement be done before the federal government will issue permits or provide federal funding for a project. NEPA applies to “major” federal actions. The term covers all projects that receive federal funding or require a federal permit or license to be built. For ocean energy projects, a NEPA review will usually be triggered by the need to obtain a permit from a federal agency such as the US Army Corps of Engineers, the Department of Interior or the Federal Energy Regulatory Commission.

The threshold issue under NEPA is whether to prepare an “environmental assessment” and issue a “finding of no significant impact” or to prepare an in-depth “environmental impact statement.” The level of review depends on the likelihood of a significant impact on the environment. For large-scale projects, the lead agency will typically go straight to a full-blown environmental impact statement.

A total of 17 states have state environmental policy acts or so-called Little NEPAs that are triggered if there is a similar state “major action.” For example, California, Massachusetts and New York have state environmental policy acts that implement similar NEPA-type requirements.

An environmental assessment or environmental impact statement can be time-consuming and costly to prepare. Some of the issues addressed include air quality, water quality, visual impacts, noise impacts, navigation, sediment deposition, archeological and cultural resources, and potential impacts on marine mammals, birds, shellfish, fish habitats and commercial and recreational fish populations. Other issues that may also have to be addressed include dredging impacts, utility line crossing agreements, local economic impacts, and recreational impacts.

NEPA requires the lead agency to take a “hard look” at the potential environmental consequences and, if there are significant impacts, evaluate what can be done about them, including potential mitigation measures. A full-blown environmental impact statement takes at least a year to complete. Courts do only a limited review of any conclusions that the lead agency reaches after looking over the environmental impact statement. The agency can be overruled only if its conclusions were “arbitrary and capricious, an abuse of discretion or contrary to law.”

The NEPA and state environmental impact review proceedings and numerous federal, state and local permits and approvals have public review periods. There is often a 30- to 60-day public comment period for most permits and approvals. In some situations, affected community groups may petition for party status before FERC or a state siting board.

Project developers do best to develop a proactive strategy for handling permitting issues and anticipating areas of concern that may be raised by regulators or the local community.

One approach is actively to engage the local legislators and regulators, and schedule pre-application meetings to identify potential areas of concern. Public open houses may be used to educate the local community. The project should also keep in mind that potential project changes or mitigating measures may be necessary to secure local support.

Renewable Portfolio Standards

An increasingly important consideration in financing ocean energy projects is eligibility for renewable energy certificates, or “RECs.” There are basically two types of RECs: compliance RECs that are bought and sold to satisfy a particular state renewable portfolio standard or voluntary RECs in states where there is no RPS. So far 20 states and the District of Columbia have adopted mandatory RPS requirements and more are expected to follow. While each state RPS is unique, all require that utilities and other retail electricity suppliers in the state increase the electricity that they sell from renewable fuels over time. For example, Connecticut requires that by 2005, in-state utilities must generate 4.5% of electricity from renewable energy, by 2007, 6.5%, and by 2010, 10%.

Most coastal state RPS measures identify certain ocean energy projects as renewable energy. For example, California, Connecticut, Massachusetts, New York, Rhode Island and Texas generally list wave, tidal and ocean thermal as qualifying renewable energy.

While REC markets are still in a formative stage, prices for compliance RECs in certain states have recently traded at very favorable prices. For example, vintage 2005 Massachusetts RECs reached $51 in April, and Connecticut RECs were trading at $33 in May. One REC corresponds to one megawatt hour of electricity produced from a renewable energy source.

Energy Bill

The energy bill that President Bush signed on August 8 provides some important incentives for ocean energy projects.

It makes ocean energy projects (including tidal, wave, current, and thermal) eligible for renewable energy production incentive, or REPI, payments from the US Department of Energy. The projects would be “tier 1 technologies.” The tier 1 program directs the department to use 60% of the money it has available for REPI payments for payments to utilities. Utilities can apply for direct payments of about 1.5¢ a kWh.

The bill also creates a mandatory federal purchase requirement of not less than 3% of the electricity the government uses from renewable sources during 2007 to 2009. The percentage increases to not less than 5% between 2010 to 2012 and not less than 7.5% from 2013 and thereafter. Tidal, wave, current and ocean thermal technologies qualify as renewables for this purpose.

Finally, the bill authorizes federal grants to help fund research, development, demonstration and commercial application projects for various renewable energy technologies. Ocean energy projects qualify potentially for these grants. The bill also authorizes federal loan guarantees for up to 80% of project costs for renewable energy projects, including ocean energy. A project must use new or significantly improved technologies that are not yet in commercial service to qualify.