US Offshore Wind Lease Issues
Offshore wind developers bidding in federal auctions of sites off the US coast commit to a time-consuming and expensive process.
The Biden administration set a goal last year of deploying 30,000 megawatts of offshore wind capacity by 2030.
Two major offshore auctions have already taken place in 2022, with a third expected in the fourth quarter. The US government leased nearly half a million acres of the Atlantic outer continental shelf in the New York Bight auction in February 2022. Fourteen bidders competed to develop six areas in the New York Bight between New Jersey and Long Island. The auction collected $4.37 billion for 5,600 megawatts of potential new offshore wind development. The government awarded another 110,000 acres for lease in the Carolina Long Bay offshore wind auction in May 2022. A California wind auction is scheduled for early December.
Large federal tax credits will help encourage construction of projects. The Inflation Reduction Act enacted in August allows at least a 30% investment tax credit on such projects — or production tax credits on the electricity output for 10 years — that start construction by sometime in the mid-2030s. The tax credits could reach 40% or higher, depending on the location of the onshore parts of the project and how much domestic content is used.
However, the Inflation Reduction Act may complicate future lease auctions. The Bureau of Ocean Energy Management (BOEM) cannot lease new areas for offshore wind development unless it offered at least 60 million acres for oil and gas leasing the previous year and signed at least one lease from that auction. This could delay the California auction.
BOEM is authorized by the Outer Continental Shelf Lands Act to lease portions of the outer continental shelf.
Leases are documented using an October 2016 form called the “Commercial Lease of Submerged Lands for Renewable Energy Development on the Outer Continental Shelf” (Form BOEM-0008). BOEM proposes to alter certain provisions of the form for certain auctions.
The form of lease is provided with the proposed notice of sale.
Interested parties are invited to submit comments about the lease form proposed for a particular auction. A final notice of sale is then issued containing the final lease form. An auction is held, winners are announced and the lease is sent to the winner bidder for execution within 10 business days after the award.
Auctions are held only in cases where BOEM determines that more than one developer wants the site. In cases where no competitive interest exists, BOEM may negotiate a lease with the sole developer after consultation with federal agencies, state and local governments and Indian tribes.
BOEM has held eight competitive lease auctions and has only issued two non-competitive leases, one of which was subsequently relinquished.
BOEM has authority to lease areas in federal jurisdictional waters, meaning for the area between three and 200 miles off the US coast.
The leases are subject not only to existing US statutes and regulations, but also any future such statutes and regulations that do not contradict or conflict with an express provision of the lease. Future enacted statutes or regulations could impose new obligations with significantly increased development or compliance costs.
Two Major Plans
The lease grants the lessee the right to occupy an agreed portion of the US outer continental shelf only after a site assessment plan (SAP) and a construction and operations plan (COP) have been approved by BOEM.
These take time to prepare and can be rejected by BOEM in three situations. One is if the lessee’s activities would have adverse environmental consequences. Another is if the SAP and COP do not provide adequation protection for safety, prevention of waste, natural resource conservation or coordination with federal agencies or national security interests. The third situation is if the proposed activities would interfere with reasonable other uses of the high seas.
Any BOEM rejection must explain the reasons. The developer can submit revisions.
Development and approval of the SAP and COP are detailed and lengthy processes, taking years to complete. The two plans can only be submitted after complying with site assessment and consultation requirements in the lease.
The lease includes significant coordination, consultation and reporting requirements.
The lessee must make reasonable efforts to consult with, and take steps to minimize potential adverse effects on, a long list of parties that may be affected by the project. The list includes coastal communities, commercial and recreational fishermen, research institutions, Indian tribes, the shipping industry, submarine cable operators, other ocean users and “underserved communities” as defined in section 2 of Executive Order 13985.
There are at least nine separate consultation, planning and reporting obligations of the lessee.
The lessee must develop a draft fisheries communication plan (FCP) within 120 days after lease execution, including strategies for communicating with fisheries and for distributing notices to licensed fisheries and other stakeholders, the identity of the lessee’s fisheries liaison, status of discussions with stakeholders, proposed effort to reduce adverse effects on fisheries, processes for filing complaints to the lessee and efforts to mitigate any impacts. The lessee must notify BOEM two weeks before any survey and report annually on any complaints filed.
The lessee is also required to submit a draft native American tribal communications plan (NATCP) and meet with any affected federally-recognized tribes within 120 days after lease execution. The NATCP must specify the lessee’s plans for communicating with tribes and disseminating information to tribes and must identify the lessee’s tribal liaison and protocols for regular tribal engagement both in type and frequency. The affected tribes must be invited to help with drafting the NATCP.
The lessee must also develop an agency communication plan (ACP) with details of the lessee’s plans for active communication and collaboration with all federal, state and local agencies having jurisdiction within 120 days after lease execution in order to ensure an efficient and sustainable development process. The ACP should identify the lessee’s agency liaison and the lessee’s plan for regular interaction with government agencies, and those agencies must be invited to help draft the ACP. The lessee must provide a written summary of how it addressed agency comments.
The lessee must submit a survey plan at least 90 days before conducting any physical, biological or cultural resources survey, including the details and timelines sufficient for analysis by BOEM. The survey plan must be consistent with the FCP and NATCP and involve coordination with the US Coast Guard. The survey plan is deemed approved if BOEM does not respond within 30 calendar days. However, it may not be wise to assume deemed approval if the fisheries survey could result in a “take” of any endangered species. The BOEM lease says “additional time should be allowed” in such cases.
The lessee’s biological surveys must be coordinated with BOEM, the National Marine Fisheries Service and US Fish and Wildlife to determine whether interaction is expected with any endangered species.
An archeological survey must be done. It must include an archeological report by a qualified marine archaeologist and must be done in coordination with federally-recognized tribes. The report must include a statement that there was no impact on historical properties or a description of the nature and extent of any impacts.
The lessee must also do an avian and bat survey, monitor offshore movement and include bird and bat deterrent devices. It must report annually to BOEM on any dead or injured birds or bats discovered at the site.
The lessee must submit a plan for “contributing to the creation of a robust and resilient US-based offshore wind supply chain.” This supply chain includes vessels, infrastructure, grid upgrades, component manufacturing, storage and laydown yards, docks and navigation equipment, refueling stations and R&D. The lessee must make an effort to involve diverse communities during all phases of contracting. It must send BOEM regular updates on its efforts in this area and a self-evaluation of how well it is doing. The New York Bight auction gave bidders credit in bids that promised to use equipment manufactured or assembled in the US, including nacelles, blades, towers, foundations, transition pieces, inter-array cables, export cables and offshore substations. If achieved, bidders would be given a 50% discount on rent under the BOEM lease for five years.
The lessee must submit a progress report every six months during the initial five-year site assessment term. The progress reports must list interested parties with whom the lessee has engaged, what it is doing to mitigate any adverse impacts on those parties and what feedback it received from them.
Failure to follow all of the reporting requirements could delay project development or lead to a suspension of the lessee’s operations by BOEM.
The COP should include a request for any easements reasonably required by the lessee for full enjoyment of the lease. BOEM will approve any easements it agrees are necessary without further competition.
The lessee must develop two common lines of orientation with the holder of any adjacent BOEM lease area. These are two straight channels for ships and helicopters to pass between adjacent projects. If the lessee is unable to coordinate, then there must be at least a one nautical mile setback from the adjacent area.
The lessee’s operations may not be conducted in any manner as determined by BOEM that unreasonably interferes with any other lease or that could harm the environment, create a hazardous or unsafe condition or adversely affect any historic or cultural sites, structures or objects.
Development of an offshore wind farm takes several years after bid award and requires significant capital outlays before the first dollars of revenue are received.
It will be at least eight years after the Vineyard Wind project was awarded a lease (BOEM Lease OCS-A-0501) before it will start commercial operation.
A substantial bid deposit is required ($5 million for the New York Bight auction), and the entire bid amount must be paid within 10 business days after the award.
The first year of rent must be paid within 45 days after the lessee receives the lease for execution. The lessee must post $100,000 in financial assurance before lease issuance, additional security before SAP approval in an amount estimated by BOEM to meet all “accrued obligations,” with a possible increase in the amount before COP approval, and a decommissioning bond by the start of construction. The financial assurance amounts are subject to adjustment for increasing or decreasing obligations at BOEM’s discretion. These obligations are in addition to costs to prepare required surveys, develop and submit the SAP and COP and coordinate with stakeholders, and equipment supply and construction costs.
The lease includes a typical broad indemnity for any damage caused by the lessee, its employees or subcontractors.
However, it goes beyond that to make the lessee accountable for any damage caused by the US government in connection with any identified military command headquarters, including for any act or omission or negligence of the United States, its contractors, officers, agents or employees. This indemnity obligation overrides the lessee’s limitation of liability contained in the lease and any directly contradictory lease provisions.
A requirement to indemnify a party for the party’s own negligence is is unenforceable as against public policy in many jurisdictions.
BOEM may suspend activities, cancel the lease and impose penalties for any failure to comply with the submerged lands act, the SAP, COP or the terms of the lease.
It also retains the right to suspend any lessee activities due to national security concerns.
It can also cancel the lease if it determines that the lessee’s activities could harm or damage life (including aquatic life), property, minerals or the environment.
The lease can be terminated only after the lease has already been suspended on account of the condition for five or more years. It can be terminated more quickly after a hearing that concludes the condition will not dissipate or if the government concludes the advantages of cancellation outweigh the benefits from continuing the lease. BOEM is not required to provide compensation for any suspension, but is required to compensate the lessee for a termination for loss of anticipated net revenue or, if less, the net costs paid by the lessee under the lease.