US holds first offshore wind site lease auction

Yesterday the U.S. Department of the Interior held its first competitive lease sale for renewable energy on the Outer Continental Shelf. With a total bid of about $3.8 million, Deepwater Wind New England, LLC won the rights to lease two parcels covering 164,750 acres offshore Rhode Island and Massachusetts. What do the auction results mean?

Consistent with President Obama's climate action plan, the Interior Department is promoting the use of federal lands for the production of renewable electricity. Yesterday's auction represents the first competitive auction for leases for offshore wind sites in federal waters. Following significant stakeholder process, the Interior Department identified and refined the parcels off Rhode Island and Massachusetts, and solicited interest in leasing sites. In June, the Interior Department announced that nine companies were legally, technically, and financially qualified to participate in the auction.

The auction took place in two phases in late July. First, a panel met to consider non-monetary factors, including whether any bidders held agreements that could make their project a more realistic success. For example, bidders demonstrating a power purchase agreement or joint development agreement could score bonus points enabling them to compete against higher monetary bids. Deepwater Wind's joint development agreement with the State of Rhode Island thus gave it an advantage in the second round held on July 31. This round took a more traditional auction format, with bidders placing a series of increasing bids until only one bidder remained for each parcel.

Three bidders participated in the auction: Deepwater Wind New England, LLC, Sea Breeze Energy, LLC, and US Wind Inc. After 4 rounds, Deepwater Wind had won the south parcel for $94,153, and only one other company remained in the competition for the north parcel. By round 11, Deepwater Wind had won the north parcel with a bid of $3,744,135.

With the auction completed, Deepwater Wind has 10 days to execute the lease agreements. Its first rent under the leases will be due in 45 days. Lease fees for the sites will be charged at $3 per acre, and if Deepwater Wind develops an operating project, it will also pay an annual fee roughly equal to 2% of its wholesale energy market revenues.

Building on this first auction, the Department of the Interior plans to hold a second auction for sites off Virginia in September. Eight bidders have been deemed qualified to participate in the Virginia auction. How many bidders will actually participate in the auction? How much competitive interest will arise? For what price will the parcels' lease rights sell? Will the leases - whether off Rhode Island and Massachusetts, or off Virginia - lead to operating offshore wind projects? Time will tell how the 2013 offshore wind lease auctions affect U.S. energy development.