N.C. Offshore Wind Milestone: Duke Energy, TotalEnergies Awarded Offshore Leases

Recently, we wrote about North Carolina’s efforts to become a major player in offshore wind energy. Those efforts gained additional momentum in May 2022 as the Bureau of Ocean Energy Management (BOEM) awarded leases to Duke Energy Renewables Wind, LLC and TotalEnergies Renewables USA, LLC. If fully developed, the two lease areas will generate 1.3 gigawatts (GW) of offshore wind energy—or enough clean, renewable energy to power nearly 500,000 homes. The development of offshore wind resources is a major component of North Carolina’s stated goal of achieving carbon neutrality by 2050.

The auctions won by Duke and TotalEnergies earned them the right to investigate the viability of developing offshore wind energy in two adjacent portions of the Wilmington East Wind Energy Area, also known as the Carolina Long Bay area. The two leased areas together, encompass a 110,091-acre region off the southern tip of North Carolina’s Atlantic Coast, not far from the South Carolina border. 

The total winning auction price was $315 million: $160 million from TotalEnergies for the western lease area, and $155 million from Duke Energy Renewables Wind, LLC for the eastern lease area. A total of 16 companies qualified to bid for the projects, but there were only 4 bidders on the western lease and 5 on the eastern, meaning not every qualified bidder participated in the auction.  

The winning bids for Carolina Long Bay are exponentially higher than the prior offshore wind lease awarded in 2017 for another area off the coast of North Carolina called “Kitty Hawk”, but they are still significantly lower than comparable bids from the New York Bight auction held earlier this year on February 23, 2022 which included six lease areas. According to TGS, an energy data and intelligence company, the winning bids for Carolina Long Bay $45,000 and $42,700 per GWh/year for each area, while the New York Bight action was between $83,000 and $130,000 per GWh/year. This approximately 30%-50% lower bids for Carolina Long Bay could be due to the uncertainty and lack of incentives for offshore wind in the electric market in North and South Carolina.

The 2017 Kitty Hawk lease in North Carolina went to Avangrid Renewables, LLC for just over $9 million (significantly less than the recent Carolina Long Bay leases) and covered 122,000-acres located approximately 27 miles east of Corolla, North Carolina. The lease was subsequently assigned to Kitty Hawk Wind, LLC, the project company set up by Avangrid. Assuming BOEM completes its environmental impact statement and issues a record of decision in the next 12-14 months, construction of the Kitty Hawk project is scheduled to begin in the second half of 2023. The entire lease area is estimated to produce 2.5 GW of energy, or enough to power 700,000 homes, but the Construction and Operation Plan (COP) submitted to BOEM in July, 2021, proposes to develop only 40% of the lease area, located in the northwest corner. The COP includes 69 Wind Turbines and will result in the generation of 800 MW of energy, which is planned for delivery into Virginia and the PJM market (Phase 1). That still leaves 60% of the lease area in the southern portion of Kitty Hawk (Phase 2) up for grabs, with a potential for development and delivery into North Carolina. But whether Phase 2 can be developed, and which state may benefit from it, will depend on several factors. 

With regard to Kitty Hawk Phase 1, the energy production has been committed to the Commonwealth of Virginia and will help that state to achieve its legislative mandate to procure 5.2 GW of offshore wind energy by 2034. Additionally, Phase 1 is expected to generate nearly $2 billion dollars in total economic benefits for Virginia and northeast North Carolina over the next decade. Included in this projection are the following specific benefits identified for Virginia:

• An increase of $1.5 billion in sales by Virginia businesses related to project construction;
• An increase of nearly $390M in total net household earnings during construction for Virginia residents;
• An increase of nearly $100 million in income and sales tax revenues between 2021 and 2030 for the Commonwealth of Virginia and the City of Virginia Beach; and
• The creation of 25,799 jobs annually in Virginia during the construction phase and of 26,900 full-time equivalent new jobs once construction is complete.

North Carolina certainly would like to reap equal or greater rewards from Phase 2 of Kitty Hawk, Carolina Long Bay, and any other lease area located off its coast, and the Governor has taken significant steps to make that happen, including creation of an offshore wind task force (NCTOWERS) and issuance of Executive Order 218, which established a goal of procuring 2.8 GW of offshore wind by 2030. The Governor’s Offshore Wind Taskforce was established to study and provide recommendations to support offshore wind development. Womble Bond Dickinson attorneys Lisa Rushton and Hayes Finley are members of the NCTOWERS subcommittee on Infrastructure, Environmental Justice and Inclusion, which specifically is tasked with researching, evaluating, and making recommendations regarding transmission and OSW-related infrastructure in North Carolina that foster environmental justice and provide for equitable access. 

The North Carolina legislature, on the other hand, has not responded with as much strength, and although it recently directed the N.C. Utilities Commission to create a 70% reduction in carbon emissions by 2030 in HB951, there is no Renewable Energy Portfolio Standard (REPS) or state mandate specifically for offshore wind in North Carolina. 

HB951 Creates Uncertainty in the Future of Offshore Wind for North Carolina

Adding further uncertainty to the future of offshore wind benefits within North Carolina is the draft Carbon Plan filed by Duke and sitting before the North Carolina Utilities Commission (NCUC). HB951 requires the NCUC to take "all reasonable steps" to achieve 70 percent carbon emissions reductions by electric public utilities from 2005 levels by 2030, and achieve carbon neutrality by 2050. To achieve this the NCUC is required to issue a “Carbon Plan” by December 31, 2022 using a least-cost approach and to develop this plan in concert with stakeholders and utilities.  While the bill continues NC’s existing Competitive Procurement of Renewable Energy (CPRE) program into 2022, and establishes an independent power producer (IPP)/utility ownership split of 45 percent/55 percent for new solar and solar plus storage generation of 80MW or less, it otherwise requires that any new generation sources necessary to meet the bill's carbon reduction goals (such as from offshore wind) be “owned and recovered on a cost of service basis by the applicable electric public utility…"  This language raises  questions with regard to how two out of the three currently leased offshore wind areas may be owned or operated if they end up sending power to support North Carolina’s carbon reduction goals.  Additionally, the draft Carbon Plan submitted by Duke Energy on May 16, 2022, includes several proposed alternatives to achieving HB951’s carbon reduction goals, and not all of them include offshore wind. 

As the NCUC works to finalize its Carbon Plan, unless the language in HB951 is amended, costs are likely to play a key role in determining whether offshore wind will be identified as a preferred resource for achieving the carbon reduction goals due to HB951’s requirement for use of “the least cost path” to achieve the carbon reduction goals and other planning and generation requirements of the bill. As drafted, the Carbon Plan is projecting annual energy cost increases of 1.9% to 2.5% through 2035, and opponents of Duke’s draft Carbon Plan have already raised concerns over the impacts to low-income populations.

According to Duke, the lease area won by Duke Energy Renewables Wind, LLC could support up to 1.6 GW of potential offshore wind energy, enough to power nearly 375,000 homes. Since Duke Energy Renewables Wind, LLC is owed by Duke Energy (the largest regulated public utility in North Carolina), this lease area is a potential resource that doesn’t require an interpretation of HB951’s utility ownership criteria and is likely to connect and provide power to North Carolina, depending on which pathway for carbon reduction is selected by the N.C. Utilities Commission under the Carbon Plan.  What is critical for this resource is the analysis and criteria that are used for assessing costs.

The lease area awarded to TotalEnergies is expected to support just over 1 GW of potential offshore wind energy, enough to power more than 300,000 homes. This project could connect to either North or South Carolina, although neither state has direct incentives for offshore wind through REPS or any other mandate at present, thereby providing little incentive for utility providers to procure the energy produced by offshore wind for distribution to its customers. But, the interpretation of North Carolina’s HB951’s “new generation ownership” provision and the NCUC’s selection of the pathway to achieve carbon reduction goals will undoubtedly influence whether TotalEnergies connects the project to North Carolina. Phase 2 of Kitty Hawk faces a similar restraint in sending power to North Carolina. And, both projects very well may have other options.

The Carolina Long Bay leases are close enough to connect to the grid in South Carolina, which as of February 2022, has finally showed some real interest in OSW. On February 2, South Carolina lawmakers in the House passed House Bill 4831, which directs the State Commerce Department to perform an economic development study to “evaluate the State's business advantages, economic climate, workforce readiness and other assets to create a roadmap to effectively compete to attract offshore wind energy supply chain industries.” The bill has not been passed yet, but shows a first real effort on the part of South Carolina to capitalize on the potential economic benefits offshore wind could bring the state. 

North Carolina’s Commerce Department is way ahead of South Carolina in this respect, having published an Offshore Wind Supply Chain Report in March, 2021. 

Future of Offshore Wind in the Carolinas

“With three separate wind projects now in the area, and potentially more on the way, the Carolinas are positioned to be the next American offshore wind hub,” National Ocean Industries Association President Erik Milito said in a statement. “Today’s winning bids were each more than seventeen times larger than the winning bid from the Kitty Hawk Offshore wind lease sale just five years ago. We're seeing the maturation of the market and an optimistic outlook for offshore wind in areas beyond our Northeastern states.”

The award of Kitty Hawk and Carolina Long Bay leases is just the beginning for offshore wind development in and around the Carolinas. In April, BOEM published a call for information on six distinct new areas located in the Central Atlantic and comprising almost 3.9 million acres for future potential development. But, the road to offshore generation is not short or direct. 

Obtaining the necessary federal, state and local approvals and connecting power to the electric system could present one set of hurdles to getting wind energy onto the grid in this region. A lack of federal and state incentives in the Carolinas may also hamper offshore wind development now and into the future. And, a Trump-era moratorium on new offshore leases in the Southeastern U.S is slated to begin on July 1, which has the potential to prevent the issuance of any new lease areas from North Carolina south until 2032. 

The project developers for the Carolina Long Bay leases for example are faced with some significant pushback from local landowners and Wilmington-area elected officials, who are concerned about the projects’ potentially negative impact on the region’s tourism industry. Brunswick County Commissioners went to far as to pass a resolution in August 2021 opposing the placement of offshore wind turbines closer than 24 nautical miles from its coast. Other beach communities in the area have approved similar resolutions. The Wilmington East area is 17 nautical miles from Bald Head Island in Brunswick County at its closest point. 

However, before opening the lease auction for the areas, BOEM worked closely with the public and major stakeholders to minimize the effects of offshore wind development in Wilmington East, including making site changes to their original proposal. Regardless, before any construction can begin, BOEM will need to prepare Environmental Impact Statements under the National Environmental Policy Act, and local stakeholders will certainly have an opportunity to voice any concerns that remain.

As for incentives, without a direct REPS requirement (or a directive from the utility commission) for offshore wind, there is little inducement for utility providers in the Carolinas to procure offshore wind for distribution to its customers since at present offshore wind remains more expensive and is not as dependable as other traditional sources of energy. Further, the sunset of a direct federal offshore wind incentives program may additionally raise concerns for offshore wind investment. 

Until recently, the U.S. Department of Energy offered the Renewable Electricity Production Tax Credit, which allowed wind energy producers “to claim a federal income tax credit (of 1.5 to 1.9 cents/kWh) on every kilowatt-hour of electricity generated for the power grid annually for a period of 10 years after a facility is placed into service.” However, this program ended on Dec. 31, 2021 and has not yet been renewed. In addition, the Carolina projects may well be unable to benefit from the federal Investment Tax Credit (ITC), which offers a 12-30% tax credit for offshore wind projects due to the fact that current legislation requires that construction commence prior to December 31, 2025, and it is very unlikely that either lease area within Carolina Long Bay can complete a Site Assessment Plant, analyze the lease areas, develop a COP, and receive necessary federal and state approvals to commence construction prior to that date. It’s not all bad news, however. A further extension of the ITC by Congress, similar to prior extensions that have been enacted with bipartisan support, is quite likely under the current Administration and would greatly benefit further growth in the offshore wind sector.

BOEM’s use of bidding credits in the Carolina Long Bay auction demonstrates another avenue for the federal government to bolster the industry, and continued use of such credits in offshore leases could be a valuable resource. The Carolina Long Bay projects obtained a bidding credit under the BOEM leases, equal to 20% of the applicable bid amount, conditioned on successful bidders contributing 80% of the credited amount to initiatives that support workforce training or domestic supply chain development. BOEM said the recent Carolina Long Bay credits will result in a $42 million contribution to these initiatives. In addition to generating revenue for supply chain development, such bidding credits benefit the bidder because only 80% of the credit amount must be contributed by the bidder in approved development initiatives, and the bidder can retain the remaining portion of the credit amount. The winning bidders at the Carolina Long Bay projects are required to demonstrate payment of the contribution amount when the bidder submits a facility design report.

The Trump-era moratorium on new offshore leases in the Southeastern U.S is also slated to begin that could limit future lease areas. The 10-year moratorium is scheduled to take effect July 1, 2022 and any future offshore development from North Carolina to Florida during this period will require a Congressional override, which offshore wind supporters are strongly encouraging. Wind industry advocates have called on Congressional leaders to repeal the 10-year moratorium in the final, conferenced version of the Senate’s “The United States Innovation and Competition Act of 2022” and the House’s America “COMPETES Act” of 2022, and the issue remains under deliberation by Congress.

Womble Bond Dickinson’s Energy and Natural Resources Team will continue to follow these trends and keep you informed about the latest offshore wind developments.