Government Incentives for the Development of Offshore Wind Energy in the United States: A Study of Incentives Needed to Support a New Clean-Energy Industry

Offshore wind energy is now receiving substantial attention as an alternative commercial energy source. Despite the increased interest in this new technology, and the tremendous energy generating potential off the Northeast/Mid-Atlantic region of the U.S., no projects have been installed. This study addresses three barriers to the offshore wind energy industry: (i) high upfront capital costs, (ii) extensive, and at times unclear, regulatory/approval process, and (iii) competition from conventional energy sources. The effect of current federal and state policies on these barriers was examined to assess how promotional policies and financial incentives within the region have addressed the current challenges facing an emerging offshore wind energy industry. U.S. incentives were also compared to the two leading European countries in installed offshore wind energy capacity, Denmark and the U.K., to determine in what areas U.S. incentives are lacking and how they could be improved. Overall, it was found that the U.S. utilizes primarily financial incentives at the federal level and promotional policies at the state level, and that changes in federal policy are necessary to advance offshore wind energy. Foremost, political commitment for the industry needs to be solidified and the regulatory process streamlined. Furthermore, the U.S. requires a system for internalizing the environmental damage associated with fossil fuels, a national Renewable Portfolio Standard, and tendering system. While the U.S. has the potential to become an industry leader in offshore wind energy, it remains to be seen if the current government incentives will be sufficient support to advance this new clean energy


I. Introduction
The oceans have been utilized historically for the exploitation of living resources and fossil fuels, as well as a highway for maritime commerce. In the face of increasing environmental, international and security concerns, the economic role of the oceans has recently expanded to include renewable energy production. In particular, offshore wind energy is now receiving substantial attention as an alternative commercial energy source. 1 This study examines emerging offshore wind energy in the United States and how current policies are encouraging or deterring its development.
Proposals for new offshore wind farms began increasing in the past decade because of a number of factors: offshore wind turbines can generate power close to coastal load centers where demand for energy is high but space for power facilities can often be limited, offshore wind turbines produce a large amount of power per unit area without relying on expensive fossil fuels, and offshore wind farms in Europe have shown themselves to be a viable alternative to conventional power sources. remaining 20%, see Figure 1). 8 As a result, energy companies need a large amount of capital investment upfront. If energy rates of coastal areas remain high enough to ensure a profit from this investment, the project is feasible. However, high capital costs have been cited as reasons for a number of canceled offshore wind projects in the U.S. 9 Governmental policies play an important role in the development of this industry. 10 Granting tax credits to developers, funding research and technology advancement, and committing to renewable portfolio standards can all encourage industry growth. 11 Conversely, unclear jurisdictional authority and extensive permitting requirements that add expense to a project deter investment and hinder growth. 12 Emerging industries with sizable initial capital investments, such as offshore wind, rely even more heavily on government incentives for success. 13 With such a high risk associated with this type of investment and the level of uncertainty that a return on investment will be produced from the project, governmental support for the 8 W. Musial and S. Butterfield, 2006. "Energy from Offshore Wind." NREL/CP-500-39450 Conference paper presented at Offshore Technology Conference, Houston, TX. May 1-4, 2006. 9 R. Pospisil, 2007. "LIPA open to wind power in Master Plan despite killing offshore project on cost." Electric Utility Week: December 10, 2007. See also B. Riner, 2007. " LIPA Unplugs Plan for Long Island Wind Farm." Natural Gas Week: August, 27, 2007. See also J. Porretto, (2007). "Developer cites cost in nixing offshore wind farm in South Texas." Mexia Daily News: June 13, 2007. 10 W. Musial and S. Butterfield, 2006. Supra note 8. See also J.I. Lewis and R.H. Wiser, 2006.

Typical Cost Breakdown for an Offshore Wind Facility in Shallow Water
Operat ions and Maintence 4 industry is needed in the development stages. 14 To encourage investment, governments can create policies to: • Subsidize the new industry directly or indirectly through the use of tax credits, • Invest in the research and development of new technology, • Provide financing instruments such as grants and loans to encourage private investment, or • Create regulation that reduces developer uncertainty and streamlines the approval process.
These types of incentives can be employed at either, or both, the state or federal level to promote offshore wind.
Federal incentives for renewable energy in the U.S. have focused primarily on subsidizing the industry, mainly through the Renewable Electricity Production Tax Credit (PTC) enacted in the Energy Policy Act of 1992. 15 Under this legislation, a tax credit of 2.1 cents/kWh (adjusted for inflation) is granted to all qualified renewable energy producers (including wind, biomass, hydroelectric, methane, and geothermal) for the first 10 years of operation. The PTC plays such a central role in renewable energy proposals that many land-based wind projects have been financed to a large extent based on these tax savings. 16 However, in spite of the importance of the PTC to the renewable industry as a whole, this tax credit has expired three times before being 14 P. Astolfi, S. Baron and M. J. Small, 2008. Supra note 10. See also European Wind Energy Association (EWEA). 2004. " Wind Energy-The Facts." Accessed online at: www.ewea.org/fi leadmin/ewea documents/documents/publications/WETF.pdf. Last accessed March, 2008. See also C. Brown and P. Cassidy, 2002. " Paying for the wind: Financing issues facing the wind energy industry." Refocus 3(4): 6 and policies regarding lease, bidding and payment procedures; formal adoption of these regulations will resolve many financial unknowns for firms proposing offshore wind energy facilities.
In addition to the overarching federal incentives, individual states have created their own incentive programs to promote renewable energy. Nearly all coastal Northeast/Mid-Atlantic states have Renewable Portfolio Standards (RPS) that require a certain percentage of total electricity production within the state to be derived from renewable sources. 24 Many states also offer programs for low interest loans or grants to aid in financing capital costs. 25 These types of standards and programs are seen as instrumental in stimulating wind energy development. 26 System benefit charges, or surcharges imposed on electricity customers by utility companies, which are then reinvested to support renewable energy projects, have also been implemented by states to contribute to renewable energy development. 27 While the U.S. has just begun to consider offshore wind, Europe has utilized it for decades, 28 with Denmark and the United Kingdom leading global production in offshore wind energy. 29 Through a combination of strict emission standards associated with the Kyoto Protocol and the establishment of economic and regulatory programs, the European Union has supported large-scale efforts to develop wind energy on the continental shelf. Denmark and the United Kingdom have encouraged offshore wind energy through the use of many types of incentives including: 7 cooperative investment schemes, renewable obligation policies, direct financial support, and per-kilowatt hour production subsidies. 30 The experience of these countries may provide useful guidance as the United States seeks to encourage development of the offshore wind energy industry.
In response to the slow progression of offshore wind in the Northeast/Mid-Atlantic and the role of government incentives in promoting alternative energy, this study will address the following questions: • What are the economic and regulatory challenges facing businesses proposing to install offshore wind energy facilities in the Northeast/Mid-Atlantic?
• How is the feasibility of offshore wind projects affected by current federal and state policies in the region?
• How do the incentives provided in the United States compare internationally with those provided by Denmark and the United Kingdom, countries with very strong offshore wind energy industries?
• What additional focentives might be needed in the United States to encourage the development of offshore wind power? · To begin, this study will give a brief overview of offshore wind energy potential in the Northeast/Mid-Atlantic regions of the United States, the rationale behind developing offshore wind energy in this region, and examine all currently proposed projects in the area. This overview explains why this region of the country was singled out for this study. Next, an examination of the economics of offshore 30 R. Redlinger, P.O. Andersen and P.E. Morthorst, 2002. Supra note 7. 8 wind will be presented, describing typical project costs for capital investments, operations and maintenance, environmental assessments, financing and decommissioning. Production rates will also be compared between offshore wind and other conventional sources of energy to measure the competitiveness of this new industry and how production relates to investment costs. While the discussion of the economics of offshore wind cannot be taken directly from U.S. examples since projects are still in preliminary stages, data from European sources and projections from U.S. proposals will be used.

31
This study will then consider and analyze regulation of offshore wind energy in the U.S. and how the regulatory environment is currently encouraging or hindering investment. The proposed rules of the Minerals Management Service regarding the leasing and bidding procedures, as well as required royalty and fee payments, will be examined to determine what their impact may be on firms aiming to invest in offshore wind. In addition, an assessment of the permitting process and potential legal issues faced by offshore wind projects in the Northeast/Mid-Atlantic will be addressed.
Extensive permitting issues or a high probability of lawsuits could act as a disincentive to investment in an offshore wind project.
Lastly, an analysis of the current status ofregulatory and financial incentives surrounding offshore renewable energy at both the federal and state level within the Northeast/Mid-Atlantic U.S. will be performed to examine the conditions presently in place for the industry. Attention will be paid to policy instruments used to provide direct and indirect financial assistance to development, incentives based on production output after installation, as well as favorable regulation encouraging investment at 3 1 EWEA , 2008. Supra note 14.
9 both state and federal levels of government. The scope of this work will be limited only to state incentives offered by coastal Northeast/Mid-Atlantic states most involved in the offshore debate: Massachusetts, Rhode Island, New Jersey, and Delaware. The degree to which incentives are offered within this region will then be compared to international examples in the European Union (E.U.), specifically Denmark and the United Kingdom, the world's leading offshore wind producers. Qualitative and descriptive comparisons will be used to analyze the similarities between incentives provided by Northeast/Mid-Atlantic states, between Northeast/Mid-Atlantic states and federal incentives, and between U.S. incentives and E.U. policies. Through analysis of the policies created in each country, the goal of this work is to assess how the U.S.
compares to other countries that have exploited offshore wind, and what this may suggest for the future of offshore wind energy in the Northeast/Mid-Atlantic.
JJ Offshore Wind Energy Potential in the Northeast/Mid-Atlantic United States.

a. Rationale for Offshore Wind Energy in the Northeast/Mid-Atlantic
Demand for electricity in the United States is ever growing. The U.S. Energy Information Agency estimates that U.S. electricity demand will grow by 39% from 2005 to 2030, reaching 5.8 billion megawatt-hours (MWh) by 2030. 32 Further examination shows that coastal states use approximately 78% of the nation's electricity. 33 U.S. population concentration shows that of all coastal regions the Northeast/Mid-Atlantic is one of the most heavily populated, with nearly one-fifth of the national population living on less than 2% of the total land area. 34 The increasing demand for electricity in the Northeast/Mid-Atlantic region of the U.S., and the need to supply enough power to meet that demand has caused these coastal states to make energy policy a top priority.
Rising energy prices, uncertainties surrounding oil supply, and global climate change concerns are together driving States throughout the nation to rethink their energy mix and to encourage the development ofaltemative energy. The Northeast/Mid-Atlantic is particularly vulnerable to the price volatility of petroleum 32 A megawatt-hour (MWh) or I megawatt acting over a period of I hour (equal to 1,000 kilowatt-hours or I million watt-hours). The primary difference between a megawatt and a megawatt-hour is that "megawatt" measures the capacity of an electric generator and "megawatt-hour" measures the actual amount of electricity it produces over a certain period of time. 33  products because this region has virtually no indigenous supply of oil or gas, which are currently the primary energy generation sources for the region. 35 Renewable energy sources, such as offshore wind, can provide stable prices because they are not affected by the unpredictable price fluctuations of fossil fuels. In addition to price stability, modem offshore wind technology is efficient, reliable and has the potential to produce power at a reasonable cost. 36 As a general rule, the power output of a wind turbine increases by the cube of wind speed, therefore as the turbine technology has advanced, wind power in general has become increasingly cost competitive with traditional energy sources. 37 The proliferation of wind energy onshore, which has grown dramatically from 1,800 megawatts of installed capacity in 1996 to more than 11 ,600 megawatts in 2006 38 , reveals how wind energy is a viable and reliable alternative to traditional power plants. However, even with this substantial growth in onshore wind, the potential of energy generation offshore is much greater.
Generating wind power offshore has a number of advantages compared to its onshore counterpart. First, offshore wind farms allow for production close to coastal load centers, such as Boston, New York or Washington D.C. where electricity rates are high, but also where space for new power facilities is limited. In contrast, the potential for onshore wind power is generally greatest on remote ridgelines or on plains where the wind resource quality is high but populations are low, resulting in the need for extensive transmission systems hundreds of miles long to carry energy to 35 Ibid. 36 For a discussion on production costs of offshore wind, see Ch I II Economics of Offshore Wind Energy §c. Production Cost with Traditional Energy Sources. 37 T. Wizelius, 2007. Supra note 28. 38  12 urban areas. Currently, the U.S. electrical grid is not constructed for this type of longrange transmission. 39 Offshore wind farms, on the other hand, may be placed far enough offshore for visual concerns to be less objectionable, 40 while remaining close enough to coastal load centers for energy transmission via underwater cables.
Connecting offshore turbines directly to the power grid of densely populated coastal areas can help avoid the need for costly new overland high-voltage transmission lines.
Second, placing wind turbines offshore avoids the constraints on size that onshore turbines face, allowing projects to take advantage of economies of scale and increase production efficiency. Offshore the largest wind turbines can be used, turbines much larger than those used onshore, with a much greater capacity. Turbines used offshore can be transported and delivered to a project site using large carriers and barges and, therefore, are not limited by the physical constraints land-based transportation mechanisms. The largest offshore turbines currently being produced are 5 MW in capacity and over 120 m tall (compared to onshore turbines which are approximately half that size). 41 The ability to use such large turbines means greater amounts of electricity can be produced from fewer installed structures, allowing offshore wind to utilize economies of scale to decrease the cost per kWh. 42 Third, offshore wind blows faster and more consistently than onshore wind, further increasing the amount of power that can be produced offshore. 43  power output of wind turbines increases by the cube of wind speed, slight increases in wind speed produce exponentially larger amounts of energy. 44 On land, winds can be diverted or slowed down by interference with the landscape, compared to offshore where the amount of turbulence created by the physical environment is much less due to the flat sea surface. Overall, this results in steadier wind resources and overall faster average wind speeds. More consistent, faster blowing winds offshore also means that power generation can better meet peak demand for the energy requirements of load centers compared to onshore wind installations.
Because the potential revenue that can be produced by a wind farm depends directly on the quality and magnitude of the wind resources surrounding a project site, wind resource assessment is the first and most crucial step in developing offshore wind. Wind resource assessment has been conducted throughout the country by the federal government through the National Renewable Energy Laboratories, by individual states interested in diversifying their energy production and by private firms interested in developing offshore wind project.

b. Assessment of Offshore Wind Resources in the Northeast and Mid-Atlantic Area
The term 'wind resource assessment' refers to the calculation of the average wind speed over a specific site or area for a period of 10 to 20 years. 45 Models are created by horizontally and vertically extrapolating data collected at various points, from meteorological stations or buoys, to create a larger map of average wind speed 44 Ibid. 45 Redlinger, et al. 2002. Supra note 7.
14 within an area and aid in siting of potential projects. Wind resource assessments have been performed by most coastal states to determine the scale of their offshore wind power potential.
The U.S. has significant onshore wind resources throughout the Great Plains, enough to supply potentially all the nation's energy needs, 46 though there is currently no infrastructure capable of transmitting such large amounts of energy the long distance to coastal population centers. Likewise, wind resource modeling along the east and west coasts, has identified large areas of high average wind speeds (greater than 7.5 meters/second) within 50 nautical miles of the coast. The National Renewable Energy Laboratory (NREL) has determined that the offshore wind resources along the Atlantic and Pacific Coasts between 5 and 50 nautical miles could generate roughly 900 gigawatts (GW) of wind power, an amount roughly equivalent to the amount of electricity used currently by the entire country (see Figure 2). 47 Of course not all of this area is viable for wind energy development, due to competing uses (shipping channels, marine protected areas, naval uses) and technological constraints, which currently limit wind turbine installment to shallow water (less than 30 m depth). 48 However, even with these exclusions the vast potential for offshore wind energy is compelling.
46 "[T]he total amount of electricity that could potentially be generated from wind in the United States has been estimated at 10,777 billion kWh annually-more than twice the electricity generated in the U.  , 3 and 4). The outstanding character of these wind resources is further enhanced by their location over shallow water. Compared to the west coast where the continental shelf drops off quickly, the continental shelf on the east coast deepens much more gradually (see Figure 5). This is beneficial because current wind turbine technology is limited to use in water depths of 30 m or less. As a result, the shallow east coast continental shelf, in combination with high average wind speeds creates an ideal setting for offshore wind farms. In the future, as turbine technology advances to allow for installation in greater depths, more areas on the outer continental shelf will be available for offshore wind energy production. 49 Due to the advantages of offshore wind in comparison to more conventional energy sources and the vast wind resources present off the Northeast/Mid-Atlantic, many projects have been proposed throughout the region (see Table 1). Though none of the projects has yet been installed, many projects have gained momentum as a result ofrising oil prices and increased concern ar~mnd national energy security. Of the four states examined in this study, each has had a unique approach to its involvement in offshore wind. 49 Ibid.   covering Rhode Island's offshore waters, executed by a joint partnership between the Coastal Resources Management Council (CRMC) and the University of Rhode Island (URI). URI will provide data to the CRMC, which will develop the regulatory framework of the SAMP. The offshore SAMP will define use zones for Rhode Island' s offshore waters, taking into account existing uses, critical resources and transportation lanes of offshore areas. The result of this SAMP will be pre-selected sites that will be more easily permitted and developed by the project developer. Under the federal Coastal Zone Management Act, preparation of a SAMP enables permitting of projects within the area covered by the SAMP to proceed on the basis of an 62 ATM, 2007. "Final Report RIWINDS Phase I: Wind Energy Siting Study." Accessed online at: http://www.energy.ri.gov/documents/independence l /RIWINDSReport.pdf. Last access September, 2008. 63 Ibid. proposals, the Public Service Commission unanimously chose Bluewater Wind's proposal. Subsequently, the commission directed Delaware' s primary utility provider, Delmarva Power and Light, to negotiate a long-term power purchase agreement with Bluewater Wind to purchase at least 200 MW of power from the offshore wind farm. 82 This power purchase agreement is the first in the nation for an offshore wind project and guarantees that Bluewater Wind will be able to sell at least a portion of the power it produces. The Bluewater Wind project will now be assessed for environmental impacts and begins work on obtaining the 27 state and local permits needed for installation and ope~ation of the project. 83 Bluewater Wind will also likely be granted a limited term lease by the MMS to collect wind data on the outer continental shelf. 84 Each of the four Northeastern/Mid-Atlantic states most involved in offshore wind has approached the development of this industry differently. In Massachusetts, efforts have been driven by private firms attempting to expand into the new clean energy market, in contrast to Rhode Island, Delaware and New Jersey whose state governments have encouraged offshore wind development. 85 The potential energy production from offshore wind on the east coast is high and could provide large  The difference in the development of an offshore wind energy industry within Northeastern/Mid-Atlantic states is likely due to the lessons learned from the Cape Wind experience in Massachusetts. Rhode Island, Delaware and New Jersey want to encourage industry development and are working to create a favorable regulatory system. See Chapter 3-Regulation of Offshore Wind Energy. 31 coastal load centers with much needed energy at stable prices. However, in addition to the quality and quantity of the wind resources offshore, the development of offshore wind is also controlled by the economics of building such an industry.

III Economics of Offshore Wind Energy
There have been a number of proposed offshore wind farms in the U.S. that have been canceled prior to installation because of the large capital investment required and the uncertainty over the project's return on investment. 86 Therefore, an understanding of the economics associated with offshore wind farms is necessary to determine if current government incentives are effective. The total cost of an offshore wind project can be broken down into: • Meteorological and environmental assessment • Capital costs • Operations and maintenance, and • Decommissioning.
Each type of expense is examined below, followed by an examination of the cost of financing an offshore wind project and consideration of how competitive the rates of offshore wind-generated electricity are to more conventional forms of power such as coal, gas or nuclear.

a. Project Costs
The viability of an offshore wind energy industry in the Northeast/Mid-Atlantic rests on the establishment of a cohort of'successful endeavors to demonstrate profitability. Economic feasibility relies on developers being able to limit costs, while &6 R p .. 1 · osp1s1 , 2007. Supra note 9. See also B. Riner, 2007. Supra note 9. See also J. Porretto, 2007. Supra note 9. at the same time maximizing revenue. The cost to install and operate offshore wind farms varies widely depending on the project, however, all projects are influenced by physical parameters such as: the number of turbines, the size of the turbines, the reliability and maintenance requirements of the technology used, the distance the site is from shore, the water depth at the site, and the accessibility of site (See Table 2    O% of its investment cost on environmental assessments 95 and the Cape Wind Project off the coast of Massachusetts has already spent $30 million in pre-construction costs related to permitting, reviews and legal fees. 96 With an increased number of completed projects and as a more streamlined permitting and review process is established these preliminary costs will likely be reduced.

ii. Capital Costs
The capital cost of an offshore wind farm constitutes the largest portion of the total cost and includes the cost and installation of the turbines, foundations, substations and transmission cables (See Table 4). Offshore wind turbines are substantially more expensive than onshore turbines. The increased expense is the result of additional defense mechanisms needed by offshore structures against harsh offshore conditions, and augmented engineering to improve reliability. 97 Adding further to the expense, many turbine manufacturers are choosing to focus on the fastgrowing onshore wind market rather than offshore, causing the supply of offshore turbines to be limited and more costly. 98 These supply chain issues, however, will likely change once offshore wind projects become more common, and can support a more robust industry.  In addition to the actual turbine, the costs of the underwater foundations are significantly more expensive offshore than onshore. Driven monopiles are the most often used foundations for offshore wind farms and essentially extend the superstructure of the tower beneath the sea surface 10-30 meters. 99 Foundations for offshore turbines are usually 2-3.5 times the cost of onshore foundations as they are much larger in order to accommodate the force of the spinning turbine and hydrological forces, and require additional installation costs. 100 Typically, the cost to secure a 3.6MW wind turbine generator onshore equals $592K (£400K), compared to an offshore turbine which approximately $1.48M (£1M). 101 As wind farms are sited further offshore, in deeper waters and harsher environments, increased transportation time and risk of logistical downtime during installation are much more extensive.
Foundations located on mobile sediments also require scour protection, or large rocks placed at the base of a turbine to protect against the movement of sediments, which can potentially be detrimental to the stability of the structure and its operational life. 102 To install these massive turbines offshore ·'heavy lift vessels' are required to transport and erect the infrastructure. These vessels are not only expensive, but need to be booked well in advance which adds to the financial risk of the developer, since weather and sea conditions are so unpredictable offshore. between 20% and 25% downtime during the installation phase, in which contracted vessels remain tied up at the dock. 103 In addition to weather challenges, the large number of planned offshore wind farms worldwide and the high demand for the limited number of heavy lift vessels is expected to cause a shortage of installation vessels, increasing project delays. 104 An expanding offshore wind industry in the United States will likely require a greater investment in domestic ship-builders, suppliers and trained personnel specialized in heavy lift vessels. In response to ship shortages, suppliers are also testing advancements in the preconstruction of turbines so that the turbines are fully assembled onshore and transported out to the project site, ultimately allowing for 'tum key' installation. This type of construction decreases the number of weather related delays, however, it also complicates transportation To collect the energy produced from the turbines and transport it back to the coastal grid, transmission lines and offshore substations are required. Both onshore and offshore substations are required to step-up and down the voltage before and after transmission. Because offshore wind energy is one of the first technologies to produce energy offshore, underwater transmission cables will need to be installed for all proposed projects. Perhaps in the future, a more extensive transmission grid will exist offshore, therefore, not requiring as much capital investment on the part of the developer. 106 Furthermore, it is likely that onshore utility grids will also require dl h . d . I 07 Th 1 f h 1 upgrading to han e t e mcrease capacity. e tota cost o t ese two e ements can be very large, depending on the distance of the wind farm from the nearest coastal grid connection (see Table 4).
To date, European developers have been challenged by the rising costs of raw materials (i.e. steel and copper) used in the construction of turbines and transmission cables and the large production lag time for turbines. 108 These bottlenecks with the turbine supply chain are likely caused by the large increase in demand for this technology from a number of world markets (both on and offshore) and too few manufacturing plants. Turbine suppliers have responded to this issue with plans to increase their production lines, however, the impact of this expansion will not be felt for years, as such growth requires major investment. 109 106 In Germany, the 2006 Infrastructure Planning Acceleration Act obligates the nearest utility operator to connect the offshore wind park to the grid. This regulation affects any wind park whose construction will commence before the end of201 I. The cost of grid connection will be carried by the network operator, not the developer, and can also be distributed across all transmission network operators. German Energy Agency (DENA), 2006. "Offshore networks: The connection of offshore wind parks to the national grid." Accessed online at: www.

Operation and Maintenance Costs
A third principal cost element in generating electricity from offshore wind is the operation and maintenance (O&M) of the turbines, substations and transmission lines. These costs include regular maintenance, repairs, insurance, management, royalty and lease payments.

11°
For a newer machine, O&M costs might have an average share over the lifetime of the turbine of about 20-25% of total cost perk Wh produced. However, because current offshore turbines are not more than 20 years old, long-term O&M data is not available, or comparable for cost estimations.
Manufacturers, however, are continuously aiming to shrink these costs through the development of new turbine designs requiring less regular service visits and, therefore, reduced downtime. 111 During the initial years of operation, manufacturers offer warranties to cover malfunctions and part replacements, but after the warranty period those costs become the burden of the developer (See Table 3 trend towards larger wind turbines will continue to lower O&M costs per kWh over • 114 time.

iv. Decommissioning Costs
Decommissioning costs relate to the removal of the superstructure (i.e. turbine blades, nacelle, and towers), the foundation, any scour protection installed and possibly the offshore transmission cables at the end of the wind farms life. offshore wind farms were not left indefinitely, to disintegrate, but would also add to the already large initial investment needed by developers.

b. Financing Project Costs
With such a large investment needed for environmental testing, capital, installation, operation and maintenance, financing plays an important role in the feasibility of a project. Financing can originate from three main sources: (i) private equity, (ii) commercial debt and/or (iii) bonds. Privately owned wind projects use primarily the first two sources, in contrast to publicly owned projects which rely more heavily on bond financing.
11 7 In an all-equity financing scenario, the developer provides all capital funding for the offshore facility, usually generated from the company's other operational activities. This type of financing, therefore, is only used by private entities with balance sheets large enough to orchestrate such large up-front investments.
Developers who use credit to finance a project must convince lenders of the quality of the project, its projected net cash flow, technology warranties and the tax incentives provided by federal legislation. 11 8 Project owners benefit from two significant Federal tax incentives: (i) accelerated depreciation of capital investments 11 7 • ATM, 2008. Supra note 62. Because all current U.S. offshore wmd projects are proposed by private ~~titi~s, they will be the focus of this section.
Ibid. See also P. Astolfi, S. Baron and M.J. Small, 2008. Supra note I 0. Most current wind projects ~se project financing rather than corporate financing. Project financing differs from corporate financing m that, the project is treated as a stand-alone entity with limited recourse to the parent company. Therefore, only the project' s revenue stream can be used to pay the project' s debt obligations and the parent company's assets are not at risk. See R. Y. Redlinger, P.O. Andersen and P.E. Morthorst, 2002. Supra note 7. over the first 5 years of the project' 19 and (ii) the production tax credit (PTC) which reduced federal tax liability dollar for dollar based on the sale of project electricity during the first 10 years of operation. 120 These tax incentives can provide additional leverage to a project when negotiating with banks, though uncertainty over the longterm availability of tax credits reduces their bargaining power. 121 In fact, these tax incentives are so valuable that developers will often partner with another company, known as a ' tax equity investor', who can provide capital in exchange for tax credits. 122 As a result of the impact of these tax incentives, federal legislation regarding these credits has a considerable effect on the cost to finance, and the ultimate economic feasibility of a project.
In addition to the tax benefits available to new offshore wind developments, financing is also based on a project's production of: (i) Renewable Energy Certificates (REC) and ( and demand, but can range from $2-$49 per MWh. 124 These credits represent an additional flow of cash for an offshore wind farm and can be used to further strengthen a financing agreement. PP As are long-term agreements between a producer of renewable energy and a utility company for the purchase of a certain amount of electricity at a particular price level. These agreements lessen the risk associated with an offshore proposal by guaranteeing that the power produced by a project will be purchased at a stated price. Not every offshore wind project has a PP A prior to construction, but the existence of one is advantageous.

c. Production Cost Comparison With Traditional Energy Sources
While offshore renewable energy produces clean energy, advances energy independence and strengthens national security, in the end, the emergence of an offshore renewable energy industry will only occur if it is competitively priced compared to other current energy sources (i.e. coal, natural gas, nuclear, etc.) The cost of production from natural gas equals $0.04 to $0:05kWh, hydropower from $0.03 to $0.04/kWh and coal from $0.02 to $0.03kWh. 125 Offshore wind power, however, currently in its infancy, is being generated at between $0.08 and $0. MMS, 2006. Supra note 2. In the last 20 years, the cost of creating energy from onshore wind has dropped significantly from $0.40/kWh to $0.04 to $0.06/kWh due to technological advancements. 47 projects are considerably more expensive.
126 Cost analysis between onshore and offshore wind farms shows the relatively large expense of turbines in onshore projects, compared to offshore projects which require a much larger portion of the budget to be spent on foundations and support structures (See Figure 6). Onshore wind energy over time was able to reduce production costs to a competitive level and offshore installations are projected to show a similar decline. The U.S. Department of Energy predicts prices will decrease to $0.05/kWh by 2012 as technology improves, turbines grow larger and the number of installations also increases. 127 Without continued interest in the industry, however, these advancements and cost reductions will not come to fruition.
Despite the fact that offshore wind energy is expensive, the distinct advantage of wind energy is that after the installation process, provided that wind predictions and energy output have been accurately calculated, the generation cost of this technology is predictable and stable. This reduces the overall risk to a developer over the amount ofrevenue that is likely to be produced from the facility, and also produces stable electricity prices for consumers. During times when costs of conventional power are volatile, the price stability provided in the long-run by offshore wind may offset the relatively higher cost per kWh in the short-run. 128 In addition to price stability, offshore wind energy can also offer more accurate price forecasting. Conventional power sources fuel and O&M costs, represent a significant portion ( 40-60%) of the production costs adding to price variability, compared with offshore wind where the fixed capital costs represent the principal factor in determining production cost. 129 As a result, prices can be pre-set long in advance and not fluctuate.
In addition to comparing prices over a long-term time horizon, a fair comparison of the different energy production rates must include all internal and external costs to society. Coal and natural gas plants produce multiple environmental externalities not accounted for in their prices. Air pollution from fossil fuel fired power plants adds, not only to global warming issues, but also to human health related expenses and environmental degradation. A European Commission study that quantified the cost of externalities associated with energy production found on average an additional charge of€ 0.04-0.07 per kWh ($0.04-$0.07) should be added to coal power and € 0.01-0.03 per kWh ($0.01-$0.03) to natural gas, compared to less than € 0.01 per kWh (<$0.01) for wind energy. 130 While·it is often difficult to quantify environmental impacts, it is believed that these issues should be considered when comparing production costs.
Conventional energy rates are also somewhat under inflated because of the effects of past government subsidies that helped to lower their production rates. For example, in the mid-1990s, global fossil fuel and nuclear power subsidies equaled approximately $250-300 billion annually.
131 Since then several countries, including the United States, have reduced subsidies to these traditional energy sources, however, the impact of these subsidies now presents an obstacle to the entrance of renewable energy into the global energy market. 132 The redistribution of energy subsidies to cleaner technologies should help level the playing field and help make offshore wind energy a more competitive option.
In conclusion, the costs to install and operate an offshore wind farm are large and require a substantial amount of investment upfront. Together, these add to the risk of a project, and ultimately slow the growth of an industry. Compared to conventional sources of energy, offshore wind still appears to be too expensive, however, by not internalizing externalities or factoring in the long-term effects of past subsidies, the energy development was as follows: What is urgently needed is ... a comprehensive offshore management regime ... that considers all offshore uses within a larger planning context. A coherent and predictable federal management process for offshore renewable resources that weighs the benefits to the nation's energy future against the potential adverse effects on other ocean users, marine life, and the ocean's natural processes, should be fully integrated into the broader management regime. 139 The ·commission further specified that the legislation needed to provide for: a streamlined process for the licensing, leasing, and permitting of all renewable energy facilities sited in United States waters; consideration of the public nature of oceans and their resources; ensuring that the general public share in the financial returns from the private use and development of a public resource; and providing for a transparent decision-making process that considers interests and concerns at the state and local level. Ibid.

54
analysis of what lessons can be learned from the experiences of Cape Wind and how the approval process might be improved. 33 U.S.C. 403 § 10 reads as follows: "That the creation of any obstruction not affirmatively authorized by Congress, to the navigable capacity of any of the waters of the United States is hereby prohibited; and it shall not be lawful to build or commence the building of any wharf, pier, dolphin, boom, weir, breakwater, bulkhead, jetty, or other structures in any port, roadstead, haven, harbor, canal, navigable river, or other water of the United States, outside established harbor lines, or where no harbor lines have been established, except on plans recommended by the Chief of Engineers and authorized by the Secretary of War; and it shall not be lawful to excavate or fill, or in any manner to alter or modify the course, location, condition, or capacity of, any port, roadstead, haven, harbor, canal, lake, harbor of refuge, or enclosure within the limits of any breakwater, or of the channel of any navigable water of the Continental Shelf Lands Act (OCSLA) 145 applies federal law and jurisdiction to the seabed, subsoil, and permanently or temporarily fixed artificial islands and installations on the outer continental shelf. 146 The purpose of this act is to establish a regulatory framework for the extraction of minerals, primarily oil and gas from this area of the ocean, while taking into account environmental impacts, multiple user groups and equitable returns for the use of . a public good. Later amendments to the QCSLA gave the USACE the authority to prevent obstruction to navigation in navigable waters from artificial islands, installations, and other devices beyond 3 nautical miles. 147 This amendment extended the RHA § 10 authority out to the OCS, however, the exact meaning and jurisdiction of this extension has been . 1 148 controversrn .
Under the umbrella of these two laws, the first permit was granted to Cape Wind by the USACE to install the data tower. This permit started a long line of litigation against the developer that would continue throughout the permitting process.
In Alliance to Protect Nantucket Sound et al. v. US. Department of the Army et al. 149 the plaintiff argued that the USACE did not have the authority to grant a permit for offshore meteorological data tower and that the agency acted arbitrarily and . 148 The controversial language, is the meaning of the phrase "which may be erected [for the purposes of resource extraction]" in § l 333(a) ( 1 ). Opponents to Cape Wind argue that the use of "may be" excludes projects not related to resource extraction. Conversely, proponents argue that the language only gives examples of some types of structures that are covered. Depending upon one's reading of "may be" in §I 333(a)(I ), the USA CE RHA § J 0 authority may be to only those structures used for resource ex~action. See also, T. A Utzinger, 2004 56 capriciously in deciding that an EIS was not required. The First Circuit Court held that although Section 10 authority under the OCSLA was ambiguous as to the USA CE authority to issue this type of permit, the legislative history showed that Congress intended to the USA CE to have jurisdictional authority over all structures, not just those related to mineral extraction. The court also ruled that the USACE did not act in a manner that was arbitrary or capricious in not requiring an EIS for the tower. During this litigation questioning USACE authority to permit offshore wind projects on the OCS, the Energy Policy Act of 2005 was enacted and greatly clarified jurisdictional authority over this new industry.

ii. Energy Policy Act of 2005
The This new regulatory authority granted to DOI under the Energy Policy Act of2005 does not supercede or modify existing authority of any other federal agency, nor does it apply to areas designated as National Marine Sanctuaries, National Parks, National Wildlife Refuges or any National Monuments. The project siting process will have to take into account these exclusion zones. authorized by the OCSLA or other existing law and: ( 1) produce or support production, transportation, or transmission of energy from sources other than oil or gas; or (2) use for energy-related purposes or for other authorized marine-related purposes, facilities currently or previously used for activities authorized under the OCSLA. 152 The DOI delegated this new authority to the MMS, which also has authority over oil and gas exploration on the OCS. This new authority under OCSLA provides that MMS will, among other things: • Issue leases, easements or rights-of-way on the OCS for alternate energy and alternate use activities on a competitive basis, unless it is determined through bid solicitation that no competitive interest exist; • Coordinate and consult with affected state and local governments; • Pursue appropriate enforcement actions in the event violations occur; • Require appropriate financial surety to ensure that facilities constructed are properly removed at the end of their economic life; • Regulate and monitor alternate energy and alternate use activities; and • Determine a fair return to the Nation for private use of this public on the ocs by one agency is one approach to achieving a more comprehensive offshore management regime, managing the OCS as a whole rather than managing uses individually.
To facilitate the Secretary of the Interior's ability to determine which sites may or may not be appropriate for alternative energy development, the act also mandated an interagency digital mapping initiative. Beyond the mapping initiative, MMS has begun to sign memoranda of understanding (MOU) with other agencies to clarify the roles of each department throughout the review process. MMS has collaborated with the USCG to develop the USCG' s role in assisting in the NEPA review with respect to impacts of the project on navigation. 155 In addition, due to the fact that the DOE has a greater understanding of wind resources and the wind energy industry through the work of the National Renewable Energy Laboratory (NREL), MMS and DOE will also be signing an MOU to: facilitate cooperation between the two government entities for exchanging technical information relating to offshore wind energy R&D activities, 154 .
engineering principles of wind turbines and their components, and certification procedures for the turbines and the entire structure.

156
These types of interagency MO Us are not required by law to be published publicly and, therefore, their existence can often be unclear. However, it can be expected that additional MOUs are likely as MMS finalizes its regulations. 157 These types of agreements will not only help clarify roles but will also draw on the expertise of each agency to produce the most effective regulatory scheme for offshore renewable energy. was essentially on hold as developers are unable to secure leases, or to begin project planning and design.

iii. Mineral Management Service Proposed Regulations
The agency first drafted a Programmatic Environmental Impact Statement (EIS) to address the general impacts offshore renewable energy production could have on the OCS and best management practices that should be implemented. The MMS chose to prepare this programmatic EIS to assist its efforts to develop a comprehensive management scheme and to establish the Alternative Energy and Alternate Use Program (AEAUP) for the OCS. The AEAUP will approve and manage permitting for all offshore renewable projects. The aim of this program is to "provide a road map for developers to follow during the permitting process, allowing developers to more adequately estimate the resources required for a proposed project" and, ultimately, to facilitate faster development of the alternative energy industry on the OCS. 160 In addition to the guidelines specifically outlined, the programmatic EIS also acknowledges the agency's authority to consider, as appropriate, individual projects on a case-by-case basis before final regulations are completed. 161  details of a proposal. 162 The AEAUP acted as the MMS interim policy and is in effect until the MMS final rules take effect, which will then regulate all program activities . fi d 163 from that pomt orwar .

Leases, Bidding Procedures and Fees
Within the final rules developed for alternative energy on the OCS, the MMS identifies two types ofleases that can be awarded to developers: (1) commercial leases for 25 years of full-scale commercial energy production, and (2)  The commercial leasing process for offshore renewable energy is designed after the leasing system used with OCS oil and gas exploration and development.
Commercial leases can be obtained in two ways: through a competitive bidding process or a non-competitive bidding process (See Figure 7). The main difference between the two is with a competitive process MMS identifies a particular area on the ocs and then places a call for bids from all interested parties. Alternatively, a noncompetitive bidding process is initiated when a developer submits a lease request to MMS, afterward confirms through a lack of response to a proposed sale notice, that there is no competitive interest in that area by any other developer. 168 In cases involving a competitive bid, MMS is proposing the use of a cash bonus system as the basis for determining the winning bidder. Where no competitive interest exists in a lease area, a marginal acquisition fee is being considered by MMS. 169 The Energy Policy Act of 2005 mandates that 'the Secretary shall establish royalties, fees, rentals, bonuses, or other payments to ensure a fair return to the United States for any lease, easement, or right-of-way granted.' 170 Therefore, once a lease is obtained the lessee will be responsible for annual rental fees based on the acreage amount leased. MMS is proposing rental rates of $3 to $5 per acre for commercial leases, project easements and rights-of-way. 168 Ibid. 169 Ibid. This rate was set below the current rates for oil and gas leases (which equal on average approximately $5.26/ acre 171 ) because the MMS recognizes that the underlying value of the leased acreage used for an offshore renewable energy facility is much less impacted compared to oil and gas projects.
172 While these lease payments appear low, it is estimated that Cape Wind lease payments over the first 20 years will equal approximately $5.6 million. 173 In addition to rental fees, royalty payments will also be required once an offshore wind project starts to produce revenues. While the royalty scheme has been left somewhat ambiguous in the proposed rules, MMS has suggested that royalty rates may be set at approximately 1 % of gross revenue during the first two years of operation, increasing to 2% thereafter. Comparably these rates are much lower than those currently used for oil and gas leases, which are currently at approximately While leases provide developers with property rights, permits provide permission to utilize a lease for a particular activity. Throughout the leasing process, multiple federal environmental reviews are required before the project will be allowed to continue. During these reviews, MMS will serve as the lead agency and, therefore, permitting authority for offshore wind projects 178 under RHA Section 10 and under the . 404 179 Clean Water Act Section .

National Environmental Protection Act
Under the National Environmental Protection Act (NEPA) 180 , federal agencies are required to consider the environmental impacts of "major federal actions significantly affecting the quality of the human environment." 181 Granting federal permits for offshore wind farms constitutes a federal action and, therefore, requires the preparation of an Environmental Impact Statement (EIS) to review all potential environmental impacts of an offshore wind project. 182 During this review process conducted by MMS, input from many other agencies regarding the impact of a wind farm is taken into account (see Table 5). While none of these agencies has the authority to deny the issuance of a permit, agency comments are incorporated into the final EIS, which is subsequently used in the approval of a permit. Once MMS has reviewed and approved all aspects of the EIS, the agency may then grant a lease, easement or right-of-way to an offshore wind energy project on the OCS.
Because the Energy Policy Act of 2005 was enacted in the middle ofUSACE's EIS review of Cape Wind, the act contained specific provisions regarding its status.
The 'Savings Provision' of Section 388 183 states that: Nothing in the amendment made by subsection (a) requires the re-submittal of any document that was previously submitted or the reauthorization of any action that was previously authorized with respect to a project for which, before the date of enactment of this Act --( t) an offshore test facility has been constructed; or (2) a request for a proposal has been issued by a public authority.
This exception allowed Cape Wind to continue on with its review without having to start over from the beginning, which would have subjected the project to competitive bidding and an even more extended permitting and review process.  • Formal consultation and review of potential impacts to marine sanctuaries in the area pursuant to the Marine Protection, Research and Sanctuaries Act * In addition, depending on its location, a wind energy project Section 10 Permit may be subject to review~ one or more state coastal zone management pro_g_rams in accordance 69 with the Coastal Zone Mana ement Act federal consistenc rovisions.

Section 101404 Permit
In addition to a NEPA review, an offshore wind project must also obtain a 70 installation of a wind farm and undersea transmission cables connecting the wind farm to the utility grid.

ii. State Permitting and Review
Even if the actual wind farm is located in federal waters, as is the case with Cape Wind, transmission lines must run through state waters to connect the project to the grid. As a result, numerous state and local permits apply. While each state's permitting requirements are unique and dependent upon the specific project site, there are some universal certifications and reviews to which all proposed offshore wind projects will be subject. Two of these common state reviews are: (1)  and also on the specific details of that project, however, all projects will require town, some additional evaluation.

iii. Permitting Case Study: Cape Wind
Since Cape Wind is the only offshore wind project that has advanced into the permitting phase, it is examined here to illustrate the additional state and local review process to which potential offshore wind projects may be subject (See Table 6). In all, Cape Wind requires 13 official permits and reviews, not including the additional agency approvals required during the NEPA review process. Despite the fact that this permitting process was initiated eight years ago, many permits are still pending or under litigation. Two main opposition groups, the Alliance to Protect Nantucket Sound and the Ten Tax Payer Citizen Group have staged an ongoing offensive against the project, adding to the delay and expense of the project. In response to the extensive permitting requirements and legal challenges, Cape Wind has requested that the Energy Facilities Siting Board (EFSB) issue a composite certificate, or so-called "super permit," that would encompass eight local and state permits necessary for the project to proceed. 198  .,i::.. ,    CCC is a regional land use planning and regulatory agency that reviews projects within Commission Commission state waters that may affect the regional planning or environment through impacts of Review water quality, traffic flow, historic values, open space, natural resources or economic devel~ment.

One of the major lessons that Cape Wind has demonstrated is how important
public acceptance is to the success of a project. If the public does not welcome a wind fann, litigation is almost certain. Even in instances where the opposition's legal challenges were dismissed by the court, the cases added delay and expense to the project. Building public support prior to formally proposing a project may, in the end, save substantial amounts of time and money for the developer. The potential for delays from litigation and regulatory uncertainty to deter investment in this new industry, has led other coastal states within the Northeast and Mid-Atlantic region to adopt a new permitting scheme for offshore wind energy.
The Cape Wind permitting process has also magnified the current lack of agency coordination and essentially how not to structure an approval process. Coastal states within the region which want to encourage and promote an offshore wind industry in their states have recognized the issues of Cape Wind' s experience and are now in the process of formulating a completely different approach that is more streamlined and government driven rather than developer driven. For example, Rhode Island's coastal zone management agency, the Coastal Resources Management Council (CRMC), is developing a Special Area Management Plan (SAMP) covering the state and federal waters out to 20 miles. The offshore SAMP will define use zones for Rhode Island' s offshore waters, taking into account existing uses, critical resources and transportation lanes of offshore areas. The result of this SAMP will be preselected sites that will be more easily permitted and developed by the project developer. Under the CZMA, preparation of a SAMP enables permitting of projects within the area covered by the SAMP to proceed with a more abbreviated review of an Environmental Assessment in lieu of a full Environmental Impact Statement.
Completion of the SAMP is expected within two years. 207 While a offshore SAMP may aid in the siting and permitting of the actual wind farm, it is not clear whether the SAMP will aid in the permitting of transmission lines that run through coastal and tidelands and resulted in many of the lawsuits encountered by Cape Wind. The idea to create a one-stop permitting process though, serves as an incentive to potential developers, choosing a state with a more favorable regulatory environment.
The State of Massachusetts has recognized the need for a comprehensive ocean management scheme and recently enacted the Oceans Act of 2008. 208 The Act is an effort by the state to create a uniform regulatory system to balance current and future commercial and recreational uses within Massachusetts' s state waters. The Act calls for a comprehensive ocean management plan to be developed by the Office of Energy and Environmental Affairs, and will be used to coordinate all certificates, licenses, permits and approvals for any proposed projects. This plan is similar to Rhode Island's Ocean SAMP, but in this case applies only to state waters. While the geographical scope of each plan differs, the aim of both plans is the same, determining the optimal locations for future offshore projects and establishing a regulatory regime by which those projects will be developed.

V Government Incentives
The current energy market presents several barriers to the emergence of an offshore wind industry in the Northeast/Mid Atlantic region of the United States.
Collectively, the high initial investment costs of offshore wind farms, the effects of past conventional energy subsidies and overall regulatory uncertainty has slowed the progression of offshore wind power despite the growing interest in its development. offshore wind industry, and currently hold the top two positions globally in operating capacity. These two countries provide useful comparisons for the current U.S. incentive scheme, and may help provide useful lessons to apply to U.S. offshore wind energy policy.
The purpose of this chapter is first to define the many types promotional policies and financial incentives that can be employed by a government to advance a new offshore wind industry. Second, it will identify, compare and analyze current incentives being offered at the federal and state level in the Northeast/Mid Atlantic region. Lastly, U.S. incentives for offshore wind energy (both state and federal) will be compared with incentives provided in the United Kingdom and Denmark, two countries which both have established an offshore wind industry.

a. Types of Incentives
Government incentives can be designed to either create favorable regulatory conditions or provide financial support for a new industry. 210 Promotional policies include policies that expedite the permitting or approval process, add-in the cost of externalities to conventional energy generation, or facilitate a structured bidding process for offshore leases. Financial incentives provide monetary support fixing price levels to guarantee project profitability, or by providing subsidies, and/or tax credits to lower the cost of installing and operating an offshore wind facility. The various 210 There are various other forms market based incentives that can be used to encourage investment in rene~able energy. For example, voluntary green marketing allows consumers to choose to pay a premmm to ensure their electricity is being generated from renewable sources. The focus of this chapter is on governmental incentives for renewable energy. promotional mechanisms are not mutually exclusive and can be used in combination to provide the greatest effect. Each method, however, does have advantages and disadvantages to its use (See Table 7). Recognizing their strengths and weaknesses can aid policy makers in deciding which, or what combination of incentives to adopt.

i. Promotional Policies
Promotional policies are policies, regulations or requirements that bolster the use of energy from renewable sources. The support provided by promotional policies can be direct or indirect depending on its structure (see Table 8). Two types of direct promotional policies are renewable quotas that guarantee a share of the energy market to renewable energy, and government sponsored bidding processes, or tendering systems, that facilitate offshore leasing. 211 Indirect promotional policies include policies that help to level the competition between renewables and conventional power generation, or a streamlined regulatory system that makes the approval and development process easier to navigate.
Renewable Portfolio Standards (RPS), also known as renewable obligations, is the most ubiquitous type of promotional policy. Governments that institute RPS targets recognize that a renewable technology may not be able to compete with conventional energy generation on the open market, therefore a separate market just for renewables is created. RPS require electricity retailers to meet a certain percentage of total energy production from renewable sources, through the use of Renewable  Advanta es and Disadvanta es + Ensures operators of a fixed return on investment + Transparent and flexible (different technologies can have different tariffs) + Developers can use these agreements to obtain affordable financing +Allow for technology-specific promotion -Prices are usually fixed at higher rates, which are then passed along to the consumer or taxpayer -Does not ensure that a particular target for capacity is met, since the market determines industry capacity + Straight forward, transparent + Subsidies can be paid upfront which adds security to the project -Economically inefficient, does not differentiate good projects from bad, therefore inefficient projects still get subsidized -Must be strictly monitored by a government regulator for abuse to ensure that project costs are not artificially inflated -Funds need to be generated through taxes or consumer surcharges -Subsidies can be more olitically unfavorable + Effective in enticing large investors into the industry, who want to lower their tax burden -Can be inefficient if investors are more interested in tax shelter than electricity production +/-Less transparent than direct investment subsidies, so it may be more politically acceptable 7 Continued. Types of Incentives Used in Promoting New Renewable Energy Table  Industries.

Incentive Advanta_g_es and Disadvanta_g_es
~ d" + Straightforward policy mechanism f n subsidies* are 1rect fr!!IUC 10 +Eliminates the temptation to inflate project costs ~;ts paid per kilowatt-hour :electricity produced + Encourages production efficiency -Funds need to be generated through taxes or consumer surcharges -Subsidies can be more politically unfavorable -Project owners must rely on the assumption that subsidies will continue to be provided into the future uction tax credits awarded +Eliminates the temptation to inflate project costs ;=project owners based on the per + Encourages production efficiency kilowatt-hour of electricity +Effective in enticing large investors into the industry, produced who want to lower their tax burden -Project owners must rely on the assumption that subsidies will continue to be provided into the future Gnnts or loans*: Funds awarded +Lowers the up front capital costs required for a project ortemporarily loaned out to -Compared to other more direct incentives, investing in projects; most likely funded R&D projects does not necessarily translate into increased through a system benefit fund or installed capacity other government created fund; used to support R&D, capital investments, resource assessment or environmental impacts Loan Guarantees/ Preferential + Designed to provide loans at favorable interest rates (below market rates) Financing Organizations: Government backed loans that reduce the risk to creditors of default  Tendering systems, or a government process of open bidding of pre-designated areas for offshore wind, allow for controlled industry expansion in appropriate areas.
Competition among developers also helps to reduce project costs over time. These systems can be used in conjunction with an abbreviated permitting process, making the development process as easy and as quick as possible. By pre-determining areas for lease, a developer can expect a much lower risk of project litigation or siting delay.
This type of promotional policy requires a large amount of government commitment toward the growth of the industry, as well as a well-designed framework coordinating all government agencies involved.
Policies that make it easier for interested developers to obtain approval for projects, or level the playing field in the competitive electricity market can indirectly encourage the growth of an offshore wind industry. Developing a clear and concise permitting scheme reduces delays, at either the federal, state or local level, that ultimately increase the cost and can impede the growth of an industry. Both processes, however, require significant amounts of coordination and collaboration across agencies and departments, which may be difficult in situations where there are differing opinions and objectives. Though any degree of cooperation or integration within the approval process, helps to streamline the process and make project 89 fixed pricing laws mandate the purchase price of electricity generated from renewables, thereby ensuring a certain level of return for an investor. Under fixed pricing systems, the government sets the price for a renewable energy technology and the market determines the amount of capacity that is installed based on that price.
Conversely, regulatory policies that set a quota requiring a certain percentage of total energy production to originate from renewable sources, allow government agencies to set the amount of desired renewable energy capacity and let the market determine the price of the electricity produced. 218 The most prevalent form of a fixed pricing system is called a 'feed-in tariff.' Under a feed-in tariff, electric utilities are obligated to enable renewable energy facilities (i.e. an offshore wind farm) to connect to the electric grid, and the operators of the wind farm are paid a fixed price for every kWh of electricity they feed into the grid. 219 The premium added to the market price for electricity is generally passed down to the consumers, or the taxpayers. 220 Today most pricing laws provide a fixed payment for a period of time (approximately 20 years) based on the technology type, facility size and cost of generation, and are incrementally removed thereafter. To succeed in increasing industry growth, feed-in tariffs must be high enough to cover the additional production costs of a technology like offshore wind, and they also need to be guaranteed for a time period long enough to assure a sufficient rate ofretum for the developer. 221 In addition to fixed pricing laws, financial incentives can be applied in multiple ways, as investment support upfront or production support throughout the project's operating life. Investment incentives are designed to reduce the capital costs of a project, thereby encouraging further investment. Alternatively, production incentives are aimed at reducing the cost of producing electricity from renewable sources. 222 In either case, investment and production incentives can serve as financing instruments to l d . 223 negotiate better en mg terms.
Investment subsidies are direct payments provided based on the installed capacity, or a percentage of the total investment cost of a project. While this strategy is straightforward in application, it also requires strict monitoring against abuse to ensure that project costs are not artificially inflated. As a result, an attentive regulator is needed when implementing this type of financial incentive. Similarly, investment tax credits allow owners to reduce their tax liability based on the size of investment in the project and are also subject to problem of project cost inflation by developers.
However, with an investment tax credit system, an additional issue can be investors who are more interested in the tax shelter than operating an efficient production facility, ultimately resulting in poor performance projects. 224 On the other hand, investment tax credits can be very effective in enticing large investors who are very interested in lowering their corporate tax burden. 225 Accelerated depreciation, or tax laws that allow for developers to write off a larger portion of their capital expense during the early years of operation, could also be considered a type of investment credit because it results in decreased tax liability. 222 Ibid.
223 224 Se~ Ch. Ill Economics of Offshore Wind §b Financing. This was the case in California during the early 1980s when investment credits were so lucrative for onshore wind farm developers that investors could recoup 66-95% of their investment over the first few r 2 e 5 ars of a project, producing little to no electricity. See . Supra note 132

Ibid.
Similarly, production incentives can be granted as subsidies or tax credits, but are based on the yearly kilowatt-hour energy generation of a project and not the amount of capital investment. Consequently, production incentives encourage efficient and reliable facilities and eliminate the temptation of owners to inflate project costs. 226 However, because production incentives are more long-term in nature, project owners must rely on the assumption that the incentives will continue to be available in the future. Continual reauthorization makes production incentives much more sensitive to the political whim of the legislating body, either at the state or federal level. For that reason, the shorter the duration of the production incentive, the more renewals are required, and the greater the risk of termination, which in tum, reduces the financing power of such a subsidy or tax credit, ultimately making it an ineffective gen ce of a new clean-energy industry such as offshore wind. In the United em er States, the federal government can provide incentives to promote offshore wind energy on a national scale, while individual states within the Northeast/Mid-Atlantic region can enact policies to encourage offshore wind projects that will serve their state's energy needs. The absence of any operational wind farms in the region, despite notable interest by developers, prompts the question 'how is the economic feasibility of offshore wind projects affected by current federal and state policies in this region?' To begin, an examination of the promotional policies and financial incentives offered to private industry at the federal and state levels will be performed. There are a number of incentives offered to public entities (i.e. municipal or tribal projects), such as the Renewable Energy Production Incentive, Clean Renewable Energy Bonds, Qualified Energy C~nservation Bonds, however, those will not be discussed here since they are not aimed at promoting a g~1vate offshore wind energy industry in the U.S. . 1 This act required utility companies to buy power from the lowest cost producer, Ol . including independently owned electric companies. Prior to PURP A, only utility companies could own _ and operate electric generating plants. This legislation encouraged the development of renewable resources by guaranteeing a market for their electricity, however, it was fairly limited in that it applied to only small-scale renewable projects, and all onshore.
Technically, PURP A only calls for utility companies to buy renewable energy if it is more cost competitive compared to conventional sources. By strictly interpreting the law, the Federal Energy Regulatory Commission has forbidden the inclusion of externalities and other factors in the pricing of electricity and ultimately d .
s a resu t, most convent10na energy generation p ants are almost always the most cost competitive, and PURP A has lost much of its applicability to modem energy markets. Since PURP A, the federal government has not instituted any additional promotional policies and instead has relied to a large extent on tax credits to encourage the development ofrenewable energy (see Table   9.)233    The Renewable Energy Production Incentive is similar to the PTC, but instead of granting a credit ~oward federal income taxes this incentive is intended for project owners that are not subject to federal mcome taxes (i.e state and local municipalities, or non-profit organizations) and gives a payment based on the per kilowatt-hour generation. 235 This incentive program administered through the Department of Energy over time Jost much of its appropriated funding and became unable to pay out all incentive payments. The accelerated depreciation incentive was taken even further by the federal Economic Stimulus Act of2~08, which included a 50% bonus depreciation provision for eligible renewable-energy systems acquired and placed in service in 2008. If property met these requirements, the owner was entitled to deduct 50% of the adjusted basis of the property in 2008. The remaining 50% of the adjusted basis of the property is depreciated over the ordinary depreciation schedule. However, since no offshore wind farms were installed in 2008, this incentive does not directly apply.

ii. Federal Financial Incentives
[A]void, reduce or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the . . d 244 time the guarantee is issue .
The loan guarantee program has over $10 billion in authority to issue loan guarantees for energy efficiency, renewable energy and advanced transmission and distribution projects, however, the authority to issue these loan guarantees expires on September 30, 2009. 245 Since the program's initiation in 2005, energy efficiency, renewable energy and advanced transmission and distribution projects have received $10 billion in guarantees; nuclear and clean-coal power facilities have received twice that amount, receiving $28.5 billion in backing. 246 There are additional incentives offered by the federal government to promote wind energy, however, they are aimed at projects developed by the public sector and up to 7.5% in 2013 and beyond. 248 These standards, however, lack the teeth present in a hard quota and only apply to federal buildings and not the entire electric market.

iii. American Recovery and Reinvestment Act of 2009
A substantial boost for renewable energy incentives occurred in the American Recovery and Reinvestment Act of 2009, including multiple provisions to further encourage wind energy development in the United States. 249 Four items applying specifically to offshore wind include: • A 3-year extension of the PTC, therefore, any new installations in-service before 2013 will receive a 10-year, 2.1 ¢/kWh production tax credit.
• An option to convert the PTC into a U.S. Treasury Grant for projects placed in service before 2013, used to cover 30% of the cost of qualified property (qualified property is new equipment including tangible property integral to the wind energy facility), however the grant application must be filed prior to October 1, 2011. 250 These grants can provide a large portion of the upfront capital costs required for an offshore wind facility and eliminate the need for a tax-equity partner. 251 This provision provides flexibility to the developer in choosing the most beneficial form of financial incentive.
In all this Act opens up new sources and forms of funding for offshore wind energy at a time when many renewable energy projects are being stalled by the economic downturn and it provides a longer commitment to the PTC, in comparison to past practice.
In spite of the recent improvements to the financial incentives available to offshore wind, currently there are still no strong promotional policies. As PURP A has become less influential over time, the financial incentives of the PTC, MACRS accelerated depreciation standards, the DOE loan guarantee program and the new grants and investment credits offered under the American Recovery and Reinvestment Act of2009, make up the entire promotional scheme.at the federal level. Even though, the American Recovery and Reinvestment Act extended the PTC and the DOE loan guarantees, their duration is still somewhat short, with each set to expire within the next three years. As a result, offshore wind projects that are still in early proposal stages in the Northeast/Mid Atlantic cannot be assured that these incentives will be present as their project progresses to installation.

c. Northeast/Mid-Atlantic State Incentives
One common promotional policy shared by all of the four Northeast/Mid-Atlantic States examined in this study, along with six additional states within the region, results from involvement in the Regional Greenhouse Gas Initiative (RGGI).
This initiative is implementing the first mandatory cap-and-trade program in the United States to reduce greenhouse gas emissions. 252 Beginning in 2011, RGGI will limit the total amount of C02 emissions from conventional fossil-fuel power plants in all ten states to an amount called the "cap," currently set at 188 million tons of C0 2 per year. 253 While there is no limit on the amount of C0 2 that any particular power plant can emit, the combined C0 2 emissions from all covered power plants within the region cannot exceed this cap. Under this system, every regulated power plant is required to own one permit (called an "allowance") for each ton of C0 2 that it emits.
Allowances can be traded within a market, at any time before a compliance deadline, however, the individual states control the total number of allowances available within their state to guarantee that the cap is not exceeded (See Table 10.). The market-based approach of tradable allowances not only attaches a price to some of the externalities associated with fossil fuel power plants, but also promotes power plant efficiency and will help level the playing field for offshore wind energy within the energy market.  The central promotional policy in the State of Massachusetts is a Renewable Portfolio Standard that establishes a state-wide renewable energy quota. The state has also started to take the initial steps in expediting the permitting review process, by to support renewable-energy companies in the early stage of development. 262 The state also has an Alternative Energy and Energy Conservation Patent ExemptioQ. that grants a corporate excise tax deduction for any income received from the sale or lease of a U.S. patent deemed beneficial for energy conservation or alternative energy development for up to five years. 263 Many of the financial incentives offered through MTC, except for the Business Expansion Initiative grants, which can equal up to $3 million, are for amounts less than or equal to $500,000. 264 Incentives of such small amounts, relative to the total cost of an offshore wind facility, do not provide strong encouragement for the developing industry. As a result, it appears that in Massachusetts the promotional policies are more robust than the financial incentives. Out of the promotional policies, the RPS is by far the strongest promotional instrument. Furthermore, the comprehensive Ocean Management Plan being created, as well as the model ordinance for local permitting is the first step in creating a concise permitting structure through all levels of government.

ii. Rhode Island
Rhode Island shares many of the same types of incentives offered in primarily wind resources off the coasts of the state. 267 This program is unique, in that it specifically targets offshore wind energy in meeting the state's RPS.
In a decision to be proactive in balancing offshore activities, Rhode Island began an unprecedented process of zoning its offshore waters. The Ocean Special Area Management Plan (Ocean SAMP) will define use zones for Rhode Island's offshore waters, taking into account existing uses, critical resources and transportation lanes of offshore areas (see Figure 8). The result of this SAMP will be pre-selected sites for offshore renewable energy that will be more easily permitted and developed   In all, Rhode Island has focused primarily promotional policies, rather than the use of financial incentives. It is similar to most states within the region in mandating an RPS, however additional promotional policies offered have gone a step further, with the creation of the Ocean SAMP and the initiative to obtain 15% of its electricity from wind energy specifically. While the Ocean SAMP has yet to be completed, and its impact on the permitting and approval process of offshore wind projects is still unknown, the initiation of such a process indicates the state' s commitment to promoting offshore renewable energy. It also provides a unique type of incentive in comparison to surrounding states, and has the potential to safeguard against the delays 118 smaller sized grants (less than $250,000), which are less beneficial to developers of larger offshore projects.
Offshore wind energy in Delaware is primarily promoted through the state's RPS mandates and the inflated RPS credits. Exemptions in Delaware's RPS, however, that allow municipal and rural cooperatives to not participate in the state's RPS, reduces the demand for RPS credits, and may undermine the influence of this promotional policy. Lastly, the financial incentives offered by the State of Delaware are too small for commercial offshore wind energy projects and, therefore, do not help to encourage a commercial offshore wind energy industry.

d. Comparison Between Federal and State Incentives
The three main barriers identified in this study to an offshore wind energy industry in the Northeast/Mid-Atlantic are (i) high upfront capital costs, (ii) an extensive and at times unclear regulatory/approval process, and (iii) inequitable competition from conventional energy sources. Therefore, the incentives offered in the U.S. at the federal and state level will be evaluated within the context of these three issues. In general, on the federal level, financial incentives are the dominant form of promotional instrument being used, in contrast to primarily regulatory incentives on the state-level (see Table 5-2). The fact that no offshore wind facilities have yet been installed in the Northeast/Mid-Atlantic suggests that past support mechanisms in place (prior to those offered in the American Recovery and Reinvestment Act of 2009) may have not addressed all the obstacles facing offshore wind. The new federal support, however, may provide the additional support necessary to assure an offshore wind farm installation within the near future.
High upfront capital costs are primarily relieved through federal financial incentives: PTC, U.S. Treasury grants, the accelerated depreciation program and the DOE loan guarantees. However, the effectiveness of the main financial incentive, the PTC, has been impacted by its short duration and unpredictability. The PTC, while very important to the feasibility of offshore wind projects, has been allowed to expire on so many occasions that its value in the financing of projects has been diluted. Even with the recent renewal of the PTC for three years, this credit still remains unreliable to project developers, especially when particular offshore wind proposal like Cape Wind have been in assessment for over seven years. The inconsistency of this production credit not only reduces financing opportunities for offshore wind developers, it also signals that there is a lack of long-term commitment by Congress in the development of an offshore wind energy industry. The option to convert the PTC into a U.S. Treasury Grant upfront, given in the recent economic stimulus package, is a much more reliable financial incentive as all the support is given at once. The grants may also be a more valuable to developers who need the most assistance with financing capital costs (i.e. turbines and support structures, which can together account for over 50% of the cost). 287 Both of these financial incentives, the PTC and the U.S. Treasury Grants, are only guaranteed for the next 2-3 years, after which time their futures remain uncertain. This is especially true when considering the fact that this current period of economic stimulus, which resulted in the extension and creation of 287 See Ch lll Economics of Offshore Wind Energy, Figure 3-3. these two incentives, will likely be followed by a period of budgetary cuts by the government to address the nation's deficit.
Despite the fact that all four Northeast/Mid-Atlantic states have System Benefit Funds, most are not large enough to provide financial incentives to offset the large capital investment required for commercial offshore wind projects. Most of the grants and loans offered through these funds are for less than $250,000 or offered to public entities, such as municipalities. The only state that appears to be offering direct financial assistance in the development of an offshore wind industry is New Jersey, with the rebate program for meteorological towers, and the $4 million grant offered for a pilot program. By offering financial incentives, tailored to meet the needs of current offshore wind developers, the greater the potential there is to advance the industry within the state. In an attempt to create a more favorable business environment for an offshore wind energy manufacturing industry, Rhode Island is offering sales tax exemptions for equipment sold within the state and corporate state tax exemptions for companies that create a certain number of jobs within the state.
These incentives indirectly lower the amount of capital investment by supporting local production of wind turbines and other infrastructure.
Currently, there are no applicable federal promotional policies to expedite the approval/permitting process. In fact, the delay in MMS regulations regarding offshore wind energy has further delayed proposed projects throughout the region. The recent change in political climate however, has placed a higher priority on the development of renewable energy industries, and opens the door for greater regulatory support of offshore wind in the future. State incentives addressing this issue are currently offered in Rhode Island through the Ocean SAMP, and in Massachusetts through the Ocean Management Plan, and Model Local Ordinance for Permitting Large Wind Facilities.
Together the RI Ocean SAMP and the MA Ocean Management Plan go the farthest in providing for an expedited review system, the Model Local Ordinance for Permitting Large Wind Facilities provides a valuable tool to local governments in developing a fully streamlined permitting/approval process. New Jersey has not formally adopted any regulatory incentive to improve the approval process, however the funding of a pilot project will likely serve as a learning exercise in how the state's regulatory process can be improved upon for future projects.
Incentives intended to level the playing field between renewable and conventional energy sources are all implemented at the state level, through the use of RPS, and the RGGI cap and trade system. Each state' s RPS sets aside a certain portion of the energy market just for renewable energy, eliminating the unfair competition between the developing offshore wind industry and the long subsidized conventional energy sources. In addition, New Jersey and Rhode Island have both set specific state targets for offshore wind energy generation, which shows state commitment to industry development within their waters. The RGGI cap and trade system begins to force electricity producers to internalize the externalities that they produce, and, therefore, indirectly helps to promote the development of clean energy throughout the region.
In summary, the promotional schemes provided to offshore wind energy in the U.S. consist of financial incentives offered on the federal level and primarily promotional policies on the state level. The federal financial incentives while strengthened from the economic stimulus bill, still lack a long-term reliable future.
However, the flexibility provided by the option between production tax credits and upfront capital grants may offer the added financial support needed to assure the installation and operation of the region's first offshore wind facility. Out of the four states examined in this study, New Jersey and Rhode Island appear to be the states most favorable to offshore wind energy development. Both states have specific offshore wind energy targets and incentives, through the New Jersey Energy Master  • A need for long-term grid planning; • The importance of more efficient approval procedures, which build on past experience and are in proportion with the scafo of the project; • A need to ensure good quality assessments and clear rules for allocation of grid costs; and • The establishment and use of marine spatial planning instruments to reach optimal site selection. 294  In response to these recommendations, the European Commission published its Strategic Energy Review in November 2008. It proposed a number of Priority Infrastructure Projects, particularly creating a blueprint for a North Sea offshore grid, "to interconnect national electricity grids in North-West Europe together and plug-in the numerous planned offshore wind projects", along with additional interconnection plans for the Mediterranean and Baltic regions to facilitate the development of renewables and form the foundation for "a future European supergrid. " 295 Together all of these promotional policies are building an E.U. framework for offshore wind power targeted at removing industry barriers. In addition, each member state can institute its own promotional instruments to encourage offshore wind development of its shores. The two countries operating the largest percentage of global offshore wind energy are Denmark (with 28%, 409.15 MW, see Figure 9) and the United Kingdom (with 39%, 590.8 MW).

i. Denmark
Denmark was the first country to install and operate an offshore wind farm in 1991 , and currently boasts the two largest operational offshore wind farms, though multiple U.K. farms under construction will soon take that title. Much of Denmark' s early success in the development of offshore wind can be attributed to strong and explicit government ambition to develop offshore wind energy, with the goal of becoming a world leader in the industry. A stable commitment to renewable energy financial support for renewable energy in order to gain a foothold in the energy market, led to the creation of strong government incentives and the development often offshore wind projects (See Figure 10).
Early on, the Danish government understood the need for a clear regulatory system regarding offshore wind energy development, therefore primary jurisdiction over the emerging industry was given to the Danish Energy Authority, with all other relevant government agencies coordinated through this authority. A tendering system of pre-designated offshore lease areas was also employed to control the rate and areas developed. The aim of this regulatory structure is to create a streamlined framework for "one-stop shopping." 297 In addition, the Danish government realized the importance of public/private collaboration with electricity companies to analyze and plan for offshore wind development. As a result of this partnership, an Action Plan on Offshore Wind Power and an extensive demonstration program emerged, resulting in the two largest offshore projects (Homs Rev and Nysted/Rodsand, see Figure 10). 298 The Danish Energy Authority, also engaged in a government screening process, Denmark's feed-in tariff has been seen as a vital financial incentive in the development of the country's offshore wind energy industry. Beginning in the 1980s onshore, the use of a feed-in tariff system obligated utilities to purchase windgenerated electricity at a rate that equaled 85% of the price paid by consumers. 300 The tariff led to the creation of a bottom-up market for small (25-55 kW) onshore wind projects, gradually growing into offshore wind development as demand rose and onshore space became limited. The tariff requirements were modified in 200 I , no longer requiring utilities to pay a fixed tariff, but rather a variable feed-in tariff in addition to the market price so that the total price fell within €0.048-0.069/kWh (approximately $0.06-0.09 USD/kWh). 301 Past feed-in tariffs have been on the order of approximately $0.02 USD/k Wh for the first 10-12 years of the facility's operation. 302 The amount required in the form of the variable feed-in tariff then became a criterion on which tendering bids were evaluated. The applicant requiring the least amount of financial support from a feed-in tariff was awarded the lease. However, some have argued that this change in the financial incentive to a variable feed-in tariff has made the industry less profitable and caused a slow-down in installed capacity within the country (see Figure 11).  this industry is able to compete on a more even basis with conventional energy sources.
In addition to providing a fixed pricing incentive, the Danish government also mandated that the costs of grid connection be split between the grid operator and the wind turbine owner according to the rules set out in a government order. 303 For offshore wind projects located on sites predetermined by the government's planning process, the grid operator pays grid connection costs from an offshore grid junction point and the internal grid of the wind farm is paid by the project owner. For offshore farms in other locations, the developer has to pay the connection costs to an onshore junction point. 304 This not only reduced the amount of upfront capital costs required for a project, but also encourages development within pre-determined offshore wind energy zones. However, the first promotional schemes involved fixed pricing systems, together with a national quota.
The first promotional instrument used was the·Non-Fossil Fuel Obligation (NFFO), introduced in 1990 following the privatization of its electricity supply industry. The original intention of this program was to support the country's nuclear power plants, which were not otherwise cost competitive, however, renewable energy generation also benefited from this scheme. The NFFO system set aside a certain portion of the electricity market for renewable energy, and used a competitive bidding 309 BWEA, "Offshore Wind." Available online at: http://www.bwea.com/offshore/info.html. Last accessed March, 2009. system to solicit proposals from developers. Bids with the lowest per kilowatt-hour production rate, would be awarded power purchase contracts by the government.
Regional electricity suppliers were mandated to purchase electricity produced from these NFFO renewable projects at premium prices, to be later compensated by the government for the additional cost. Government funding for these price premiums were raised through a Fossil Fuel Levy, or tax on electricity generated from conventional fossil fuels. 311 This NFFO strategy was the main policy used by the In conjunction with the tendering of offshore leases, the U.K. also implemented a Capital Grant Scheme to provide funding for certain offshore projects.
The primary aim of the scheme is to: • Stimulate early development of a significant number of offshore wind farms.
• Deliver an early contribution to the Renewables Obligation and emission reductions; • Underpin development of the industry and the equipment supply chains; • Provide a learning experience which can improve confidence and help reduce future costs; and Eclipse Energy * These two projects were outside the original Round 1 process but conform to its terms, Ormonde is an innovative wind-gas hybrid project.   • Enable future-projects to proceed without the need for grant support. 319 Following completion of Round 1 & 2 of the tendering system, the total budget for the Scheme increased from £64 million to £92 million. As a result, at least £30 million of capital grant funding is available to support offshore wind demonstration projects under Round 3 of the Scheme. In addition, a further £ 10 million will be available through the New Opportunities Fund (NOF), bringing the total available under the next Round to at least £40 million. 320 It is expected that when the country's offshore wind energy industry reaches a sustainable level, these grants will no longer be required.
Currently, the U.K. is working to further strengthen the regulatory framework and assist industry development through the proposed Marine Bill being debated in Parliament. 32 1 The Bill seeks to address all users of the marine environment to ensure a sustainable approach to the use of the sea. Its objectives are to streamline the consenting process; address the possible need for a single overarching marine agency, responsible for all ocean uses and undertake an evaluation as to the necessity of Marine Spatial Planning. This bill recognizes the importance of an efficient approval process, the need to balance multiple stakeholders, and the role government as a facilitator in the planning process. The U.K. Energy Minister Brian Wilson said regarding the siting of future projects, "As the wind farms will be closer together, it means developers can share their resources and help bring down the cost of this abundant source of energy. " 322 This Marine Bill is part of a large movement within the E. U. for marine spatial planning, to promote efficient use of maritime space and support investments in offshore renewable energy. 323 Overall, the United Kingdom has utilized primarily promotional polices to advance offshore wind energy, following the fixed pricing system of the NFFO and with the current exception of the financial incentives offered under the Capital Grant Scheme. The country's Renewable Obligation creates a market for renewable energy within the country, while also adding to the profitability of offshore wind projects through the proceeds generated from the ROC trading scheme. Both the RO and the Climate Change Levy help to level the playing field between offshore wind and conventional energy sources. The tendering system utilized by the U .K. government, along with an expedited and centralized approval process led to very fast development and growth of the country's offshore wind industry, resulting in the country becoming a global leader in installed offshore wind capacity.

iii. Comparison Between US. and European Incentives
If the goal of a country or state is to generate a sustainable and profitable offshore wind energy industry, continual government commitment is needed, as well as policies that create markets and increase the potential rate of return for investors. 324 Denmark and the United Kingdom have both been able to successfully grow an offshore wind energy industry within their country as the result of effective promotional strategies, and long-term political commitment. Denmark's overall strategy has involved both regulatory and financial incentives, in contrast to the United Kingdom, which has relied mostly upon regulatory incentives to support industry growth. In both cases, the following characteristics were evident: (1) a clear regulatory system was created and channeled through a single department or agency, (2) a tendering system was used to coordinate offshore lease areas, (3) national quotas were used to create a long-term market for renewable energy, (4) policies mandating conventional energy sources to internalize their externalities, and (5) some financial support to increase project profitability or investment cost. This suggests that while financial support is important, regulatory incentives may provide an even more effective instrument in promoting this new industry.
Although financial support was provided in Denmark through a feed-in tariff system, shared grid connection costs between the developer and utility companies, and cooperative ownership schemes, the U.K. was able to rapidly grow its offshore wind industry, and become the world leader without the use of these financial incentives.
Instead, the U .K. 's incentives have been the result of promotional policies. Creating a national market for renewable energy through an RPS or other quota system, in tum, encourages utilities to enter into long-term power purchase agreements, and helps to facilitate favorable financing agreements for the developer, and may provide sufficient support for the growth of an offshore wind industry.
International comparisons between the U.S., Denmark and the United Kingdom are limited by the fact that each country has its own unique political 145 I ~ structure. Though, the five common elements identified above can serve as evaluation criteria to aid in recognizing current deficiencies in U.S. policies, and suggest potential areas in which modifications can be made to better support industry growth. In comparison to the federal incentives offered iq the U.S., both European countries provide overall more types of support to offshore wind, especially in terms of promotional policies.
Currently, there are no federal promotional policies related to offshore wind, suggesting the U.S. lacks a consistent vision when it comes to offshore wind energy.
The Energy Policy Act of 2005 was a step in the right direction toward a more streamlined regulatory process, however, the absence of firm regulation regarding offshore wind energy for four years presented an added barrier to proposed offshore wind projects. The MMS has a form of tendering within its final regulations, though this process seems to be far from ready for implementation. internalize any of the externalities produced, resulting in under-priced electricity rates and an unfair competitive advantage against renewables. Instead, the U.S. on the federal level has chosen to focus on financial incentives, which have a limited time span and are subject to federal economic policy decisions.
On the state level, the types of incentives offered in the Northeast/Mid-Atlantic appear to better match the characteristics seen within Denmark and the United Kingdom. All of the states examined have initiated programs to attach a price to the externalities associated with non-renewable energy generation, through the initiation of the RGGI cap and trade program. Each state has also implemented RPS targets, creating a market for the renewable energy created from offshore wind projects. In particular however, New Jersey and Rhode Island have included specific targets for offshore wind energy, further promoting this particular technology. These two states also exhibit the most progress toward a clear and concise regulatory process, and an in-state tendering system through the pilot project funded in New Jersey, and the

Question 1: What are the economic and regulatory challenges facing businesses proposing to install offshore wind energy facilities in the Northeast/Mid-Atlantic?
There are currently both economic and regulatory challenges facing the development of an offshore wind energy industry in the U.S. As seen in the body of this study, the three main economic hurdles are: the high upfront capital investment required, financing difficulties in the current economic conditions, and an uncompetitive production cost in comparison to fossil fuel power generation. The high capital costs of the turbines, foundations, and transmission cables, combined with logistical challenges in the installation of these structures, requires that a project developer rely heavily on financing. Financing agreements can be hard to secure by a developer if the proposal appears too risky or unprofitable. Without a power purchase agreement, tax credits or other form of revenue backing, financing institutions will likely not lend to project developers, especially in such a credit tight economy. The profitability of offshore wind projects is too uncertain, primarily as a result of stiff production cost competition with conventional fossil fuel powered generation.
Offshore wind energy remains economically uncompetitive because fossil fuels have enjoyed a long history of subsidies and are not currently mandated to include externalities in production costs.
In addition to economic obstacles, the development of an offshore wind energy industry in the U.S. is faced with two major regulatory issues: delayed federal regulations for offshore wind energy and an extensive permitting and review process that is complicated, time consuming and costly. The Energy Policy Act of 2005 identified DOI (and subsequently MMS) as the lead federal authority over offshore 150 1 1, I wind energy, however, the lack of formal rules and regulations for the past four years regarding the process for leasing and operating facility on the OCS has created an impenetrable obstruction to progress within the industry.
All of the Northeast/Mid-Atlantic states examined within this study are attempting to encourage offshore wind energy development within their state, though it is the lack of regulatory clarity on the federal level that is impeding state efforts.
Furthermore, Cape Wind, the one proposal that has advanced into the approval process, has demonstrated the deficiency of appropriate state and federal offshore wind energy policy and a framework for interagency coordination at either the federal or state level. As a result, offshore wind proposals must undergo extensive reviews by individual agencies, which lengthens the permitting and approval process, and ultimately adds to preconstruction expense. Together, these regulatory and economic challenges create significant barriers to the development of an offshore wind energy industry.
Question 2: How is the feasibility of offshore wind projects affected by current federal and state policies in the region?
Three barriers focused on for analysis in this study were: (i) high upfront capital costs, (ii) extensive and at times unclear regulatory/approval process, and (iii) inequitable competition from conventional energy sources. The effect of current federal and state policies on these barriers was examined to assess how well promotional strategies-by the federal and state governments have addressed the current challenges facing an emerging offshore wind energy industry within the region. 151 l , 1 Overall, U.S. federal policy relies solely on financial incentives in the form of tax credits, grants, and loan guarantee programs to promote offshore wind projects, addressing only one of the barriers identified, namely high upfront capital costs (see Table 12). Currently, there are no promotional policies or regulatory incentives (such as a national renewable energy quota, extemality tax, or cap and trade program for fossil fuel energy, or e_ xpedited permitting or tendering scheme for offshore wind leases) offered at the federal level, which together with the limited duration of the financial incentives, demonstrates a lack of political commitment toward this new industry. Conversely, states within the Northeast/Mid-Atlantic lack the ability to provide substantial financial incentives for commercial offshore wind energy projects, and, therefore, rely primarily on promotional policies such as state Renewable Portfolio Standards, a regional cap and trade emissions program and expedited permitting schemes to encourage industry development.
All the states examined have mandated Renewable Portfolio Standards or quotas, creating a separate market for renewable energy and eliminating market competition between renewable energy and fossil fuels (see Table 12). In addition, all four states are members of RGGI cap and trade system, which further adds to the cost states are attempting to streamline the regulatory and approval process for commercial offshore wind farms. Although New Jersey has not initiated specific regulatory policies to reduce delays in permitting, the funding provided to support a pilot project 152 within the region will likely serve as an important learning experience in how the state' s approval process can be improved. New Jersey and Rhode Island also exhibit the most explicit support for offshore wind energy, above other forms ofrenewables, through targets set within each state pertaining particularly to offshore wind energy generation. These targets have the potential to promote power purchase agreements between utilities and offshore wind developers, which can provide assistance in financing projects. 153 r l' I II 11 I-" U1 *"" blank boxes= no policies or financial incentives offered for offshore wind energy under this mechanism some = few or limited policies or financial incentives present supporting offshore wind energy under this mechanism strong = many or substantial policies or financial incentives present supporting offshore wind energy under this mechanism • as a result of policy or programs to begin in the near future Question 3: How do the incentives provided in the United States compare internationally with those provided by Denmark and the United Kingdom, countries with very strong offshore wind energy industries?
When comparing the strategies used within the U.S. to Denmark and the United Kingdom, the lack of federal promotional policies and long-term commitment to developing the industry is most evident (see Table 12). The government of Denmark has provided steady political support for offshore wind energy since the early 1990s, and over time developed a clear, concise regulatory process. In addition, under a government facilitated tendering system and offshore planning/mapping process, industry growth has been encouraged while also being controlled. The financial incentive created by a feed-in tariff has also been instrumental in the growth of Denmark's offshore wind energy industry. Feed-in tariff systems, while effective at ensuring developer profitability, often result in higher rates for consumers.
To the contrary, the United Kingdom, which started out with a fixed pricing system under the Non-Fossil Fuel Obligation, abandoned this financial incentive (along with the risk ofrising consumer rates) for promotional policies, and in the end was still able to rapidly grow its offshore wind energy industry. Through an ambitious Renewable Obligation, tendering system, and expedited review process the United Kingdom has been able to effectively use promotional policies to create a growing market for offshore wind energy. Environmental taxes on fossil fuel use have also helped to incorporate environmental degradation into the cost of conventional power generation and level competition between technologies. The one financial incentive offered by the United Kingdom, the Capital Grant Scheme, addresses the issue of high upfront capital costs, though these grants were not utilized by all offshore wind energy projects presumably because financing could be obtained as a result of the market demand created under the promotional policies.
Of course, supplementing both of these national strategies to promote offshore wind the E.U. has also employed a strong commitment to reducing emissions, increasing renewable energy use, and coordinating offshore wind energy initiatives across member states. The creation of such a favorable political climate has undoubtedly helped the European offshore wind energy industry expand so quickly, and provides an important lesson to the United States.
Overall, one lesson that can be learned from the example of Denmark and the United Kingdom is that there is more than one way to support an offshore wind energy industry. Denmark focused its promotional strategy on controlling the price of offshore wind energy, ensuring its profitability. The United Kingdom focused instead on mandating renewable energy production under a renewable obligation system. The growth of offshore wind energy in both of these countries, suggests that both promotional strategies can be effective. Common to· both countries, though, was a clear regulatory process, combined with a tendering system to efficiently allocate offshore leases, and an overarching climate change policy that internalizes the externalities associated with competing energy sources. Furthermore, coordination between countries has helped to facilitate quick expansion in Europe of the offshore wind energy industry. · Question 4: What additional incentives might be needed in the United States to encourage the development of offshore wind power?
From these European examples it is evident that on the federal level, the U.S. lacks strong political commitment and effective promotional policies. Financial incentives have played the central role in encouraging renewable energy development on the federal level, though the duration of those incentives, especially during tough economic times remains questionable and ultimately undermines their influence. In the long-run, promotional policies that encourage cost reductions in offshore wind power, such as a system of competitive tendering of lease areas, will add to the technologies cost competitiveness and lower the overall cost to society. Federal promotional policies, in the form of a national renewable quota, a tendering system that provides an expedited review process, or an environmental tax system would dramatically increase the demand for renewable energy, facilitate responsible development of the industry, and level the competition among clean energy generation and fossil fuels. While the implementation of an additional tax on energy companies seems politically unlikely, a national RPS and tendering system remains possible. National RPS targets can also facilitate more long-term power purchase agreements from utilities, which aid in financing agreements and help to reduce challenges associated with high capital costs.
MMS has outlined a possible tendering process within their recently released final rules, however, the delay in finalizing those rules created a major roadblock to the industry's development. With formal regulations now in place and support from the current administration, these advancements in federal policy can begin to take place.
At the state level, Northeast/Mid-Atlantic states have done much to promote offshore wind energy development. Some states such as Rhode Island and New Jersey have given special attention to offshore wind energy, thus creating the most favorable political environment, while Massachusetts and Delaware offer more generic renewable energy incentives. Because it is difficult for states to offer meaningful financial incentives from a limited system benefit fund, strong promotional policies currently appear to be the best option for states within the region. Regional promotional policies can also help to spur larger federal policies.
While the MMS has begun to initiate interagency coordination, through the signing of multiple MO Us with different departments, federal/state coordination is also needed. Given the federal system of government in the United States, federal/state coordination can help streamline the approval process through the use of joint reviews or permitting. Federal/state coordination would also make it possible to provide the most effective mix of promotional instruments. Clearly, the federal government has a greater capacity to offer financial incentives on a scale useful to offshore wind energy projects, and the states have already implemented a number of promotional policies, combining them more effectively could synergize the impact of both strategies.
Further investigation into how federal and state promotional instruments could be complementarily designed to increase their success would be helpful in determining how best to support a U.S. offshore wind energy industry.
In summary, this study has shown that ifthe U.S. is to harness the vast offshore wind energy potential off the Northeast/Mid-Atlantic coasts, changes in federal policy are necessary. Foremost, political commitment for the industry needs to 158 be solidified and the regulatory framework needs to be fully finalized. A national RPS would increase power purchase agreements between new projects and utility companies, and indirectly help project financing. As seen in the United Kingdom, the use of a tendering system by MMS could result in a rapid growth of the industry. In all, the U.S. has the potential to become an industry leader in offshore wind energy, though it remains to be seen if there will be enough governmental support for this new clean energy industry.