Dominion wins Virginia offshore wind lease

Wednesday, September 4, 2013

Dominion Virginia Power was the winning bidder in today's auction for the right to lease sea space off Virginia to develop an offshore wind project.  The auction, held the federal Bureau of Ocean Energy Management, was for a lease for a designated wind energy area covering about 112,799 acres of the outer continental shelf.  The site, about 23.5 nautical miles off the Virginia Beach coastline, is considered capable of supporting over 2,000 megawatts of wind generation.  

Prior to the auction, the Bureau of Ocean Energy Management approved eight bidders as eligible to participate.  But only Dominion and Apex Virginia Wind LLC participated in the auction.  By the sixth round, Apex dropped out and Dominion won.  While the official results have not yet been published, Dominion reportedly paid between $1.1 and $1.6 million for the right to this lease.

The Virginia auction follows July's auction in which Deepwater Wind paid $3.8 million for the right to lease 164,750 acres off Rhode Island and Massachusetts.  To compare projects against each other, one metric for evaluation is the effective premium the winning bidder paid in dollars per megawatt of resource potential in the area.  This premium represents the cost of outbidding the competition for the site, and is distinct from the ongoing lease payments that would ultimately be due when a lease is entered into.

With an estimated resource potential of 3,395 megawatts, the Massachusetts bid implies a lease premium of about $1.12 per megawatt of potential.  Dominion's winning bid for Virginia implies a lower lease premium of 55 to 80 cents per megawatt of potential.  The difference between these premiums could be due to a combination of several factors, including the degree of competitive interest in the site, and bidders' varying projections about the development, fixed and operating costs of a project.  The value of winning the lease also depends on the bidder's plans and capital availability.  Any development of the sites would likely occur in phases over the coming years, and seems unlikely to reach its full estimated potential in the near term.  Nevertheless, the lower Virginia lease premium illustrates the market results for this auction; its implications may depend on Dominion's plans.

The Bureau of Ocean Energy Management anticipates holding subequent auctions for offshore wind site leases elsewhere in the country in the coming months.  Will these leases lead to the development of offshore wind in U.S. waters?

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