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Q4 2014 / Edition 2 December 2014 DOES SHALE GAS THREATEN PROSPCTS FOR OFFSHORE WIND IN THE US NORTHEAST?

EXECUTIVE SUMMARYAside from its proximity to strong offshore wind resources, the North-

east US is also favorably positioned near the Marcellus and Utica shale

resource plays. Shale gas from these plays has increasingly underpinned

gas-fired power generation plants in the region, and in process hastened

the shuttering of less- competitive power generation plants, primarily coal

and nuclear. This has shifted the primary energy mix of the entire region

strongly in favor of natural gas, and called into question the role and

efficacy of other power generation sources in the region. In New England

alone, primary demand for natural gas climbed from 30% of power gen-

eration in 2000 to over 52% by 2013. More than half of new gas pipeline

projects that entered into service in the U.S. between 2012 and 2013 were commissioned to support shale gas deliveries to the region,

according to the US Energy Information Agency (EIA). With a number of new gas pipeline projects and expansions proposed that will

significantly increase gas deliveries to the region in the near future, the supremacy of shale gas in the northeast power generation mix

seems all but guaranteed.

Given the fierce competition from natural gas demand, not to mention the penetration of more commercially mature renewables such as

solar energy and onshore wind, the long-term prospects for offshore wind in the region appear to be under threat by a robust portfolio

of cheaper energy resources, particularly in the power generation sector. However, a closer look at the regions’ power market funda-

mentals and state-level energy policies suggests that offshore wind may not only be a competitive, but a necessary contribution to the

region’s primary energy mix for the foreseeable future

1 See article “ Overhalf of U.S. natural gas pipeline projects in 2012 were in the Northeast.” Today In Energy. Energy Information Agency. March 25, 2013. http://www.eia.gov/todayinenrgy/detail.cfm?id=10511

ME- Maine; MA= Massachusetts; NW= New Hampshire;VT= Vermont; RI= Rhode Island; CT= Connecticut; NJ= New Jersey; NY= New York; PA= Pennsylvania

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accentuated in times of peak-demand; regional gas plants and residential customers all compete for a limited supply of deliverable gas capacity, in turn pushing up the premium for immediate gas delivery. This is reflected most visibly on regional spot markets during winter peak demand months, which routinely see spot market gas prices spike up to 10 times higher than the price of gas elsewhere. Because utilities factor in transport costs and risks to overall power prices, the Northeast is likely to continue to endure higher electricity prices until pipeline (and storage) capacity is sufficiently expanded to keep pace with demand.

HIGH POWER PRICES ARE A FUNCTION OF NATURAL GAS DEMAND

Source: US Energy Information Administration. Pipeline projects. Notes: Capacity data exclude gathering and distribution fines. Data for 2013-2015 are based on companies’ announcements.

A prevailing misconception about pow-er markets is that proximity to natural resources provides low-priced energy inputs. However, this is simply untrue. A lack of sufficient pipeline capacity to deliver natural gas from the Appalachia shale plays to gas-fired power plants in the northeast US, as well as fierce competition in contracted pipeline ca-pacity between utilities, residential and commercial customers, has culminated in significantly higher contracted prices for natural gas supplies in the region, translating into higher electricity prices than seen elsewhere in the continental U.S. The “bottle neck” pressure is

A prevailing misconception about power markets is that proximity to natural

resources provides low-priced energy inputs. However, this is simply untrue.

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Although gas production in the Marcellus continues to spur investments in major Northeast regional pipeline projects (such as the recently announced $3 bn Access Northeast Pipeline expansion, amongst others), the U.S. Energy Information Agency predicts that despite these planned additions in pipeline capacity, Northeast markets will continue to bear frequent supply constraints. This is because material gains in pipeline deliverability capacity will be offset by the increasing substitution of natural gas in the energy mix. This, coupled with declines in deliveries from conventional gas sources elsewhere, will essentially nullify the supply impact of gradually increasing pipeline capacity and keep gas markets in the region tight.2

2 See article “ Overhalf of U.S. natural gas pipeline projects in 2012 were in the Northeast.” Today In Energy. Energy Information Agency. March 25, 2013. http://www.eia.gov/todayinenrgy/detail.cfm?id=10511

Indeed, as of August 2014, nine out of the ten highest retail electricity prices paid by consumers in the conti-nental US were recorded by states in the Northeast, and more specifically in New England – despite the boom in nearby Marcellus shale supplies. For the reasons mentioned above, and contrary to conventional thinking, increased dependency on natural gas for power gen-eration in the region will only continue to sustain tight markets and high retail electricity prices. Moreover, the early retirement of aging coal and nuclear plants across the Northeast (itself partially a consequence of cheaper natural gas inputs) will also contribute to the higher rel-ative electricity prices in the region. To this end, the EIA predicts that at least 2,800 MW of coal and nuclear power generation capacity in the region will come offline by end-2017, while power generation demand will continue to grow at an average rate of 3% per annum. Within this gap, power prices are likely to ascend.

Given these dynamics, it is no surprise that since 2010 the American Public Power Association has warned against the pitfalls of an over-reliance on gas for home heating and power generation in the Northeast, particularly given the inadequacies of the gas distribu-tion and storage network. However, those warnings have gone largely unheeded by the market. As a result, high electricity prices are expected to be the norm, rather than the exception, for the Northeast.

STATE POLICIES MANDATE A DIVERSIFIED ENERGY PORTFOLIO

3 It should be noted that California, the US state with the most aggressive Renewable Energy Portfolio Standards (33% by 2020), is the only state that routinely tops the US northeast states in retail electricity prices. Nevertheless, high electricity prices here are somewhat offset by below average house-hold energy-use per capita, making it politically and economically more palatable. 4 See article “New England relying more on natural gas along with hydroelectric imports from Canada.” Today in Energy. 22 August 2014. Energy Infor-mation Agency. http://www.eia.gov/todayinenergy/detail.cfm?id=176715 See article “Electricity costs up in gas dependent New England” New York Times. 2013. http://www.nytimes.com/2013/02/16/business/electricity-costs-up-in-gas-dependent-new-england.html?pagewanted=all&_r=o

While state legislators are reluctant to intervene directly in electricity markets, they have become increasingly committed to mandating Renewable (Energy) Portfolio Standards (RPS) - statuary obligations mandating utility power providers to obtain and sell a percentage of their electricity from renewable energy sources in a given year. Not only will this wean states off of conventional power generation supplies such as natural gas and coal, but it will also contribute to reduced carbon emissions. To date, some 29 states have implement-ed RPS’s, including each of the states in the US Mid-Atlantic and New England, with the exception of Vermont (which has a voluntary scheme). Taken together, these standards will usher in an increasing role for renewable energy sources in power generation for the long-term. While more mature renewable energies such as solar are featured in the portfolio standards (Class II), there is also fair emphasis on Class I, or “new” renewable energy sources that encompass offshore wind, tidal, and/or biomass. In certain states such as Massa-chusetts and New Jersey, Class I targets feature just as prominently in the RPS as Class II (see table above). Along with federal sup-port spurring investments in new technology and cost reductions in offshore wind, these policies should provide a significant opportunity and optimism for the industry in the future, obliging states in the Northeast and elsewhere to generate more of their electricity using low or zero-carbon generation sources.

Continental US | Data Source: Energy Information Agency

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There is more reason for optimism than doubt that offshore wind will play an increasing and even promi-nent mix in the Northeast electricity generation sector by 2030, despite the proliferation of shale gas. As evidence, the country’s first commercial offshore wind project, Cape Wind, is being developed off the coast of Massachusetts. Meanwhile, Rhode Island, Maine, New Jersey and Maryland are each advancing demonstration projects of their own. Given the current pipeline of US projects, a conservative forecast suggest that roughly 600 MW of offshore wind capacity may be installed off the northeast coastline by 2018, supplying competitively priced power to the grid alongside natural gas.

Even if increased gas infrastructure capacity eventually loosens electricity market prices, state-level policies in each of the Northeast-ern US states will promote the inclusion of offshore wind into the energy mix. To this end, states such as Maine and New Jersey have already established unofficial targets for offshore wind capacity. Similar policies are seemingly not far off the horizon in other northeast states weary of winter price spikes due to over-reliance on natural gas. As such, the current dominance of natural gas in these markets only strengthens the case for a more diversified energy portfolio. At the very least, it highlights the necessity of an “all of the above” energy strategy on a state-by-state basis. Indeed, over the past few years, insufficient pipeline capacity and the shuttering of tradition-al power plants has pushed power prices up rather than down, exposing the vulnerability of an over-dependence on natural gas. This phenomenon has made an even stronger case for offshore wind in the northeast United States’ power generation portfolio.

CAN OFFSHORE WIND COMPETE IN US NORTHEAST POWER MARKETS?

*Based on US DoE Assumptions of “Advanced Stage” projects.

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