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Vitter, Alexander Seek Answers on Obama Offshore Wind Lease in Atlantic OCS

Vitter, Alexander Seek Answers on Obama Offshore Wind Lease in Atlantic OCS
November 09
09:12 2012

From a release out of Sen. David Vitter’s office…

U.S. Sens. David Vitter (R-La.) and Lamar Alexander (R-Tenn.) today sent a letter to U.S. Department of Interior Secretary Ken Salazar asking him to explain the administration’s economic reasoning in allowing an offshore lease sale for wind energy in the Atlantic Ocean. The senators’ letter notes that that the agency will not allow offshore oil and gas leasing in the Atlantic Outer Continental Shelf (OCS), and requests data on the economics of the wind lease sale, to compare with “the value of a similar lease for oil and gas on equivalent acreage.”

“The administration has a habit of picking energy industry winners and losers, and we want an explanation,” Vitter said. “Secretary Salazar should at least be able to defend the economics of the lease sale for wind energy. For example, the federal government receives significant revenue from royalties for offshore oil and gas production in the form of rents, royalties, bonus bids and taxes. Can the same be said for this offshore wind project?”

“Our nation’s energy policy must make economic sense for taxpayers and not be manipulated to favor one energy source over another,” Alexander said. “I hope we find that the administration’s decisions aren’t driven by politics but instead are geared toward developing the kind of low-cost, reliable energy we need to help our private sector grow and add good-paying jobs.”

In their letter, the senators write, “the Federal Government derives significant revenue from royalties for offshore oil and gas production. The current rate companies must pay is between 12.5% and 18.75%. ” This is before taxes and after competitively bidding on the lease. This tax is levied on all energy produced by an oil and gas company working on federal offshore or onshore resources. The senators ask, in comparison: “What is the effective royalty rate Interior has contracted with NRG Bluewater Wind Delaware LLC for this lease for the energy it produces? What is the anticipated revenue to be raised from this development over the next 10 years?”

A copy of their letter is below.

November 9, 2012

The Honorable Ken Salazar
Secretary
U.S. Department of Interior
1849 C Street NW
Washington, DC 20240

Dear Secretary Salazar:

We write in interest of your press release dated Tuesday, October 23, 2012, titled “Interior Announces Commercial Lease for Renewable Energy Offshore Delaware, First Lease under Administration’s ‘Smart from the Start’ Offshore Wind Strategy Part of Effort to Expand American Made Energy.” A strong mix of different types of energy in our energy portfolio is necessary, but under this Administration, we’ve seen policies that pick and choose preferred energy technologies such as wind energy and implement policies that favor a chosen technology without any evident regard to economic impacts. This situation seems further apparent with the October 23, 2012 announcement of exclusive commercial leases in the Atlantic Outer Continental Shelf (OCS) for wind energy development with no competitive bidding process.

We favor development of energy in the Atlantic OCS, including renewable and oil and natural gas development. Unfortunately, the same cannot be said for the Department of Interior. We note that there has not been a single competitively bid lease for any energy in the Atlantic OCS under your leadership, and further, your department continues to ignore strong bipartisan support for developing all of our nation’s energy resources on the OCS.

In fact, lifting of the moratorium on leasing in the Atlantic OCS was a result of decisions made by the President and the U.S. Congress, then controlled by a Democrat majority in 2008. In 2009, the Department of Interior rejected a lease plan that would have provided for oil and natural gas leasing offshore Virginia. As well, you have elected to block oil and gas leasing off the vast majority of the OCS for at least the next five years, effectively negating the bipartisan decision.

Given the current Administration’s propensity to choose energy winners and losers — a policy we would note that is failing in multiple countries in Europe — we request your help in better understanding the economics of the lease sale for wind energy you have approved. Specifically, we would appreciate answers to the following:

1. The Federal Government derives significant revenue from royalties for offshore oil and gas production, on top of substantial up-front competitive bids for the rights to explore and produce energy (these bids alone totaled nearly $10 billion in FY 2008). The current royalty rate companies must pay is between 12.5 percent and 18.75 percent. This, when combined with bonus bids, constitutes a substantial tax right on all energy produced by an oil and gas company working on federal offshore or onshore resources. What is the effective royalty rate Interior has contracted with NRG Bluewater Wind Delaware LLC for this lease for the energy it produces? What is the anticipated revenue to be raised from this development over the next 10 years?

2. If NRG Bluewater Wind Delaware LLC received the wind energy production tax credit (currently a 2.2 cents per kilowatt hour payment regardless of demand at the time of production) does the contract stipulate that the royalty rate be adjusted to ensure there won’t be a net payout of federal tax dollars to NRG Bluewater Wind Delaware LLC? In other words, will this company get paid by the federal government to produce wind energy so they can in turn pay any royalty they might owe to the federal government? Will the total value of any production or other renewable tax credits exceed the price paid for the lease?

3. In Interior’s November 23, 2010, press release for the “Smart from the Start” initiative, it was indicated that “a revision to its regulations that will simplify the leasing process for offshore wind in situations where there is only one qualified and interested developer” was in our national interest. Given that there was no competitive bidding for this lease, what was the actual bid for this lease, and how does that compare to the average bonus bid that was paid in the last OCS lease sale for an oil and gas lease on equivalent acreage?

4. Who are the intended customers for the electricity to be sold by NRG Bluewater Wind Delaware LLC, and what rate have they indicated they will be able to charge utilities for bringing electricity on to the grid? After all, according to the Energy Information Administration, offshore wind generation is estimated to be over three times as expensive to build and operate as onshore wind generation.

5. What utility companies have indicated they are interested in purchasing electricity from NRG Bluewater Wind Delaware LLC, and what states are within the potential service area where consumers will be paying the additional costs of this electricity?

6. What has been the environmental review process in awarding NRG Bluewater Wind Delaware LLC this lease? Did this process take into consideration threats posed by the development to avian species that could be impacted by wind turbines?

In the context of job creation and strengthening our economy, it would be helpful to understand the underlying economics of this lease sale, and in turn be able to compare it to the value of a similar lease for oil and gas on equivalent acreage, including revenue stream comparisons. Particularly, in light of the multiple failures from the Stimulus (Solyndra, Evergreen Solar, First Solar, Mountain Plaza Inc., Fisker, etc.) and the current criminal investigation of Abound Solar, it would be useful to know what kind of return on investment the Department of Interior expects from this venture, as well as the anticipated price impact for electricity relative to current rates.

We look forward to your prompt response.

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