Ocean Energy Report for 2005

Milestones for 2005

On January 14, 2005, the Electric Power Research Institute (EPRI) issued its final report on Wave Energy Conversion in the United States. The report, which was a culmination of many months of study, analyzed the wave potential at various coastal sites in the United States, examined the economics and viability of various ocean technologies and provided an overview of potentially applicable permitting regimes. The EPRI Report concluded that generation of electricity from wave energy may be economically feasible in the near future and as such, warrants continued investigation. EPRI's endorsement of continued study of wave energy represents a real sea-change in attitude. EPRI's membership comprises many of the nation's largest electric utilities, which as recently as a decade ago had little interest in any form of renewable energy, let alone a nascent technology like ocean energy.

Building on its success, in April 2005, EPRI launched a second phase of its oceans program, this time focusing on evaluation of tidal technologies and potential tidal sites in the United States and Canada. Tidal technologies (often referred to as hydrokinetic devices) have potential applicability not just in certain ocean environments but also in rivers and streams -- and have thus attracted attention from the hydroelectric industry.

US and FERC Developments
In April 2005, the Federal Energy Regulatory Commission (FERC), which has jurisdiction to issue licenses for hydrokinetic and ocean technologies, agreed to provide limited waivers from licensing to developers of pilot projects. Verdant Power, developer of the nation's first hydrokinetic project in the East River, New York, had requested the ruling so that it could install six project units and provide power to customers in order to test the project's capabilities in real-world conditions. In the absence of an exemption, Verdant would have had to wait an additional year before it could complete all the studies necessary to receive a license. Moreover, Verdant's inability to test its project without a license posed a catch-22 because, without the tests, Verdant could not gather data necessary to complete its license application. As a result, FERC made a narrow exception to its otherwise mandatory license requirement. FERC held that developers could obtain a limited exemption from licensing (Verdant was given 18 months) as long as they did not generate power for commercial uses and needed to install the project to gather data needed for the licensing process. With the exemption in hand as well as other necessary permits from the Corps of Engineers and State of New York, Verdant remains on course to deploy its first six units sometime in 2006.

At the same time, while FERC indicated willingness to bend its rules, it has still declined to break them, even to help a new industry emerge. In October 2005, FERC denied Australia-based Energetech's request that FERC declare that Energetech's proposed Port Judith Project, to be located a mile off the coast of Rhode Island, did not require a license. FERC offered Energetech an opportunity to request a more limited exemption. FERC specified that to qualify for the exemption, Energetech would need to show that the exemption was needed to gather data for licensing and that power generated by the project would not have an effect on the interstate grid, which would trigger FERC jurisdiction.

Since the FERC ruling, both FERC and the Department of Energy have tried to explore ways to streamline permitting for hydrokinetic technologies in rivers, streams and oceans. In April 2005, at the behest of the National Hydropower Association, FERC convened a meeting of small hydro and ocean developers, resource agency representatives and other stakeholders to figure out how to expedite permitting without compromising environmental protection. Later that year, in October 2005, DOE, through mediation group RESOLVE, held a three-day meeting in Washington, DC, to familiarize stakeholders with a wide range of existing ocean energy technologies, identify these projects' potential environmental impacts and start a dialogue on how to foster cooperation between developers and stakeholders so that ocean and hydrokinetic projects can move forward.

Other FERC developments included the February and March 2005 issuance of several preliminary permits to two different companies to study tidal energy sites in the Gulf Stream off the coast of Florida. Also, the AquaEnergy Group, located in Washington state, continued to advance through the licensing process for its proposed Makah Bay Project, which will be located in the Olympic Coast Marine Sanctuary in the Makah Bay off the coast of Washington state. In May 2005, AquaEnergy announced that it received a first round infusion of capital from Finavera, an Irish renewable energy company, which can hopefully help AquaEnergy complete the licensing process and bring its projects online.

On the U.S. scene, Ocean Power Technologies (OPT) also made strides, securing $2.8 million dollars in funding from the Navy for a 1 MW project underway at a naval base in Hawaii. Because of its location on a naval base, OPT is not subject to FERC licensing requirements though it must still comply with other environmental regulations, including preparation of an Environmental Assessment which has been completed.

Developments Overseas
Ocean technologies continued to advance beyond the United States as well. In May 2005, Ocean Power Delivery (OPD) announced a deal with an electric company in Portugal to construct the world's first commercial wave farm. The 2.25 MW project will be comprised of three of OPD's distinctive, orange sausage-shaped, Pelamis units. And in December 2005, Marine Current Technologies announced that it had received additional funding of 2 million pounds for its SeaGen project, which that same month obtained approval needed to move forward with deployment.

Legislative and Regulatory Developments
In May 2005, Sean O'Neill and I founded the Ocean Renewable Energy Coalition (OREC), a trade association to promote and advance commercial application of ocean energy. Within six months, OREC attracted ten core members including renewable energy advocates, developers and consulting firms that are prominent in their respective sectors.

During the summer of 2005, OREC joined with other ocean energy developers and lobbyists who working together to play a pivotal role in obtaining federal recognition for ocean energy in the Energy Policy Act of 2005. Among other things, the Energy Policy Act requires the Department of Energy to include ocean energy in an inventory of renewables that the new law requires DOE to undertake. And the Energy Policy Act also makes ocean energy eligible for moneys authorized for appropriation for development of renewable energy projects. Prior to the Energy Policy Act, no other federal legislation since the Ocean Thermal Energy Conversion (OTEC) Act of 1970 had accorded recognition or authorized funding for ocean energy. This represents a loss not because ocean developers could have actually used the production tax credit (PTC) (in the short term, they probably cannot), but rather because the availability of a PTC makes projects more appealing to private investors. Thus, ocean developers have a task on their plate for 2006, i.e., to continue to fight for the PTC.

Section 388 of the Energy Policy Act authorizes the Secretary of Interior to grant leases on the Outer Continental Shelf (OCS) for development of alternative energy sources such as offshore wind and wave. Prior to the Energy Policy Act, the Secretary only had authority to lease the OCS for oil, gas and mineral development. Thus, the Energy Policy Act fills a gap in the Secretary's authority and eliminates the uncertainty that has plagued projects like Cape Wind, the 420 MW offshore wind project being developed off the coast of Massachusetts, as to whether they can acquire sufficient property interests to be developed.

On December 30, 2005, the Federal and State Management Service (MMS) issued an Advance Notice of Proposed Rulemaking (ANOPR) seeking comments on the development of a regulatory program to implement permitting of alternative energy uses on the OCS. The ANOPR is a comprehensive effort, comprised of 36 questions on topics such as what types of prequalification criteria, if any, should apply to lease applicants (e.g., a showing of financial capability to carry out the project), how MMS can balance potential competing uses between different types of alternative offshore uses, what types of environmental information should be required to assess project impacts, whether MMS should consider special programs for permitting pilot projects, and how MMS can calculate royalties, especially for offshore renewable projects which are in their infancy and presumably cannot afford significant royalty payments. One topic, which the MMS ANOPR does not address, concerns the potential overlaps between MMS jurisdiction and those of other agencies. For example, will an ocean energy developer on the OCS need to pass through an MMS licensing process in addition to a FERC process? Or will the agencies enter into some kind of MOU to coordinate efforts and share information? OREC hopes to mobilize offshore renewable energy developers and work cooperatively with more established trade associations to develop comments that will assist MMS in carrying out its responsibilities.

What Lies Ahead

Despite all of the progress and successes enjoyed in 2005, the ocean energy industry faces the greater challenge in 2006 of keeping the momentum going and finding the resources to deal with multiple challenges.

MMS Regulations
For starters, the ocean energy industry now has a unique opportunity to directly impact the regulatory regime governing offshore renewable projects through participation in the MMS rulemaking. At the same time, with limited resources and a need to focus on getting real projects online, developers may not have the ability to extensively participate in the rulemaking process. The danger here is in the absence of comment from ocean energy developers, MMS may establish a regime, which could foreclose development of ocean energy in the United States even before the industry has a chance to get started. MMS could not be faulted for this outcome; as an agency, it must make decisions based on the record before it. If ocean developers are absent from the record, MMS will devise policies that conform to input from other participants and stakeholders.

Attracting Private Funding
At the same time, while ocean energy developers will need to grapple with the MMS rulemaking, the industry has now reached the point where it must begin deploying real projects in order to attract investment from the private sector. While many investors have shown interest in ocean energy projects, none are willing to take a huge plunge, so to speak, until actual projects are deployed and begin to operate. So developers must continue to move slowly, as existing funding permits.

Streamlining Permitting and Reducing Costs
Existing regulatory hurdles further complicate matters. Despite FERC's efforts, developers still face several years and millions of dollars in costs to license their small and generally benign projects. Most existing regulation was developed for large utility owned hydro plants, with little thought to cost because utilities can simply pass licensing costs on to ratepayers. Moreover, small tidal or ocean projects simply do not have the same impacts as large hydro plants, with impoundments and reservoirs, which can change the environmental composition of a river basin. And even if ocean energy projects turn out to have unanticipated effects, they are small and portable and can be easily removed.

Thus, another challenge for developers is to find ways to streamline the licensing process and reduce the costs. One potential solution might be for Congress or state governments to appropriate more money to resource agencies to fund and conduct studies, rather than having developers bear the costs, which is the present model. Environmental studies benefit all taxpayers by ensuring that our resources are adequately protected -- and there is no reason why tiny ocean energy developers should bear the cost, particularly when they already provide a public service by risking their own private capital to build projects that will reduce reliance on fossil fuels and minimize environmental problems for future generations.

Seeking out government funds
Though in the long run the ocean energy industry will not succeed without private funding, at the same time, developers should not overlook potential sources of federal funding. As mentioned earlier, the Energy Policy Act authorized millions of dollars of appropriations for many renewable projects, including ocean renewables. Developers should consider retaining firms that specialize in appropriations to ferret out and make requests for appropriations for project funding.

For the past dozen years, I've represented and counseled all types of ocean energy and small hydro developers in the U.S. and overseas. In all that time, there's never been the same swell of activity, both in terms of project development and legislative and regulatory activity that I witnessed this past year.

Without a doubt, ocean energy made a splash in 2005. But in 2006, here's hoping for a tidal wave.