Contributed by John Michael, Josh Heideman, and Ellen Campbell — Vinson & Elkins

For centuries, global commerce moved by the power of offshore wind. While the age of the trading schooner is long past, the power of offshore wind as a modern-day energy resource has barely begun to be tapped.

Offshore wind has the potential to provide more than the total amount of energy used worldwide today. In the United States alone, the Department of Energy estimates that we have 7200 terawatt hours of offshore wind potential (nearly double our current electricity use).

Nonetheless, offshore wind today provides less than 1% of global energy supply, and very little of that is U.S. based.  The newly passed Inflation Reduction Act of 2022 aims to spur further development of offshore wind projects in the U.S. by providing new financial incentives, but regulatory hurdles continue to pose issues for such development.

The Inflation Reduction Act allows for either a production tax credit (PTC) or investment tax credit (ITC) that can be claimed by offshore wind installations that begin construction before Jan. 1, 2025. For installations with construction starting after December 2024 and before January 2036 (as such date may be extended based on the reduction of greenhouse gas emissions from 2022), carbon-neutral offshore wind projects would be eligible for a technology-neutral ITC or PTC. 

The ITC and PTC available under the Inflation Reduction Act include certain labor and wage requirements in order to be eligible for the full credit amount and additional “bonus” credits may be available for offshore wind in the event certain “domestic content” requirements are met. 

Under these rules, the ITC could theoretically be as high as 40% if the labor and wage requirements are met and a certain percentage of U.S. manufactured materials are used. While other renewable energy projects are required to have at least 40% of manufactured products to be U.S. manufactured to claim the domestic content bonus credit, for offshore wind installations that begin construction (BOC) prior to Jan. 1, 2025, the domestic content bonus credit can be claimed for offshore projects even if only 20% of materials are U.S. manufactured.

For installations with construction starting after December 2024 and before January 2036 (as such date may be extended based on the reduction of greenhouse gas emissions from 2022), the required domestic content percentage for offshores projects increases from 27.5% (BOC prior to Jan. 1, 2026), to 35% (BOC prior to Jan. 1, 2027), to 45% (BOC prior to Jan. 1, 2028) and then finally to 55% (BOC after Dec. 31, 2027).

GO DEEPER: Jose Zayas, EVP of Policy and Programs, American Council on Renewable Energy joined the Factor This! podcast to break down the key components of the historic Inflation Reduction Act, which includes $369 billion dedicated to clean energy and climate change.

However, the Inflation Reduction Act does little to reduce regulatory hurdles.

For facilities on the outer continental shelf (typically more than three miles offshore), multiple federal agencies must approve a potential installation. The Bureau of Ocean Energy Management issues leases and approves all construction plans. Approval must also be sought on various issues from the National Oceanic and Atmospheric Administration, the Coast Guard, the Department of Defense, the Advisory Council on Historic Preservation, the Environmental Protection Agency, the U.S. Fish and Wildlife Service, the U.S. Army Corps of Engineers and the Federal Aviation Administration.

The Inflation Reduction Act also overrode a Trump-era moratorium, in effect since July 1, 2022, that prohibited federal leasing on the outer continental shelf off the southeast coast of the United States. However, the federal government will only be able to grant new leases and rights-of-way in this region if the government’s oil and gas leasing, during the prior year, included offers of at least 60 million acres in oil and gas lease sales.

An offshore wind installation typically requires not just federal but also state permits. Even for facilities on the outer continental shelf, transmission line siting to bring power onshore is subject to state and local jurisdiction.

Permitting for projects in the coastal zone (generally less than three miles offshore) has overlapping federal and state jurisdiction (although BOEM does not have jurisdiction). Permitting in uplands (littoral lands) is generally governed by state and local law, if the land in question is not federally owned.

The Inflation Reduction Act included $760 million in grants to state and local siting authorities to assist transmission review and approval processes, although transmission permits may not be the only state and local permits a project requires and there is still no uniformity between the permitting regimes of the various states.

Century-old legislation has also posed unexpected hurdles. The Jones Act, passed in 1920, limits the transportation of “merchandise” between two U.S. points to vessels that are built and registered in the United States, are owned by a U.S. citizen and are manned by U.S. citizens.

There currently are no offshore wind turbine installation vessels (WTIVs) that are Jones Act-qualified, and the use of existing, foreign-flagged/owned WTIVs to deliver component parts from U.S. ports to offshore installation worksites within the U.S. is not permitted. The lack of Jones Act-qualified WTIVs has led to some creative logistical workarounds, such as using smaller Jones Act-qualified tugs and barges to serve as “feeder” vessels, transporting offshore wind turbine components from a U.S. port and delivering them to the installation site where they can be installed by a large crane mounted to a foreign-flagged vessel so long as that vessel remains in-position at the site and does not engage in transporting the components. 

To promote the construction of Jones Act-compliant WTIVs, the Inflation Reduction Act includes a 10% vessel tax credit (based upon the vessel’s sales price) for any offshore wind vessel built in the United States.

While there continue to be hurdles to the development of U.S. offshore wind projects, the opportunity to harness this vast resource is too attractive to be deterred, especially in light of the new tax credits that will continue to incentivize investments in these projects. Moving forward, offshore wind is an area to watch.

John Michael is a partner, Josh Heideman is counsel and Ellen Campbell is an associate at Vinson & Elkins in the firm’s Energy Transactions & Projects practice group.