Anthony J. Pennings, PhD

WRITINGS ON DIGITAL ECONOMICS, ENERGY STRATEGIES, AND GLOBAL COMMUNICATIONS

Will Offshore Wind Power Print Money?

Posted on | March 15, 2021 | No Comments

Research is showing that offshore wind farms can increase biodiversity in oceans. Like sunken ships, windmill installations present unique opportunities for facilitating marine life. These new habitats create artificial reefs and marine life-protection areas. Undersea hard surfaces rapidly collect a wide range of marine organisms that build and support local ecosystems. They also provide some refuge from trawlers and other industrial fishing operations.

This post will examine the prospects of wind energy, one of the promising alternative renewable energies that will work with hydropower, solar, and even small-scale nuclear energy to power the smart electrical grids of the future. Is offshore wind feasible? What are the downsides? Will it be profitable? Can it literally “print money” once it is operational?

Wind and torque combine to transform mechanical energy into electricity. The physics of windmills means that big is better. The larger the propellers that can be built, the more efficient they become. Bigger windmills capture more wind, and that produces more torque. The more propellers can harvest the power of the wind, the more electricity they can produce. The equation belows describes the relationship between wind speed, torque, and power output.

torque and angular speed

Media economics can help us understand the economics of wind power. Media projects like books and films, and even digital software, require huge expenditures up front but the cost of each succeeding unit of output is quite low. What is the cost of each individual copy of Windows 11? Renewable energies tend to have the same characteristics, what economists call low marginal costs. Once a windmill is manufactured and installed, the cost of each kilowatt produced is low. The marginal cost of each unit of output decreases. Granted, the costs of replacement, recycling, or reusing these large machines are valid points of concern.

Personally, wind power hasn’t impressed me in the past. In graduate school in Hawaii, I remember a big windmill near the North Shore surf spots that didn’t seem to do much. Driving up into San Francisco along Interstate 5, the windmills seem big and slow. Flying regularly over northern Texas and Oklahoma, the wind farms become a bit more impressive. Understanding the fundamental economics and the basic engineering and science of wind energy is useful for policy analysis.

Unlike solar, wind power is not directly contingent on solar rays but on larger climatic events. The US Department of the Interior‘s Bureau of Ocean Energy Management (BOEM) has been conducting environmental impact studies and is giving conditional permission to build offshore wind farms. Contracts to provide wind electricity as low as 5.8 cents per kilowatt-hour are being negotiated. Massachusetts, Virginia, and the far coast of Long Island, New York are some of the major sites under development. While previously a global laggard, the US is expected to become a major offshore electricity contributor after 2024.

The future of US offshore wind energy is dependent on several economic variables. One is power purchase agreements (PPAs) that businesses and other organizations use to solidify long-term purchases of electricity. Another is renewable portfolio standards (RPSs) that obligate US states to procure a certain percentage of renewable energy. RPSs have contributed to nearly half of the growth in renewable energies since 2000. Tax incentives are important and depend on political winds. The US Treasury extended safe harbor tax credits for renewable energies, including offshore wind in light of the COVID-19 pandemic. Offshore wind auctions are also crucial as the cry “location, location, location” resonates soundly in this industry.

Renewable critics like the Manhattan Institute have been been critical of offshore windmills, arguing that they decline some 4.5% in efficiency every year. Another concern is who will pick up the decommissioning costs of deconstructing and recycling the windmills. But the technology is new as are the maintenance, recycling, and regulatory practices.

Wind could be a significant boost for coastal communities. Major cities that were wedded to the ocean due to fishing and shipping are likely to benefit as offshore wind might provide cheap electricity and much-needed economic benefits. Tourism will benefit from cheap electricity as did Las Vegas when it had access to power from the Hoover Dam. In terms of jobs and the revitalization of shore-based businesses a wide range of services will be needed. Energy control centers, undersea construction, equipment supply, and maintenance operations, are just some of the opportunities that are emerging around ocean-based renewable energy sources.

In summary, the economics of offshore wind energy are very much like media economics – high upfront costs and low marginal costs. Book publishing requires editors and pays author royalties. It also needs paper, printing presses, and the distribution capabilities required to produce fiction and non-fiction works. While some books may not be profitable, a best-seller can provide significant returns for the publisher. Movies require extensive upfront expenses in production and post-production, but each showing in cinemas worldwide costs relatively little. Wind power requires a major capital influx to set up. But the wind is free, so once operational, the windmill begins to produce electricity. Lubrication and other maintenance activities are needed at times, but electricity is created as long as the wind is blowing. If the infrastructure is set up efficiently, it will print money.

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AnthonybwAnthony J. Pennings, PhD is a Professor at the Department of Technology and Society, State University of New York, Korea. Born in New York, he had a chance to teach at Marist College near his home town of Goshen before spending most of his academic career at New York University. Before joining SUNY, he moved to Austin, Texas and has taught in the MBA program at St. Edwards University. He started his academic career at Victoria University in New Zealand. He has also spent a decade as a Fellow at the East-West Center in Honolulu, Hawaii.

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    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

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