Note: This is the second post of a 3-part article. Click here to read the first post.
Offshore wind energy has the potential to fundamentally reform sustainable energy production in the United States. While the U.S. has only one currently functioning offshore wind farm, the U.S. Department of Energy predicts that, in the long run, the industry could produce double the yearly energy used by the entire country. In the first installment of this three-part series, I discussed this potential at length. Here, I look at one barrier to adoption—the so-called “Jones Act.” The Jones Act is a set of laws which requires that all merchandise transported between two points in the United States be carried by a qualified U.S. vessel—a ship that is built, owned, and operated within the United States and by United States citizens. The Jones Act is a barrier to offshore wind energy production because there are few (if not 0) available U.S.-flagged ships capable of installing offshore wind turbines. I argue that offshore wind companies should either be exempt or waived (for a short period of time) from the Jones Act.
Introduction
As a brief reprise of the first post, the United States Department of Energy asserts that U.S. offshore winds have the potential to produce more than 2,000 gigawatts (GW) of energy per year.1 For context, that is double the current amount of electricity used yearly in the United States.2 Moreover, if only 1% of the potential energy is captured, almost 6.5 million homes in the United States could be powered by sustainable offshore wind energy.3 The Department of Energy calculates that if the United States develops the infrastructure necessary to harness just 4% of offshore wind potential by 2050, the industry would support 160,000 jobs, and reduce water consumption in the energy sector by 5%.4 While the U.S. is on target to eclipse the Department of Energy’s predictions for 2050, offshore wind production is still a fledgling industry—the country only has one currently operating offshore wind farm.5
Because the U.S. offshore wind industry is in its infancy, states seeking to invest in offshore wind are leaning on more established European partners to build and install offshore wind turbines. These partnerships are necessary because European companies have the expertise to efficiently build and, in the immediate term, help operate the offshore wind farms that have already been approved. Although these partnerships are likely necessary to establish the industry in the United States, partnering with European companies also implicates one of the regulatory barriers to advancing the offshore wind energy industry. The “Jones Act”6, amongst other regulations, requires that all merchandise transported between two points in the United States be carried by a qualified U.S. vessel—a ship that is built, owned, and operated within the United States and by United States citizens.7 The implication of the Jones Act is that ships that transport and install offshore wind turbines must be U.S. built, owned, and operated. The specialized ships necessary to complete these tasks exist in the international fleet. But, because the U.S. has only recently entered the offshore wind industry, only a small number of these specialized ships operate under the U.S. flag. As such, the Jones Act is a serious impediment to the future of the offshore wind industry and must be lifted in order for the industry to reach its potential.
The first of four acts that are colloquially called the Jones Act, the Merchant Marine Act of 1920, was proposed by Senator Wesley Jones (hence the adopted name of the group of laws).8 The second law, the Passenger Vessel Services Act or Passenger Act,9 was proposed and passed in 1886. The Dredging Act10 was proposed and passed in 1906. Finally, the Towing Statute11 was proposed and enacted in 1940. The four acts, taken together, have broad implications that have handcuffed a variety of industries for decades. The text of the four laws implicates the following: “[T]he Passenger Act [] applies to any person who might be considered a ‘passenger’ traveling to [a] work site, the Towing Statute [] applies to the towing of a barge to a work site, and the Dredging Act [] applies to the installation of cable on the seabed or other actions taken at the work site.”12
Application
The Jones Act has stifled growth in the offshore wind industry because compliance with the law is: (1) deeply challenging because the U.S. fleet does not have the specialized ships necessary for installation and (2) increases the cost of installation. The economic success of an offshore wind farm is directly correlated with the up-front cost associated with the installation of the turbines. A recent study from Hatch, a global management/development consultancy group, provides that approximately 30% of the initial cost of an offshore wind project is the installation of the turbines.13 The study continues: “Vessels account for 20% of the installation cost, second only to the costs of cables, turbines, and foundations which account for 60% of installation costs. Therefore, vessel installation fees alone account for approximately 6% of the overall cost of the project. This is a significant sum when considering the magnitude of an OWF’s overall project cost.”14 But, even more important than the cost issue, is the fact that the necessary specialized installation ships simply do not exist in the U.S. fleet. Because the Jones Act does not allow for the use of internationally flagged ships, offshore wind projects have facilitated a strategy to get around the issue.
The end-around strategy is approximately 30% more expensive per day and frustratingly complex. It utilizes two Jones Act compliant barges to, together, take each turbine to the offshore wind site (generally a few miles off the coast). Then, a third ship, a non-Jones Act compliant, wind turbine installation vessel (from the international fleet), takes the turbine from the barges and installs it. According to Hatch, the end-around option takes slightly less time to install but costs 28% more than using only a wind turbine installation vessel. For example, the cost of using a wind turbine installation vessel from the international fleet is approximately $590,000 per turbine installation.15 The cost per turbine installation using the end around approach is approximately $820,000.16 The cost externality created specifically by the Jones Act is, for some projects, a bar to entering the market.
Some have argued that the Jones Act provides an opportunity for the industry to build its own, more efficient, offshore wind installation fleet.17 I disagree with this proposition. The industry is burgeoning now. The idea that the U.S. offshore wind market should wait until U.S. shipbuilders have built enough offshore wind installation vessels to facilitate installation of each of the 12+ projects already approved is preposterous, for two reasons. First, it presupposes that a group will come along to pay for and build the new ships. A recent study from the Department of Energy found that “a U.S.-built wind turbine installation vessel would ‘likely cost 60% to 200% more than a comparable vessel built in an Asian shipyard,’ while another report placed the price tag of such a ship at $222 million with a construction time of 34 months.”18
Second, it presupposes that the already approved projects can wait for new ships to be built. Neither of which seems, in the current economic climate, particularly likely. The better answer is threefold, two of which are already occurring. First, the projects that can withstand the cost should continue using the end-around method. Second, resources should be diverted, in the short-run, to retrofit ships to better help with the offshore installation process. This is very much a short-run solution but experts argue that it is possible.19 Lastly, the industry must push for a Congressional waiver or exemption from the Jones Act for the entire offshore wind industry.
Waivers and/or exemptions are hard to come by in relation to the Jones Act. Exemptions have been given, in a limited capacity, for some oil and gas construction vessels20 and cases where there are no Jones Act- qualified carriers able to serve the market.21 Waivers, in contrast, are governed by 46 U.S.C. § 501, providing: “On request of the Secretary of Defense, the head of an agency responsible for the administration of the navigation or vessel-inspection laws shall waive compliance with those laws to the extent the Secretary considers necessary in the interest of national defense.”22
Waivers tend to be given on an ad hoc basis, and for short periods of time. And although the text of the waiver requirement explains that waivers are only given when in the interest of national defense, the previous waivers given make clear that the term has, in some cases, been construed broadly.23
The situation for offshore wind energy fits either the requirements for exemption or waiver. Although either option would likely be difficult to accomplish, the better strategy is to lobby for a limited exemption, during which the industry could rally around retrofitting ships to accomplish the installation of offshore turbines. The waiver approach seems less legitimate because, although energy projects have been given waivers previously, any proposed waiver would have to extend to the entire industry instead of a one-off project. The Jones Act is a barrier to producing sustainable wind energy in the United States. Its archaic framework is stifling a potentially billion-dollar industry. The answer is not to wait for years or decades until the U.S. fleet includes the specialized ships necessary for these jobs. The better option is to continue using the end-around approach while, simultaneously, lobbying Congress for a limited, industry-wide, exemption.