Cato Institute Wrong On Jones Act Math Again

In a July 28 published opinion piece, Colin Grabow of the Cato Institute took issue with my characterization of a minimal Jones Act cost impact on offshore wind projects. He was reacting to the earlier publication of my critique of a June 7 article in the New York Times. For ready reference, the full text of Mr. Grabow’s editorial, my critique and the NYT’s article are all shown below in that order.

I always love a challenge, particularly one involving numbers. My estimate of the incremental project cost from using a Jones Act vessel versus a foreign flag vessel of 1.4% is a conclusion I enthusiastically reaffirm. It is a number based on all the relevant facts and it will become apparent that there is no credible support for Mr. Grabow’s challenge. Using the construction costs he highlighted, I’ll layout the figures in detail and develop what the net Jones Act impact would be with his very own example. Note that my research shows the delta between U.S. and foreign construction costs for some high specification turbine installation vessels (TIV’s) to actually be below 50%. The core point related to the accuracy of my characterization can and will be made using numbers that Mr. Grabow cannot reasonably dispute.

Determining the installation cost difference between a $500 million TIV and a $330 million TIV requires the daily charter rates and the typical amount of time to install an offshore wind turbine. The relative difference between the daily charter rates is of course what matters. We’ll use $250K/day for the Jones Act TIV and $167K/day for the foreign flag TIV, maintaining the 50% spread. Those absolute charter rates can be supported by a variety of sources and straddle the $200K or more charter rate Mr. Grabow used in an article now on Cato’s website. The actual installation of an offshore wind turbine comes near the end of the timeline and involves some half dozen or so individual lifts. My analysis of the average total TIV time involved, including transit time to and from the staging area along with port time and weather delays, is 9.52 days per turbine. At $250K/day for a Jones Act TIV, that works out to a total charter of $2.4 million per turbine. The foreign flag TIV works out to a total charter of $1.6 million. The $800K difference between the two is the incremental cost impact of a Jones Act TIV.

Such an incremental cost is best assessed relative to the entire cost of one offshore wind turbine. The March 2019 report issued by the University of Delaware Special Initiative on Offshore Wind forecast that 1,700 offshore wind turbines at a total construction cost of $68.3 billion will be installed by 2030 in coastal waters near seven Northeast states. That is equivalent to $40.2 million per offshore wind turbine. The New York Times article on the Dominion Energy project said that its 200 offshore wind turbines would cost $40 million apiece, in full agreement with the most definitive study of the domestic offshore wind sector. Therefore, the overall Jones Act charter cost represents 5.8% of the total construction cost. More to the point, the incremental Jones Act cost above foreign flag cost represents just 1.9% of the overall project cost. The same methodology would result in a lower percentage cost difference in situations where the delta between U.S. and foreign construction costs is below 50%, which I believe is the case with a certain high specification TIV with a smaller hull. To the extent that the actual average time per offshore turbine varies from the 9.52 day estimate, the net impact will change proportionately. Some will say mine is too conservative a time estimate with a variance more likely on the lower side, further reducing the net percent impact.

With all these numbers laid out clearly, I invite Mr. Grabow to highlight any errors or to articulate how less than a 2% impact on the cost of an offshore wind turbine is the “significant burden” he purports it to be. My related comments about the lack of planning speak for themselves. The permitting and regulatory processes related to offshore wind farms start years before any physical construction activities begin. TIV’s themselves come in towards the tail end of multiple construction activities. These total timelines stretch out to readily being twice as long as it takes to build a TIV. The offshore wind farm developers must have detailed PERT charts on their projects showing what needs to be done and when it needs to be done to avoid any delays. Having access to a TIV is obviously a critical requirement, as an offshore wind turbine cannot be completed without a TIV. The developers are aware of the Jones Act, that there are presently no Jones Act TIV’s and generally how long it takes to build a TIV. Their PERT charts will tell them when there is a need to begin building a new TIV to avoid unacceptable delays in completing a wind farm. Apparently that threshold was reached almost a year ago with the Dominion Energy project.

The overriding point is that the need for a Jones Act TIV isn’t new and has been on the radar screen long enough to have been proactively addressed in a manner that would avoid delays. The Jones Act didn’t sneak up on anybody. Perhaps some hoped that inaction on their part could assist in jamming through some exception. It should now be clearer than ever that the Jones Act is here to stay related to U.S. offshore wind turbine projects. Those who fail to take action to secure the availability of a Jones Act TIV at the needed time, either through a charter of one someone else is building or plans to build or from building your own, will themselves own any delay resulting from that basic lack of planning. If any project were delayed because a developer failed to secure a permit or regulatory approval at the appropriate time, nobody would think that the solution is to do away with the requirement for a permit or regulatory approval. Similarly, it is nonsense to suggest as Mr. Grabow does to “entirely remove this barrier” when it was something that was always known but not always planned for or addressed adequately.

As he frequently does, here Mr. Grabow has selected the single cost item with the widest variance and highlighted it to infer the relative difference in broader more relevant numbers. In cherry picking his 50% and harping on it, he seeks to have the casual reader think it and my 1.4% are measuring the same thing. He not only gratuitously discredits my 1.4%, but implies that the Jones Act pushes up offshore wind project construction costs by 50%. Mr. Grabow knows that a 1.4% or 1.9% net cost impact on offshore wind projects has no possibility of painting the Jones Act the bogeyman it needs to be in order to make his case. His deft sleight-of-hand is all about obscuring broader more relevant numbers and getting folks to look at just his out of context hyperbole.

The time for focusing on and planning for how Jones Act TIV needs are met is at hand. Using the 9.52 days of TIV time per turbine, to install the 1,700 turbines forecast in the March 2019 University of Delaware study would require the equivalent of 4.4 Jones Act TIV’s working constantly for ten years. Other forecasts as well as the recently announced offshore energy goal of the Biden Administration point to even more turbines installed in U.S. waters over the next ten years. While the U.S. is well behind Europe and other areas related to offshore wind, continued growth and the sharp increase in average turbine size that makes the majority of existing foreign flag TIV’s unusable will drive significant international TIV demand going forward. Based on the BloombergNSF forecast for offshore wind turbines worldwide through 2030, it looks like up to 20 new high specification TIV’s will need to be built, more than four times the need in the U.S. alone.

Despite the claims of Mr. Grabow, careful examination of the hard facts and the most relevant data demonstrate that the Jones Act is not a meaningful burden to the development of the U.S. offshore wind sector. Delays from any lack of Jones Act qualified TIV’s will lay squarely with those who failed to adequately incorporate the reality of this hundred-year-old law into their own planning. If the forecasts for demand for domestic offshore wind power through 2030 are accurate, the trend lines show that demand in the decades to follow will be even higher. The need for more TIV’s that results from that will be augmented by the demand from the expected replacement of the blades and necelles every twenty years. The foundation, tower and transmission components have a significantly longer life, which ensures several replacement cycles with TIV’s needed to both remove the old components and install the new components. It all comes together to look like a virtuous circle of increasing demand for TIV’s in the U.S. offshore wind sector. The folks who may be planning on addressing that via a feeder operation in conjunction with an immovable foreign flag TIV should double-check their numbers. I don’t see that approach as either efficient or reliable and it seems to implicitly assume an excess supply of high specification foreign flag TIV’s. As noted above, there is data pointing to increasing tightness for high specification TIV’s in the international offshore sector.

There is a simple obvious solution that addresses all issues: Build more Jones Act TIV’s. Near term known demand is more than four times what is now being built. Keep building to when that point is reached. If demand is much higher at that time, keep building even more. Serial construction supports learning curve benefits with shipyards getting more efficient with each successive unit. Moving ahead in such a constructive way is good for the country, good for the broad maritime industry and good for the domestic offshore wind sector.

Text of Grabow editorial in Riviera Maritime rebuking McCown:

Jones Act inflicts costly burden on US offshore wind

28 Jul 2021 by Colin Grabow

US cabotage law is a hinderance and substantial cost driver to US offshore wind development, writes Cato Institute policy analyst Colin Grabow

Taking issue with a recent New York Times article documenting the Jones Act’s role in frustrating the deployment of offshore wind energy, John McCown has attempted to downplay the law’s harm to the sector. Citing a mere 1.4% cost increase due to the Jones Act — a number whose derivation is unclear — Mr McCown claims the law’s impact on offshore wind projects is “hardly material.” If only that were so. Rather than a minor factor, careful examination reveals the Jones Act to be a significant burden that should concern all who wish to see the successful development of this nascent industry.

Perhaps nowhere is the Jones Act’s cost inflation more vividly on display than in vessel construction. While Mr McCown insists that Gulf Coast shipyards available to build vessels necessary for the installation of offshore wind are efficient, available numbers suggest otherwise. The lone Jones Act-compliant wind turbine installation vessel (WTIV) currently under construction, for example, has an estimated price tag of approximately US$500M. In contrast, building a WTIV in South Korea with the same design (GustoMSC NG-16000X-SJ) but a more powerful crane costs US$330M.

That’s a 50% higher price for a slightly less capable vessel.

Now consider that observers believe that four to six such vessels may be needed to meet US offshore wind needs. Compounding matters, the industry may also need a further six to eight service operation vessels with estimated construction costs 80% higher than in Europe and 30 to 50 crew transfer vessels featuring an estimated 20% US-built cost premium. The cost of US maritime protectionism quickly adds up.

But the Jones Act’s costs go well beyond vessel construction. Faced with a complete lack of Jones Act-compliant WTIVs, offshore wind developers have been forced to adopt less efficient workarounds to avoid violating the law. Installing wind turbines off Block Island, for example, required the use of Jones Act-compliant lift boats to transport turbine components from a nearby port to a foreign-flagged WTIV barred by the law from performing the transportation itself.

A demonstration project off the coast of Virginia, meanwhile, necessitated the use of a foreign-flag WTIV transporting components from a port in Canada to avoid running afoul of the Jones Act. As the New York Times points out, such a project in Europe would have taken a matter of weeks while in the United States completing the project required a year. That’s a significant cost inflator in an industry where time is money. It comes as no surprise that the Times describes overcoming Jones Act-related obstacles as the project’s biggest challenge.

When confronted with such evidence, Mr McCown blames windfarm developers for a lack of planning, but it’s not apparent how even the most meticulous strategy could mitigate the Jones Act’s added costs. In a world where Jones Act-compliant installation vessels are non-existent and their construction involves sharply higher expenditure, suboptimal improvisation is inevitable.

It’s therefore small wonder that analysts ranging from Rystad Energy to IHS Markit to McKinsey & Company have cited the Jones Act as a hindrance to the development of US offshore wind. Even the Department of Energy has highlighted increased costs resulting from inefficiencies produced by the law. That’s exactly what we should expect to happen. After all, driving up costs is the Jones Act’s entire point. If the cost difference between using US and foreign vessels was non-existent or negligible, the law would be unnecessary.

Surveying the hard facts produces an inescapable conclusion: the Jones Act is a clear and substantial cost driver for offshore wind. Washington should stop turning a blind eye to the law’s pernicious role and instead act to either mitigate or entirely remove this barrier to the industry’s success.

About the author

Mr Grabow is a policy analyst at the Cato Institute’s Herbert A Stiefel Center for Trade Policy Studies where his research focuses on domestic forms of trade protectionism such as the Jones Act and the US sugar programme. His writings have been published in a number of outlets, including USA Today, The Hill, National Review, and the Wall Street Journal.

Text of my Medium article rebuking New York Times:

Gray Lady Comes Up Short On The Jones Act

Last week the New York Times had a story on offshore wind that I believe unfairly characterized the impact of the Jones Act. I submitted a letter to the paper outlining my concern that they chose not to publish. My letter is presented below with the text of the NYT article below it.

Dear Sir/Madam:

Your June 7 “Offshore Wind Farms Show What Biden’s Climate Plan Is Up Against” article referred to the Jones Act four times and was long on calling it the bogeyman but short on the underlying facts. Using a Jones Act turbine installation vessel will marginally increase the cost of an offshore wind turbine but when you know all the relevant numbers the delta is hardly material. The final installation of each offshore wind turbine involves just a few days work by these complex vessels. Your readers would have been better served by your highlighting the day rates for such vessels and calculating the total cost over a range of days. When you do that, you’ll realize you’re talking about a low single digit percent of the $40 million per turbine cost. My own analysis as part of my deep dive into this space over the last two years points to the incremental project cost from using a Jones Act vessel versus a foreign flag vessel being around 1.4%. Hardly the barrier suggested by your article. Note that the majority of the costs of these complex vessels are appendages to the hull. As such, the multiple efficient Gulf Coast shipyards capable of building these vessels can access the same suppliers foreign builders use and that portion of the building cost would be nearly identical.

It’s understandable that wind farm developers want to minimize their costs. But they need to comply with our laws and regulations, one of which is the longstanding Jones Act. Its importance goes well beyond others because it and the industry and broad supply chain it supports are linked directly with national security. They need to deal with that reality and quit acting like their lack of planning should translate into a change in law that simply won’t occur. The Biden Administration and the large majority of members of Congress in both parties vigorously support the Jones Act.

Unfortunately, shiploads of misleading and inaccurate information on the Jones Act has been peddled the past couple of years by certain think tanks carrying water for entities seeking to progress their own business interests. That some of the funding for such ‘research’ comes from foreign entities makes these efforts even more pernicious. Ignore their balderdash, do the math and follow the hard facts.

Sincerely,

John D. McCown

25 Miller Road, Pound Ridge, NY 10576

(914) 234–7597

Note to editor on background of writer: McCown has spent four decades in the maritime sector since graduating with an MBA from Harvard Business School. That includes 15 years as CEO of a Jones Act container shipping company he co-founded and 5 years investing in maritime companies worldwide as head of transportation investments at a $20 billion hedge fund. McCown holds two shipping process patents, one related to cargo handling and another related to vessel propulsion. His mentor was Malcom McLean, the inventor of container shipping who he worked with on a daily basis for some twenty years. McCown’s recently published book “Giants Of The Sea” is a broad sweep of the modern cargo shipping industry and its development and its was just referred to by the preeminent reviewer of maritime books as an “excellent, important and very valuable book”.

Text of article in New York Times:

Offshore Wind Farms Show What Biden’s Climate Plan Is Up Against

June 7, 2021

A constellation of 5,400 offshore wind turbines covers a growing part of Europe’s energy needs. The United States has exactly seven.

With more than 14,000 miles of coastline, the country offers plenty of places to tear down turbines. But legal, environmental, and economic obstacles and even vanity stood in the way.

President Biden wants to catch up quickly — in fact, his goals to reduce greenhouse gas emissions depend on it. Still, there are many problems, including a shortage of boats big enough to take the huge equipment out to sea, fishermen worried for livelihoods, and wealthy people feared that the turbines would take the unspoiled view of theirs Clouding villas by the water. There is even a centuries-old, politically explosive federal law known as the Jones Act that prevents wind farm developers from using American ports to launch foreign construction ships.

Offshore turbines are useful because the winds at sea are stronger and more steady than on land. The turbines can be placed so far that they are not visible from land, but still close enough to cities and suburbs that they do not require hundreds of kilometers of expensive transmission lines.

The Biden administration wants up to 2,000 turbines in the water in the next eight and a half years. Officials recently approved a project near Martha’s Vineyard that languished during the Trump administration and announced support for large wind farms off the California coast in May. The $ 2 trillion infrastructure plan proposed by Mr Biden in March would also increase incentives for renewables.

The cost of offshore wind turbines has fallen by around 80 percent over the past two decades to as low as $ 50 per megawatt hour. Although they are more expensive per unit of energy than onshore solar and wind parks, offshore turbines are often economically viable due to their lower transmission costs.

“Solar in the east is a little trickier than in the desert west,” said Robert M. Blue, chairman and CEO of Dominion Energy, a major utility working on a wind farm with nearly 200 turbines off the coast of Virginia. “We have set ourselves a net zero target for our company by 2050. This project is essential to achieve these goals. “

The slow pace of offshore wind development underscores the trade-offs between urgently tackling climate change and Mr Biden’s other goals of creating well-paying jobs and protecting local habitats. The United States could push through more projects if it were willing, for example, to remove the Jones Act’s protection for domestic shipbuilding, but that would undermine the president’s promises of employment.

These difficult questions cannot be solved simply by federal spending. As a result, it could be difficult or impossible for Mr Biden to eliminate greenhouse gas emissions from the electricity sector by 2035 and achieve net zero emissions across the economy by 2050 as he would like.

“I think the clear fact that other places have jumped on us is important,” said Amanda Lefton, director of the Bureau of Ocean Energy Management, the agency that rents federal waters to wind developers. “We won’t be able to build offshore wind power if we don’t have the right investments.”

Europe’s lead means it has built a thriving complex of turbine construction, shipbuilding and skilled labor. Therefore, the USA could be dependent on European components, suppliers and ships for years.

Installing huge offshore wind turbines — General Electric’s largest one is eight feet — is a difficult job. Ships with cranes that can lift more than a thousand tons transport large components out to sea. At their destination, legs are lowered into the water to raise the ships and make them stationary while they work. Few ships can handle the largest components, and that’s a big problem for the United States.

A 1,600 mile round trip to Canada.

Lloyd Eley, a project manager, helped build nuclear submarines early in his career and has been with Dominion Energy for the past eight years. None of this prepared him properly to oversee the construction of two wind turbines off the Virginia coast.

Mr. Eley’s biggest problem was the Jones Act, which requires that ships sailing from a US port to any location within the country, including its waters, be manufactured and registered in the United States and owned by Americans and need to be occupied.

The largest ships built in the U.S. designed for offshore construction are roughly 185 feet long and can lift around 500 tons, according to a Government Accountability Office report released in December. This is far too small for the huge components that Mr. Eley’s team worked with.

So Dominion rented three European ships and operated them in the port of Halifax, Nova Scotia. One of them, the Vole au Vent from Luxembourg, is 140 meters long and can lift 1,654 tons.

Mr. Eley’s crew waited for weeks for the European ships to travel more than 800 miles each direction to the port. The installations took a year. In Europe it would be ready in a few weeks. “That was definitely a challenge,” he said.

The US shipping industry has not invested in the ships needed to transport large wind turbines because there have been so few projects here. The first five offshore turbines were installed near Block Island in 2016, with RI Dominion’s two turbines installed last year.

Had it not been for the Jones Act — it was passed after World War I to ensure the country had ships and crews that could be mobilized during war and emergencies — Dominion could have run European ships out of Virginia’s ports. The law is sacrosanct in Congress, and unions and other supporters argue that repealing it would cut thousands of jobs in shipyards and boats, and make the United States dependent on foreign companies.

Demand for large ships could increase significantly over the next decade as the US, Europe and China pursue ambitious offshore wind targets. According to Dominion, only eight ships worldwide can transport the largest turbine parts.

Dominion is spending $ 500 million on a ship built in Brownsville, Texas that can haul large wind turbines. Named after a sea monster from Greek mythology, Charybdis, the ship will be 144 meters long and lift 2,200 tons. It will be ready by the end of 2023. The company said the ship, which it will also rent to other developers, will have around 200 more turbines installed at low cost by 2026. Dominion spent $ 300 million on the first two but is hoping the others will cost $ 40 million apiece.

Fishermen fear for their existence.

For the past 24 years, Tanger Island resident Tommy Eskridge has made a living catching clams and crabs off the coast of Virginia.

Among other things, he works where Dominion wants to place its turbines. Federal regulators have adjusted the distance between turbines to one nautical mile to create wider lanes for fishermen and other boats, but Mr Eskridge, 54, fears the turbines could harm his catch.

The area has produced up to 7,000 pounds of mussels a day, although Mr Eskridge said a typical day produced about half that amount. A pound can make 2 to 3 dollars, he said.

Mr Eskridge said the company and regulators had not done enough to show that installing turbines would not harm his catch. “We just don’t know what it’s going to do.”

Annie Hawkins, executive director of the Responsible Offshore Development Alliance, which includes hundreds of fishing groups and companies, fears the government will not study the proposals and plan appropriately.

“What they do is say, ‘Take what we’ve really never done here, let’s move all in, the opponents are damned,’” said Ms. Hawkins. “From a fisheries point of view, we know that there will be massive displacement. You can’t just go fishing elsewhere. “

Fishing groups refer to recent problems in Europe to justify their concerns. For example, Orsted, the world’s largest offshore wind developer, has filed for an injunction to keep fishermen and their equipment out of an area of the North Sea designed for new turbines while it is exploring the area.

Orsted said it tried to “work with fishermen” but asked for the contract because its job was made difficult by equipment that a fisherman had left in the area that he could not identify. “In order to conduct the survey work safely and only as a last resort, we had no choice but to secure the right to remove this device,” the company said in a statement.

When developers first applied for approval for Cape Wind, a project between Cape Cod, Martha’s Vineyard and Nantucket, in 2001, opposition was fierce. Opponents included Senator Edward M. Kennedy, the Massachusetts Democrat who died in 2009, and William I. Koch, an industrialist.

Nobody wanted the turbines to block the view of the coast from their resorts. They also argued that the project would block 16 historical sites, disrupt fishermen, and clog waterways used by humpback whales, pilot whales, and other whales.

After years of legal and political disputes, the developer of Cape Wind gave up in 2017. But long before that happened, Cape Wind’s problems terrified energy managers considering offshore wind.

Projects along the east coast are in similar struggles. Residents of the Hamptons, the affluent enclave, opposed two wind development areas and the federal government put the project on hold. On the New Jersey coast, some homeowners and businesses are opposed to offshore wind because they fear it could increase their electricity prices, disrupt whales and affect the area’s leech fisheries.

Energy managers want the Biden government to mediate such conflicts and expedite permit approval.

“It was artificial, incrementally slow because of some inefficiencies on the federal approval side,” said David Hardy, CEO of Orsted North America.

Renewable energy advocates said they were hopeful because the country added many wind turbines onshore — 66,000 in 41 states. They provided more than 8 percent of the country’s electricity last year.

Ms. Lefton, the federal water lease regulator, said future offshore projects would move faster as more people realized the dangers of climate change.

“We have a climate crisis ahead of us,” she said. “We have to switch to clean energy. I think that will be a great motivation. “