How the Offshore Wind Energy Industry Can Overcome the Jones Act

Europe’s decade-long economic and regulatory commitment to the offshore wind industry has paid off. With approximately 14 GW of power installed as of June 2017, the continent now boasts more than 90% of global offshore wind power capacity. Europe’s investment has created a competitive market that continues to drive down the cost of offshore wind through a mature supply chain, experienced developers, and technological innovation.

By contrast, the American offshore wind industry has only recently begun to gain momentum. Although only in the early planning stages, more than 25 offshore wind projects—primarily located off the Northeast and mid-Atlantic coasts—representing approximately 24 GW of generating capacity are underway. Some states have announced initiatives to promote development of offshore wind resources over the coming decade: New York has committed to developing 2.4 GW by 2030; Massachusetts has committed to 1.6 GW by 2027; and Maine has committed to 5 GW by 2030.

Despite this interest, the industry faces market barriers caused by federal laws restricting the use of foreign vessels in U.S. waters. Also known as cabotage laws, these restrictions on coastwise trade (the transportation of merchandise or passengers between two points in the same country) are considered the most restrictive in the world.

The Jones Act

In particular, the Merchant Marine Act of 1920, commonly referred to as the Jones Act, generally requires that all vessels transporting “merchandise” between two points in the U.S. be: U.S.-built, U.S.-flagged, U.S.-owned, and predominantly crewed by U.S. citizens or residents. Broadly, merchandise is defined as “goods, wares, and chattels of every description,” including “valueless material.” In relation to the offshore wind industry, the Jones Act effectively forbids foreign vessels from loading turbine components in a U.S. port and installing them in U.S. waters.

Introduced after World War I, the Jones Act was meant to ensure that an ample U.S. merchant fleet would be available in times of war. It favors the U.S.’s domestic shipping industry by limiting competition from foreign shipyards and merchant vessels.

The Jones Act applies up to three nautical miles beyond the U.S. coast and to the entirety of the U.S., including most of its island territories and possessions. Beyond three nautical miles, however, the Jones Act depends on jurisdiction provided by the Outer Continental Shelf Lands Act (OCSLA), which Congress extended to approximately 200 miles offshore to the seabed and soil of the outer continental shelf to develop its vast mineral resources. As amended, OCSLA applies federal laws, including the Jones Act, to “the subsoil and seabed of the outer continental shelf and to all artificial islands, and all installations and other devices permanently or temporarily attached to the seabed, which may be erected thereon for the purpose of exploring for, developing, or producing resources therefrom.”

There are currently no American vessels capable of installing offshore wind turbines. Therefore, to ensure the continued growth of the U.S. offshore wind industry, developers must find solutions to problems caused by the Jones Act.

Supporters of the Jones Act argue that the law is vital to national defense and necessary for protecting American jobs. Opponents counter that the lack of foreign competition increases the cost of using Jones Act vessels, forcing consumers to pay higher prices for goods transported by them. Island residents in particular, such as those living in Hawaii and Puerto Rico, are disproportionately affected by the Jones Act, as they rely heavily on maritime transportation.

The 98-year-old law received renewed attention recently after Puerto Rico sustained significant damage from Hurricane Maria. Officials in Puerto Rico requested the Trump administration to temporarily waive the Jones Act restrictions—a common request after national disasters—to increase access to basic supplies needed for recovery efforts, which it did for 10 days.

Applicability to Offshore Wind Projects

While there is no question that the Jones Act applies to offshore wind projects within three nautical miles of the U.S. coast, it is questionable whether the OCSLA’s text and legislative history support extending the Jones Act’s jurisdictional reach to more remote offshore wind farms. Since offshore wind turbines are not attached to the outer continental shelf for the purpose of exploring for, developing, or producing resources from the subsoil or seabed, federal courts may hold that the OCSLA does not apply.

Further, it may be held that the OCSLA only provides jurisdiction where the development of mineral resources is concerned, since it was originally passed to address the growth of offshore oil and gas exploration rather than renewable energy production. This would be a helpful determination for the offshore wind industry, but it may only be a temporary fix if Congress decided to amend the OCSLA to explicitly apply to renewable energy projects. It would therefore be wise for the offshore wind industry to take a conservative approach and presume that the OCSLA will eventually apply to wind farms.

Assuming that the OCSLA extends to offshore wind installations, the Jones Act applies only where merchandise is being transported. In 2010, U.S. Customs and Border Protection (CBP), the agency tasked with enforcing the Jones Act, issued a ruling stating that the Jones Act does not apply where a “stationary construction vessel” is merely involved in driving a monopile into the seabed and installing “a platform deck, anemometer tower, and other components.” CBP’s ruling thus clears the way for foreign jack-up vessels to install turbine foundations, so long as the vessels remain stationary and are supplied by Jones Act vessels.

Once a monopile is “permanently or temporarily attached to the seabed” it becomes a U.S. “point” for Jones Act purposes. The Jones Act would therefore apply to any vessel ferrying components from a U.S. port to an installed monopile on the U.S. outer continental shelf.

Transferring merchandise by crane, however, does not constitute “transportation” under the Jones Act. A developer can therefore construct an offshore wind farm by using Jones Act vessels to ferry merchandise from a U.S. port to installed monopoles, and then using a foreign construction vessel’s crane to construct the wind turbines.

This strategy was successfully implemented during the construction of the first American offshore wind farm, located three nautical miles off the coast of Block Island, Rhode Island. Deepwater Wind, an American offshore wind developer, used Fred Olsen Windcarrier’s foreign-flagged Brave Tern, a state-of-the-art heavy-lift jack-up vessel, which ferried five nacelles from France, to construct its five-turbine, 30-MW wind farm with the assistance of U.S.-flagged feeder vessels. Two Jones Act-compliant liftboats assisted the Brave Tern by shuttling 15 turbine-tower sections and 15 blades from Providence to the project site. The Brave Tern used its 800-ton crane to assemble the various components during the month-long construction period.

While this strategy was successfully employed for the small Block Island project, it may not prove practical for large-scale development of offshore wind in the U.S. By some estimates, the use of foreign-installation vessels may increase project costs by as much as $20–40 million for a 100-turbine development.

Given the scale of projects under development in more mature markets—for example, in the UK, the 1,218-MW Hornsea Project One contemplates the installation of 174 turbines—the additional cost and complexity of using foreign ships may be prohibitive. The offshore wind industry may therefore need to employ a range of strategies to ensure that the Jones Act and other cabotage laws do not stifle, or entirely prevent, the growth of U.S. offshore wind.

Solutions

Several strategies could be employed to address Jones Act restrictions. They include the following:

  • Amend the Jones Act to include a waiver for renewable energy projects. While there have been many failed attempts at repealing all or parts of the Jones Act—most notably by Sen. John McCain—they have been met with stiff opposition from entrenched interest groups and have thus far proven unsuccessful. A more practical option may be to lobby Congress to amend the Jones Act to include a waiver for renewable energy projects. To increase the likelihood of passage, Congress could include a sunset provision that would repeal the amendment after a fixed date with the intent of allowing the offshore wind industry enough time to mature, thereby increasing demand for U.S-built installation vessels.
  • Seek an advisory ruling from the CBP. In response to written requests, the CBP will issue binding rulings for persons seeking clarity as to how the CBP will treat a potential transaction and, generally, developers should submit a detailed request prior to undertaking any project activities. Requesting an advance ruling regarding the applicability of the OCSLA may be particularly useful to developers planning to construct an offshore wind farm more than three nautical miles from the U.S. coast. However, as mentioned, while the CBP may consider the OCSLA inapplicable to offshore wind farms, this may not be a long-term solution to Jones Act restrictions because Congress could decide to amend the OCSLA at any time.
  • Use the feeder barge strategy employed at Block Island. As previously noted, foreign offshore wind installation vessels, assisted by Jones Act-compliant feeder vessels, can be used to construct offshore wind farms off the U.S. coast. This strategy, however, has some limitations. First, it depends on the availability of foreign installation vessels and capacity of foreign vessels is expected to tighten after 2020, increasing competition for available ships. Second, since the feeder barge strategy requires multiple ships to work in tandem and foreign vessels to travel to the U.S., it can increase the cost and complexity of installation projects. Typically, in Europe, sophisticated purpose-built installation ships like the Brave Tern work alone. While this strategy may address the lack of Jones Act-compliant installation vessels in the short-term, it will not be sufficient to support the long-term growth of the U.S. offshore wind market.
  • Repurpose existing U.S. vessels. Another option is to repurpose existing Jones Act-compliant vessels for offshore wind farm installation. Repurposing existing US vessels may prove significantly more affordable than constructing new sophisticated purpose-built vessels. In June 2017, Zentech Inc. and Renewable Resources International announced their plans to construct a Jones Act-compliant installation vessel and to deliver it by the end of 2018. The planned Jones Act vessel is based on an existing U.S.-built barge and will be designed to “navigate the New Bedford Hurricane Barrier” with the capacity to carry several turbines ranging from 6 MW to 9 MW. Repurposed vessels may also prove useful as feeder barges where larger and more sophisticated purpose-built vessels are required.
  • Build Jones Act-compliant vessels. In the long-term, so long as the Jones Act is on the books, the U.S. offshore wind industry will need to build Jones Act-compliant vessels capable of installing the next generation of turbines. The construction of purpose-built vessels, however, will require a predictable stream of projects to make the proposition profitable. As stated in the “U.S. Jones Act Compliant Offshore Wind Turbine Installation Vessel Study,” a purpose-built installation vessel is estimated to cost $222 million with an approximate construction time of 34 months. To ensure “a reasonable combination of day rates ($220,000) and internal rate of (10%), at least ten years of work or a pipeline of approximately 3,500 to 4,000 MW of offshore wind capacity is required.” As the report concludes, this would require a group of states and developers to identify a pipeline of viable projects to justify the construction of wind turbine installation vessels.

Industry and Government Collaboration Needed

While there is no single panacea for the challenges created by the Jones Act, there are a range of short-term and long-term strategies that can be employed to mitigate its impact on the offshore wind industry.

In the short-term, developers may seek advisory rulings from the CBP to determine whether the Jones Act will apply to their particular project and employ a feeder barge strategy to circumvent Jones Act restrictions. In the longer-term, developers may need to lobby for a change to the Jones Act and other cabotage laws, or work with state governments to ensure that there is a sufficient pipeline of projects to justify the construction of purpose-built Jones Act installation vessels. It will take industry stakeholders, and federal and state governments working together to ensure that American offshore wind is not stifled by market barriers such as the Jones Act.

Joshua Sohn is a partner and Daniel Lewkowicz is an associate with Watson Farley & Williams LLP in the firm’s New York office.