One of the most noteworthy features of the October 18th Final Sale Notice (FSN) for the PACW-1 offshore lease auction – which will be the first west coast auction held by the Bureau of Ocean Energy Management (BOEM) – is the availability of “multi-factor” bid credits. The multi-factor approach will allow bidders to earn credits for activities BOEM hopes to stimulate, including making commitments to domestic workforce training and supply chain development as well as entrance into community benefit agreements (CBAs) addressing the impacts of offshore development on local stakeholders. Up to 30% of the cash value of their bid is available to bidders in the form of bid credits, a not insignificant figure given both government and market estimates of potential lease values.
The FSN includes a 20% bidding credit for commitments to “support workforce training programs for the floating offshore wind industry and/or develop a U.S. domestic supply chain for the floating offshore wind industry”. In addition, bidders can receive up to an incremental 10% in bid credits relating to the bidders’ entrance into CBAs. BOEM has divided CBA credits into two categories: 1) a Lease Area Use CBA credit; and, 2) a General CBA credit, each worth 5% of bidders’ cash bid amounts.
Bidders will need to carefully consider how to approach strategies related to these valuable credits, proposals for which will be submitted with each Bidder’s Financial Form (BFF). Proposals will be reviewed by a panel, which will evaluate each proposal and determine bidders’ credit values. Credit values will then be communicated to bidders, all prior to the auction. While the effect of the submission and review timeline finalized by BOEM is that bidders will know the value of the credits they are eligible for prior to the auction, it also means that they will be forced to consider local content strategies and potentially make cash commitments much earlier in their development cycles than is customary.
Workforce Training and Supply Chain Contributions
Proposed training programs must support the floating offshore wind industry, development of a U.S. domestic supply chain for the floating offshore wind energy industry, or both. To qualify for this credit, the winning bidder is required to financially contribute the value of the credit toward a qualifying workforce training program or the development of the domestic supply chain. Notably, the commitment must be with a non-affiliate of the bidder. The workforce training and supply chain development credit is the only one that requires bidders to make an up-front financial commitment.
The workforce training contribution must result in a better trained and/or larger domestic floating offshore wind workforce. Examples include (i) contributions toward union apprenticeships, as well as stipends for workforce training, (ii) contributions toward maritime training for the crewing of vessels used for the construction, servicing, and/or decommissioning of floating offshore wind energy projects in the United States, (iii) contributions toward training workers to manufacture or assemble floating offshore wind components, and (iv) contributions toward Tribal workforce development programs.
The supply chain contribution must result in (i) overall benefits to the U.S. floating offshore wind supply chain available to all potential purchasers of offshore wind services, components, or subassemblies; (ii) the development of new domestic capacity (including vessels) or the buildout of existing capacity; or (iii) a reduction in the upfront capital or certification cost for manufacturing offshore wind components.
In the discussion of supply chain contributions, the guidance explicitly describes the development of Jones Act-compliant vessels for the construction, servicing, and/or decommissioning of floating offshore wind energy projects, as well as contributions towards port infrastructure related to floating offshore wind component manufacturing and preparation of quayside manufacturing and assembly areas. These features represent concerted action by BOEM toward addressing the current scarcity of Jones Act-compliant vessels required to construct and maintain offshore wind projects as well as the lack of suitable port infrastructure on the west coast, two of the most pressing issues facing the development of floating offshore wind in the US despite the recent announcement by Crowley that it has entered into negotiations with the Port of Humboldt Bay to be the developer and operator of the west coast’s first offshore hub.
Lease Area Use CBA and General CBA Credits
An additional up-to 10% credit is available to developers for entry into eligible Community Benefit Agreements. CBAs can be entered into with any legal entity organized under the laws of the US (including public and private corporations as well as cities and towns), federally recognized Tribal organizations, and states or political subdivisions of states. The approach BOEM landed on, which allows bidders to receive credits under both “Lease” and “General” categories varies from the Proposed Sale Notice (PSN), where the Lease Area Use CBA credit was the only benefit proposed.
The Lease Area Use CBA credit is available for CBAs between a bidder and communities, Tribal entities, or other stakeholder groups whose use of a Lease Area itself or reliance on resources harvested from a Lease Area will be affected by the development of offshore wind in that Lease Area. Given that the Morro Bay and Humboldt Lease Areas are 20 miles offshore, BOEM noted in both FSN and the FSN Response to Comments that this credit is essentially available for CBAs entered into with commercial or Tribal fisheries and related industries.
In response to public comments to the PSN raising concerns over various other groups that could be impacted by offshore wind development off the coast of Morro Bay and Humboldt, BOEM added a General CBA bidding credit in the FSN. This General CBA credit is available to bidders who enter into CBAs with communities, stakeholders, or Tribal entities expected to be impacted by effects of offshore wind development on marine, coastal, or human environments, including visual or cultural impacts. This credit is essentially a “catch-all” for impacts not specifically addressed by the Lease Area Use CBA credit. It also encourages developers to communicate directly with affected communities to determine what impacts offshore wind development will have and what steps would be best to mitigate the harm or to compensate the affected groups. A CBA or actions, programs, or resources included in a CBA used to qualify for a Lease Area Use CBA credit cannot also be used to qualify for a General CBA credit, and vice versa.
In the PSN, the Lease Area Use CBA credit was set at 2.5% of the cash value of a bid. In response to public comments concerned that 2.5% of a bid may be an insufficient incentive for bidders to enter into CBAs, BOEM raised the amount of the Lease Area Use CBA credit to 5% and added the General CBA credit with an additional 5% in the FSN. BOEM reasoned that a 10% total credit for CBAs, or half of what is available from the bidding credit for workforce training or supply chain development, would sufficiently incentivize bidders to enter into CBAs while still providing a fair return to the United States when taking into account the combination of the cash value of the bids and the potential advancement of US interests.
Developers who win a Lease Area using a bid with one or both CBA credits must use “best efforts” to ensure the monetary and non-monetary benefits provided via the CBA are equal to or greater than the value of the credit given. Upon a BOEM determination that a lessee or assignee failed to satisfy the requirements of a credit, the cash value of the bid credit awarded, plus interest, would become due. The Department of Interior’s Decision Memorandum regarding the FSN estimated the cumulative price for the Lease Areas at between $400 million and $1.6 billion (with some developer estimates being higher). Based on the federal assumptions, between $30 million and $152 million, plus years of potential interest, would be owed if bidders do not comply with the best efforts standards. As a result, developers should use diligence and accuracy in developing their strategies to avoid the potentially severe penalties.
Applicable CBA Procedures and Qualifications
The eligibility process for both types of CBA credits is essentially identical. Any bidder hoping to receive either CBA credit must submit to BOEM as part of their BFF either an existing, qualifying CBA agreement or a strategy by which the bidder pledges to enter into a qualifying CBA agreement in the future, in accordance with the requirements of the BFF Addendum. For both CBA credits, a bidder choosing to submit a strategy instead of an existing CBA must include the method by which the bidder will identify communities or groups with whom to enter into a CBA, describe the provisions that will be included in the CBA, and describe how the bidder will document and verify with BOEM that the CBA was executed in accordance with the requirements of the BFF and the BFF Addendum. For a General CBA credit, the bidder must satisfy an additional requirement by describing what commitments and forms of investments they will make as part of the General CBA. Finally, bidders who win an auction for a Lease Area using a CBA credit obtained with a strategy must submit documentation verifying entrance into a CBA meeting both the requirements set out by BOEM (discussed below) and the requirements from the bidder’s own strategy. BOEM can alter this deadline at its own discretion.
The general qualifications for both CBA credits are virtually identical as well. A qualifying Lease Area Use CBA must: i) be between the bidder and an impacted community or group, ii) specify how the community’s use of the Lease Area (or for a General CBA credit, how the community or group’s use of coastal, marine, or human environments) will be affected by offshore wind development and lease development in the Lease Area, iii) specify all benefits, monetary, material, or otherwise, provided to the impacted community or group, iv) include a commitment of all parties to the CBA to collaborate to resolve future issues, v) describe communication, engagement, and/or education methods made available to the community or group, vi) specify plans to mitigate the impacts of the offshore wind development on the community or group, and vii) contain no exclusivity language preventing the community or group from entering into CBAs with other bidders. In addition to these requirements, a qualifying General CBA must also explain how the impacts addressed in the General CBA are not addressed by a Lease Area CBA.
Conclusion
BOEM has acted decisively to include strong stimulants to developers to engage local stakeholders and invest in local communities. In many ways this approach reflects what has recently emerged in state offtake auctions, including in New York, where local content commitments continue to be a large factor in determining winners. What multi-factor bidding might mean for lease prices, bidding strategies and requirements in future lease auctions is a developing question. However, given the potential value of credits, it is highly likely that creative strategies will emerge in the wake of the California auction.