It was one step forward and one step back for PJM’s offshore wind hopes as federal officials announced the auction of 112,800 acres off Virginia while New Jersey regulators rejected a deal with developers of a proposed Atlantic City wind farm.

The Interior Department’s Bureau of Ocean Energy Management said yesterday it will conduct an auction Sept. 4 for an area 23.5 nautical miles off Virginia Beach with potential wind generation of more than 2,000 megawatts. The online auction will use an ‘‘ascending clock’’ format in which BOEM sets an asking price and increases it in steps until only one bidder remains.

Eight companies have been prequalified to bid: Apex Virginia Offshore Wind, LLC; Virginia Electric and Power Company (“Dominion Virginia Power”); Energy Management, Inc.; EDF Renewable Development, Inc.; Iberdrola Renewables, Inc.; Sea Breeze Energy, LLC; Orisol Energy U.S., Inc. and Fisherman’s Energy, LLC.

Interior Secretary Sally Jewell said the Virginia lease marks the “transition from planning to action when it comes to capturing” offshore wind’s potential.

But as RTO Insider pointed out in a June 25 Special Report, the high cost of offshore wind means PJM is unlikely to see any turbines in the water without significant changes in state and federal energy policy. Report (See The Siren Song of Offshore Wind: Cost, Political Obstacles Slow Progress Despite Huge Potential)

Exhibit A is Fishermen’s Energy’s proposed 25 MW pilot project off Atlantic City.

On Friday, the New Jersey Board of Public Utilities voted unanimously to reject a proposed deal between the developer and the Division of Rate Counsel to allow the project to proceed.

In 2010, New Jersey enacted a law committing the state to purchase 1,100 MW of offshore wind by 2020. Ratepayers would subsidize the cost of the above-market energy from the plant through Offshore Renewable Energy Certificates (OREC).

‘Net Benefits’ Test

BPU won’t award ORECs, however, unless it is convinced that a wind farm’s economic and environmental benefits exceed its costs.

The Rate Counsel, which represents ratepayers before the BPU, previously had opposed the Fishermen’s project for failing to meet the “net economic benefit” test. But Rate Counsel dropped its opposition after negotiating reductions in the projected rates from the project.

The board rejected the Rate Counsel’s deal with the developers Friday, saying that a proposed $19 million contingency fund — which would have made ratepayers liable if the project failed to receive $100 million in potential federal grants and tax incentives — violated state law.

“The only way ratepayers …can be at risk of paying for the cost of the project is through the ORECs,” BPU spokesman J. Gregory Reinert told RTO Insider.

Rate Counsel Director Stefanie Brand told RTO Insider she disagrees with BPU’s legal analysis. She said the stipulation reduced the projected ratepayer costs of the project by 40%. “It went from being one of the most expensive offshore wind projects [in the U.S.] to one of the cheapest,” she said.

The board’s action is not the final word on the project. If developers and Rate Counsel cannot reach agreement with the BPU, the case could go to an evidentiary hearing later this year.