August 20, 2010 04:26
Its been 10 years since Cape Wind Associates, LLC originally proposed developing 130 wind turbines in Nantucket Sound and, after navigating successfully through a labyrinth of federal, state and local permitting and siting challenges and fending off the perfect storm of litigation, the winds may finally be blowing in Cape Wind’s direction. (Check out this link for a good history of Cape Wind, details on the project, and legal challenges and the controversies surrounding it: http://en.wikipedia.org/wiki/Cape_Wind).
Even though now fully permitted for construction, however, the challenges for the nation’s first offshore wind project are far from over as utility regulators consider whether to approve the power purchase agreement (PPA) and public debate in Massachusetts continues to question the wisdom of allowing governmental support for a private project. Cape Wind still needs to complete the project financing arrangements, estimated at $1 to $2 billion, and an approved PPA is a crucial foundation for commercial financing.
According to National Grid’s May 10, 2010 filing with the Massachusetts Department of Public Utilities (DPU), in which it submitted the PPA documents requesting approval of the power purchase arrangements, the utility subsidiaries of National Grid, Massachusetts Electric Company and Nantucket Electric Company plan to buy about 50% of Cape Wind’s power output at 20.7 cents per kilowatt hour over 15 years, which would represent approximately 3.5% of National Grid’s electric distribution load in Massachusetts and exceed its mandate under the state’s renewable portfolio standard obligation, as set forth in the Green Communities Act. National Grid further stated that the average residential homeowner using 500 kWh per month would see an increase of $1.59 per month in 2013, equal to 2.2% increase on the bill at today’s energy commodity prices.
And so, now that the tough environmental and siting decisions have been made in Cape Wind’s favor, the issue has been joined at the DPU on the project’s economics and whether the public (in the form of Massachusetts ratepayers) should support the project. Just this week, an Op-Ed writer in the Boston Globe criticized the administration of Massachusetts Gov. Deval Patrick’s alleged lack of transparency, political support for the high energy cost of the PPA and the price risk contingencies in the contract. (The energy cost can go up or down depending on certain market conditions and there is a limited sharing of risk in the PPA related to the project’s power output and qualification for tax credits. The actual costs presented to the DPU are based on forecasts, but there are uncertainties and risks as well.)
This might be a good time to comment on what I like to call the renewable energy economic facts of life. It’s a fact that renewable energy costs more than energy generated with fossil fuel sources, such as coal or natural gas. There’s simply no way around that fact. Whether a project is solar, biomass, fuel cell, wind powered or some other renewable source, the cost of the technology and project development is simply higher and sometimes far more expensive than fossil generation. When it comes to market forces, therefore, generators of renewable power cannot sell the energy economically into a functioning market without substantial price supports or other subsidies.
One such subsidy is the federal government’s 30% investment tax credit and the production tax credit, but these tax credits are not enough to help renewable projects to clear the hurdle. They still need a long-term PPA with a credit-worthy energy buyer and a vibrant market for the renewable energy certificates (RECs) generated by the project. (Just yesterday, New Jersey's governor signed into law a measure that would create ocean RECs or ORECs to support such projects. See blog post below.) Depending on deal terms that include who (buyer or seller) acquires the ownership rights to the RECs, the per-kilowatt-hour energy cost can increase or decrease.
In Cape Wind’s case, the PPA buyer is acquiring all of the environmental attributes of the wind power, including the RECs, and capacity rights in addition to the energy itself. That means that National Grid will have the right to sell the RECs in the market and credit the ratepayers for revenues generated in the marketplace as a result. The net energy cost, therefore, will likely be less than the 20.7 cents per kWh specified in the PPA.
Ultimately, the question for Massachusetts regulators and the public will be whether the renewable energy, which promises clean renewable energy that reduces greenhouse gas emissions and global climate change, is worth the cost. If we really want to diversify our power supply with clean renewable energy and reduce our reliance on coal and natural gas fired generation, projects like Cape Wind deserve public support and contracts like the ones pending before the DPU merit serious consideration.