Cape Wind, National Grid Prepare to Negotiate Long-Term Power Contract
By: Michael C. Bailey
Cape Wind Associates, the developers of the proposed Cape Cod Wind Farm, trumpeted a major development in its quest to build the nation’s first offshore wind farm after Governor Deval L. Patrick announced that National Grid will enter into negotiations for a long-term power supply contract.
“It’s a big day for us,” Mark Rodgers, director of communications for Cape Wind, said.
The governor announced Wednesday that the Massachusetts Electric Company and the Nantucket Electric Company—which do business together as National Grid and serve, in total, 1.2 million electric customers—have agreed to enter into negotiations for a long-term power supply contract, under which National Grid would purchase electricity generated by the facility.
“Today’s announcement is a demonstration of how the Patrick Administration’s vision and desire for a cleaner, more secure energy future will put Massachusetts at the forefront of the emerging offshore wind industry,” James Gordon, president of Cape Wind, said. “We look forward to working with National Grid to deliver Cape Wind’s energy, economic and environmental benefits to the region.”
The proposed 130-turbine wind farm sited for Nantucket Sound will generate 170 megawatts (MW) of power on average, with a maximum output of 454 MW. The average electricity demand for Cape Cod and both islands is 230 MW.
“For both reducing greenhouse gas emissions and launching the offshore wind industry that will achieve those reductions, it is essential for Cape Wind, like offshore wind in general, to move from wishful thinking to reality,” Gov. Patrick said in a press release. “A contract with an electric distribution utility like National Grid will move Cape Wind one step closer to reality.”
The governor meant that last part literally as, according to Mr. Rodgers, a set Power Purchase Agreement is necessary to secure financing for construction of the wind farm. The estimated price tag for construction is “in excess of $1 billion,” Mr. Rodgers said, but he could not provide an exact figure.
Time is of the essence for Cape Wind if it wants to take advantage of American Recovery and Reinvestment Act (ARRA) funding, which would reduce the cost of the project by 30 percent. “Part of the stimulus act provided even greater federal incentives for things like wind power,” Mr. Rodgers said, but to qualify for ARRA funding, the wind farm would have to begin construction by the end of 2010 and complete construction by the end of 2012.
“That works in with our planned time line,” he said, “but it requires us moving expeditiously.”
National Grid and Cape Wind must first file with the Massachusetts Department of Public Utilities (DPU) a “memorandum of understanding” (MOU), which details the rationale for the contract, along with the methods by which the two parties will pursue a contract and a deadline for the process. Negotiations would formally begin after the DPU signs off on the MOU.
The DPU must then review and approve the contract, and Mr. Rodgers expected the entire process to take about 60 days, “which is standard.” According to Ian A. Bowles, the state’s executive secretary of energy and environmental affairs, the Massachusetts Department of Energy Resources (DOER)—which, like the DPU, operates under the Massachusetts Executive Office of Energy and Environmental Affairs umbrella—would play “a consultative role in the negotiations…they will be involved with the negotiations, but not as a direct negotiator but in an advisory capacity.” The DOER is a signatory to the MOU, providing a consultative role required by the Green Communities Act of 2008, which called for such long-term contracts to give renewable energy projects a boost when seeking financing for construction.
Mr. Bowles, who supports the wind farm, said he would not personally champion this specific contract. “I am not involved ever with DPU proceedings,” he said. He added that his support for renewable power, like the governor’s, is more “a broad advocacy” that focuses on expanding the state’s renewable energy portfolio and “does not get down to the level of specific contract negotiations.”
Because the contract process will at one point involve “a full adjudication process” by the DPU, Mr. Bowles said, the contract will be subject to a formal public hearing.
Mr. Rodgers said this public review should also serve to answer one of the long-standing questions among wind farm critics: exactly how much will the power generated by Cape Wind cost consumers?
In a press release, the Alliance to Protect Nantucket Sound said, “For years, Cape Wind has misled the public with promises of the cost savings and avoided disclosing the high price of their power, knowing that public support for their project would erode if people knew the truth.” The Alliance cited high costs as the reason behind the failure of the Long Island Power Authority (LIPA) wind farm project in New York. First proposed in 2002, the project’s projected cost ballooned from $150 million to more than $800 million, making it economically unfeasible. Audra Parker, executive director of the Alliance, added that on Tuesday “the state gave National Grid a $44 million rate hike, and [Wednesday] they announced negotiations between National Grid and Cape Wind for even higher electric bills. Massachusetts ratepayers and the organizations that protect them need to say no.”
(The Massachusetts Department of Public Utilities did approve a rate hike for National Grid, but only after rejecting National Grid’s original requested increase of $111.3 million; the final increase is $67 million—60 percent—less than what National Grid originally asked for.) “Because of the high cost of generating electricity from offshore wind, Cape Wind cannot survive without heavy subsidies and higher electricity prices,” Ms. Parker said, adding that the US Department of the Interior’s Minerals Management Service (MMS), which in January released a generally favorable Final Environmental Impact Statement on Cape Wind, indicated power generated by Cape Wind would cost “more than double the recent price of wholesale electricity in the New England electricity market.”
Mr. Bowles disagreed with Ms. Parker, stating that Cape residents would “absolutely” see a benefit from the deal in the form of reduced rates. At the very least, the addition of Cape Wind’s power to the state power supply would have a “price suppression” effect.
Energy costs in the area are determined on an hourly basis, with the price-per-hour set by the generation facility with the highest cost of generating energy for that hour. All generators in the region are paid based on that amount, so facilities with very low operating costs, such as natural gas-fired plants, make a greater profit.
With the wind farm adding to the region’s available power supply, all other plants in the region would reduce their respective outputs, meaning lower production costs, meaning lower prices across the board. The FEIS states in section 22.214.171.124.2, “environmental and socioeconomic consequences— energy industries” (page 559 of the 800-page FEIS) that the presence of the wind farm “will not increase energy prices in New England and could help to lower energy prices, should it supply energy at lower prices per megawatt hour” than other facilities contributing to the power supply.
Mr. Bowles added that a long-term power supply contract would help stabilize price fluctuations caused by “the fossil fuel roller coaster…long-term contracts tend to have a dampening effect on these fluctuations” that is passed on to the consumer.
The Cape could reap a greater benefit should the Cape Light Compact enter into power supply negotiations with either National Grid or Cape Wind. However, he said whether the CLC would be able to buy power directly from Cape Wind “is not a resolved question” and would depend on the conditions set forth in the National Grid/Cape Wind contract.
As an added benefit for Cape Codders, the addition of Cape Wind’s power would reduce the need to operate the Canal Mirant plant in Sandwich. Since 2005, the plant has operated as a standby system for the New England grid, running during off-peak hours, at 17 percent of its capacity, ready to fire up in the event the two transmission lines that carry power to Cape Cod fail simultaneously.
“Regardless of the end user, reliance is met” by the addition of Cape Wind, Mr. Bowles said. “Having another major source of power means the plant runs less,” which in turn reduces costs to Cape consumers, who pay an “uplift” charge of 1.5 cents-per-kilowatt-hour.
That charge is applied to customers’ electric bills, and according to information provided by the office of State Senator Robert A. O’Leary (D - Barnstable), residents of Cape Cod and southeastern Massachusetts have paid more than $200 million in uplift charges over the past two years to keep the Canal Mirant power plant on standby. This equals a five to seven percent increase on a typical ratepayer’s bill.
The Cape Wind project is currently awaiting a final decision by Kenneth L. Salazar, US Secretary of the Interior. A “record of decision” was originally expected this past spring, but has been delayed until the end of 2009 at the earliest.
“We’re hopeful that’s the case,” Mr. Rodgers said, again citing the construction deadlines to qualify for ARRA funding.
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