Cape Wind, National Grid Finalize Contract

By: Michael C. Bailey
Published: 05/14/10

For the past several years, one of the major unanswered questions about the Cape Cod Wind Farm has been: how much will its power cost?

That question has now been answered, yet both sides of the controversial issue are claiming that the answer vindicates their respective positions on the project.

Last Friday Cape Wind Associates announced that it had, after more than four months of negotiation, signed a long-term power purchase agreement with National Grid, which provides electricity to 1.2 million Massachusetts customers – including on Nantucket, but not on Cape Cod.

“Cape Wind looks forward to working with National Grid to diversify their energy portfolio with pollution-free, inexhaustible wind off our shore,” James Gordon, president of Cape Wind said in a press release. “National Grid’s decision to move forward with this agreement helps put Massachusetts at the forefront of this emerging industry and provides their customers with secure and stable-priced renewable energy.”

Cape Wind will sell half of the power generated by the facility to National Grid as a “bundle of attributes” that includes the cost of the power itself; Renewable Energy Certificates (RECs), which energy providers may purchase from producers to help meet renewable energy mandates; and “Hedge Value.” According to Mark Rodgers, director of communications for Cape Wind, “hedge value” refers to the value of a price volatility protection provision in the contract.

The individual costs of those three attributes are 12.5 cents per kilowatt hour (kWh), 6.7 cents/kWh, and 1.5 cents kWh, respectively, for a total cost of 20.7 cents/kWh.

The contract includes a 3.5 percent annual rate increase, which is fixed for the life of the 15-year contract, and Cape Wind officials state that this stability is a huge plus for National Grid customers.

Data provided by the Massachusetts Executive Office of Energy and Environmental Affairs showed that had this contract been in effect since 2005, the price of electricity generated by Cape Wind would have been within 1 cent/kWh of National Grid’s basic service price, and would have been lower than National Grid rates for periods in 2007, 2008, and 2009 when fluctuating natural gas prices caused rates to spike.

This comparison included only the energy rate, not the 20.7 cents/kWh total cost.

The contract is set to go into effect in 2013; the wind farm is tentatively scheduled to go online in 2012. The agreement was filed Monday with the Massachusetts Department of Public Utilities, which still must sign off on the contract.

According to a fact sheet released by Cape Wind, this will raise a typical residential electric bill by $1.59 a month, or five cents per day. “Also keep in mind,” the fact sheet stated, “National Grid’s estimates are very conservative [and] we believe that Cape Wind will reduce electricity bills over the life of the contract.”

The power generated by the wind farm would represent a little more than three percent of National Grid’s total supply, but that will be enough to satisfy minimum renewable energy generation mandates included in the Green Communities Act.

Cape Wind further stated that the wind farm would reduce wholesale energy prices for all of Massachusetts by $4.6 billion over a 20-year period.

This savings, according to a study conducted by Charles River Associates, comes from the wind farm’s twofold suppressive effect on the wholesale market. First, power supplied by Cape Wind would reduce demand on the New England power grid and thus reduce power generation and consequently reduce fuel consumption. Second, as a low-cost producer, Cape Wind’s costs would be factored into the ISO – New England spot market at the bottom of the producer stack, causing a domino effect that lowers the net wholesale price.

The Alliance to Protect Nantucket Sound painted the cost of the contract differently. In a press release the Alliance claimed that power generated by the “embattled Cape Wind project” would increase electricity costs for National Grid consumers by $23 million in the first year alone, and $442 million over the life of the contract.

Further, the Alliance claimed all Massachusetts ratepayers would see an $884 million increase in electricity costs by the end of the contract, but did not provide further details. The Alliance did not respond to a request for additional information by press time.

“This confirms the worst fears of many Massachusetts ratepayers and businesses,” Audra Parker, president and CEO of the Alliance said in a press release. “Massachusetts is already paying some of the highest electric rates in the country – a burden that has forced businesses to leave and families wondering how they will make ends meet.”

The average rate for electricity in Massachusetts is (as of January 2010) 15.56 cents/kWh, 5 cents/kWh higher than the national average according to the US Energy Information Administration.

“I have no idea where Audra came up with her $442 million figure,” Mr. Rodgers said, adding that the Alliance’s predictions about the cost impact of Cape Wind have been off. He referred to a 2008 Alliance radio ad that predicted monthly electric bills would increase $20 to $40 a month, a far cry from the $1.59 a month quoted by Cape Wind and National Grid.

The Alliance has previously contested Cape Wind’s assertion that the facility would have a suppressive effect on the wholesale market because energy purchased through a long-term power supply contract (a “bi-lateral contract”) is in fact not factored into the wholesale market. There could still be a suppressive effect on the market since power purchased under contract is not being drawn off the ISO – New England grid, and so power production is reduced, but that effect would be less dramatic.

There is still one variable that could impact the contract. The prices quoted by Cape Wind assume that the project will receive federal subsidies that were not specified in the official press release, and neither Cape Wind nor National Grid indicated what the price would be were these incentives to fall through.