Cape Wind -- It's not over yet

After nine years of debate and millions of public and private dollars, the decision to permit America's first offshore wind project fell on the shoulders of one man, U.S. Department of the Interior Secretary, Ken Salazar. Hindsight notwithstanding, there was no chance Salazar could disapprove the Cape Wind application. Does anyone doubt the Obama administration would dare to ignore the tsunami of political favoritism already bestowed on the project, no matter how unjustified? And given the administration's stated goal to nurse the U.S. economy back to health through the green movement, a denial of the permit would have unleashed a public firestorm virtually impossible to contain.

Let's face it, the Alliance to Protect Nantucket Sound had an uphill battle in the message war from the beginning. As early as 2003, even before Windaction.org was organized, everyone knew about the wealthy 'NIMBYs' ("Not in my backyard") on the Cape waging war against the one opportunity in the region to see renewables built in a substantial way. At the time, New England had less than ten megawatts of wind installed and most people were convinced Cape Wind represented an environmentally safe, low cost, economically beneficial development that could lead the nation in eliminating our reliance on fossil fuel. The NIMBYs, even those with the Kennedy name, were discredited in the press as little more than self-serving hypocrites unwilling to take one in the view for the betterment of the whole. This attitude still prevails today in some quarters but the realities of wind energy's flaws are beginning to take hold and we believe the Alliance and its supporters will ultimately be vindicated.

'Finally'

The announcement of Salazar's decision opened an emotional relief valve and pressure built-up over nine years was volcanically released. Stories about Cape Wind's approval flooded the web with words like 'Finally!' splashed across the screen. The public was informed in no uncertain terms, that Cape Wind would be built, offshore wind in the U.S. was on the upswing, and the country had officially established itself as a player in the offshore arena.

From our perspective, Salazar's action was significant, but not for the reasons stated above. Rather, from this point forward, politics and public opinion will no longer drive the discourse. The Cape Wind decision and the public record on which it's based will be challenged on the facts to determine whether the project is commercially reasonable and whether it will operate in compliance with existing laws. To be frank, there is no assurance Cape Wind will survive the scrutiny.

Issues still pending

There are several issues still pending that require resolution before the project can proceed as follows:

RADAR SAFETY. The FAA has assigned the 130 wind turbine structures (heights of 440 feet) a 'presumed hazard determination' given their proximity to airports and radar stations in the Northeast. The military has already stepped up its concerns involving the moving blades interfering with radar for surveillance and weather tracking;

IMPACT ON WAMPANOAG TRIBES. The Mashpee Wampanoag Tribe and Wampanoag Tribe of Gay Head (Aquinnah) contend that the project will destroy the archaeological evidence of their history throughout Nantucket Sound, including Horseshoe Shoal. Further they argue that the eastern horizon over Nantucket Sound must remain unaltered in order to perform their spiritual rituals and ceremonies;

FEDERAL LAW VIOLATIONS. Various stakeholders including the Alliance and Windaction.org have filed the requisite 60-day notice of intent to sue for violations of the Endangered Species Act, the Outer Continental Shelf Lands Act, and other laws. Regarding the Endangered Species Act, the parties will show that Salazar's approval ignored the Fish and Wildlife Service's original recommendations to minimize and/or avoid impacts, a clear violation of the law.

COST. All of the above are legitimate and serious concerns, but Cape Wind's true Achilles heel lies in the cost of the project. Few in the State of Massachusetts, including the ratepayers, fully understand what Cape Wind will do to electricity rates and whether the cost can be sufficiently offset by the project's expected benefits. We develop the data on this issue in more detail below.

Project costs

With no offshore wind built in the U.S., there is limited information on record to determine the economics of such a project. However, lessons learned during the recent proceedings before the Rhode Island PUC (RI PUC Docket 4111) are useful. In Rhode Island, the State reviewed the unsigned long-term power purchase agreement negotiated between Deepwater Wind Block Island, LLC and National Grid (also referred to as Narragansett Electric Company). With the backing of RI's governor and legislature, Deepwater proposed to construct a pilot wind project in shallow water off Block Island consisting of 6-8 turbines and a nameplate capacity of up to 30 megawatts. The purchase agreement contained an initial bundled energy price (energy, capacity, renewable credits) of $244 per megawatt hour (MWh) with a 3.5% escalation factor each year. According to pre-filed testimony submitted to the PUC, the cost was compared to long-term prices of $80 and $120 per MWh established for renewables located elsewhere in the region. The RI PUC ultimately determined the agreement was not commercially reasonable and withheld its approval.

During this same time, Cape Wind and National Grid initiated negotiations on a long term power contract. Under the Massachusetts Green Communities Act signed into law in 2008, Massachusetts utilities are required to enter into long-term contracts with renewable energy projects located within state boundaries, including state and adjacent federal waters.

Any power purchase agreement between Cape Wind and National Grid would have to be approved by the State. In February, MA Secretary of Energy and Environmental Affairs Ian Bowles cautioned the two parties this way: "Let me be clear. Our expectation is that the Cape Wind project must produce electricity at a substantial discount to the Rhode Island offshore wind project."

The problem for Cape Wind is its upfront capital costs. According to the latest figures from Europe, the cost to build offshore wind is approximately $5,000 per kilowatt. At 468 MW, Cape Wind will come in at a cool $2.3 billion (Most press accounts grossly understate the cost of the project).

That's a hefty expense for single power project, especially one expected to deliver only 39% of the time with no guarantee its generation will arrive when most needed. With high upfront costs and fewer hours to spread the cost over, power purchase agreements that lock in the energy and renewable credit prices are now a requirement in order to attract investor financing.

Impact on electricity rates

As noted above, renewable resources within the New England region carry a bundled energy price between $80 and $120 per MWh. If we assume Cape Wind can discount its costs to $200 a MWh, $44 off Deepwater's higher price, the above-market cost passed on to Massachusetts ratepayers will range between $128 million and $192 million per year. That's as much as $81 per year per household above any other renewables.

A provision in the Green Communities Act tilts the scale in favor of projects like Cape Wind by requiring MA utilities to enter into long-term contracts with renewable energy projects located in the state, including state and adjacent federal waters. This requirement openly discriminates against renewable generation located elsewhere including lower cost options that import from Canada or New York. This provision in the law is designed to restrict competition and place increased emphasis on the development of in-state renewable energy even if such resources are more expensive and/or more environmentally harmful. If Cape Wind were made to compete with outside resources, we suspect the project would have substantial difficulty proving its worth. But that may be what eventually happens.

TransCanada Power Marketing Ltd just filed a suit challenging several provisions of the Green Communities Act including the section that mandates contacts be entered with generators located in Massachusetts.

Uncertain benefits of Cape Wind

Earlier this year, Cape Wind Associates released a report authored by the Charles River Associates ('CRM') that analyzed the impact of Cape Wind on New England energy prices. The brief nine-page report concluded that "Cape Wind would lead to a reduction in the wholesale cost of power averaging $185 million annually over the 2013-2037 time period, resulting in an aggregate savings of $4.6 billion over 25 years." Interestingly, CMR's stated annual cost savings is in line with what we would expect Cape Wind to cost the ratepayers in above-market rates.

Aside from being thin on data, the Charles River analysis is highly speculative, at best, and fails to fully articulate the interaction between the real-time and day-ahead energy markets.

The New England ISO (ISO-NE) typically operates using a day-ahead auction where generators are required to offer firm levels of production for each hour of the next power day. The energy price, in turn, is determined based on those bidding into the system; all generators receive the same price per megawatt hour of production. Significant penalties are applied if a generator is unable to meet his commitment.

Because of its intermittency, a wind generator wishing to operate in the day-ahead market would need to contract with other dispatchable resources, most likely inefficient gas peakers, in order to "firm" their capacity commitments and avoid penalties.

A more likely scenario would be for a project like Cape Wind to operate exclusively in the real-time market i.e. a pure spot market carrying no penalties for non-performance and where prices are generally less than the prices paid for the day-ahead energy market. Those selling into the real-time market are normally paid at the clearing price of the real-time market. However, any long-term power purchase agreement will assure Cape Wind receives steady revenue at contracted price. When National Grid sells the wind energy to the grid, the energy will be sold at the lower cost spot energy market price, Cape Wind will be paid the above-market contract price, and the ratepayer will cover the difference.

The day-ahead market for the New England region represents roughly 90% of the available generation with the real-time market holding less than a 10% share. Since the price paid for ninety-percent of the generation is established twenty-four hours in advance of the power day, any participation from wind will have only a marginal impact on prices limited to those resources operating within the real-time market. Generators that bid in day-ahead who can back down are likely to do so to the greatest extent possible in order to save fuel and other costs. For New England this would be efficient co-generation natural gas, biomass, and large hydro. Since generators in the day-ahead market are still guaranteed payment, any price suppression from wind would be limited to the spot market. Thus, any downward pressure on pricing will impact inefficient single-cycle gas plants, pump storage, must-take landfill gas, small hydro, and other intermittent resources.

Assuming the New England region maintains its current policies for scheduling and dispatch of energy on the grid, ratepayers and regulators in Massachusetts would be wise to demand tangible proof of Cape Wind's economic benefit. At the very minimum, the State's consumer advocates should lose the rose-colored glasses and evaluate Cape Wind against other renewable projects in the region that can deliver reliable low/no carbon generation at a price commensurate with market value. Spending enormous sums on Cape Wind only benefits Cape Wind at the expense of the ratepayer or any potential developer who can build a better, more commercially reasonable project.