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Power pact buoys Cape Wind

With last week's announcement of a proposed pact to sell half the power from the 130 turbines Cape Wind plans to build in Nantucket Sound, the developer is poised to pursue loans and investors to pay for the wind farm's estimated multibillion dollar price tag. Under the agreement filed May 10 with the state Department of Public Utilities, Cape Wind will sell 760 million kilowatt-hours a year to National Grid for $157 million in 2013.

With last week's announcement of a proposed pact to sell half the power from the 130 turbines Cape Wind plans to build in Nantucket Sound, the developer is poised to pursue loans and investors to pay for the wind farm's estimated multibillion dollar price tag.

Under the agreement filed May 10 with the state Department of Public Utilities, Cape Wind will sell 760 million kilowatt-hours a year to National Grid for $157 million in 2013.

The price is scheduled to increase 3.5 percent each year over the 15-year life of the contract. National Grid sells electricity on Nantucket and to 1.2 million customers across the state, but the utility does not sell electricity on Cape Cod and Martha's Vineyard.

Cape Wind is still looking for a buyer or buyers for the rest of the power it will generate, company spokesman Mark Rodgers said last week.

But the agreement with National Grid includes a provision that would allow other buyers to sign on to the same terms for the remaining electricity. This means that, for example, NStar or the Cape Light Compact, which do serve the Cape and Vineyard, could get the same price for Cape Wind's power if the agreement is approved by state regulators.

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With last week's announcement of a proposed pact to sell half the power from the 130 turbines Cape Wind plans to build in Nantucket Sound, the developer is poised to pursue loans and investors to pay for the wind farm's estimated multibillion dollar price tag.

Under the agreement filed May 10 with the state Department of Public Utilities, Cape Wind will sell 760 million kilowatt-hours a year to National Grid for $157 million in 2013.

The price is scheduled to increase 3.5 percent each year over the 15-year life of the contract. National Grid sells electricity on Nantucket and to 1.2 million customers across the state, but the utility does not sell electricity on Cape Cod and Martha's Vineyard.

Cape Wind is still looking for a buyer or buyers for the rest of the power it will generate, company spokesman Mark Rodgers said last week.

But the agreement with National Grid includes a provision that would allow other buyers to sign on to the same terms for the remaining electricity. This means that, for example, NStar or the Cape Light Compact, which do serve the Cape and Vineyard, could get the same price for Cape Wind's power if the agreement is approved by state regulators.

The deal already faces fierce opposition from the anti-Cape Wind group, the Alliance to Protect Nantucket Sound and politicians, including candidates in the race to unseat Gov. Deval Patrick, who supports the project. A schedule for hearings in the case could be established within a month, according to a DPU spokesman.

But having the state's largest electric utility onboard is a big step toward buoying Cape Wind's profile among investors and bankers who will be asked to foot the project's up-front costs, estimated at more than $2 billion, finance and renewable energy experts said.

"National Grid has a very strong credit rating and credibility," said Mark Williams, a lecturer on capital markets at Boston University and former risk manager of electricity trader Citizens Power.

Securing the so-called power purchase agreement is "critical" for Cape Wind, Williams said.

'A hell of a lot of money'

The deal between Cape Wind and National Grid is not just for the power from the wind turbines but also for payments required of utilities to ensure there is enough electricity for peak demand periods and renewable energy credits that represent the project's environmental attributes.

The price for the total package is in the range of other agreements considered for proposed offshore wind projects, including a plan by developer Bluewater Wind to build a wind farm off the Delaware coast, said Jeremy Firestone, an associate professor of marine policy at the University of Delaware's College of Earth, Ocean and Environment.

"They are higher than the Bluewater deal, but they seem in the ballpark of what one would expect," he said of the price for Cape Wind.

Part of the reason for the difference may be that the Delaware agreement is for 25 years versus the 15-year proposed contract between National Grid and Cape Wind, he said.

But even if the proposed contract looks good for Cape Wind it may not necessarily be as beneficial for the consumer, Williams said.

"The bottom line is National Grid is paying a hell of a lot of money," he said. "In essence, National Grid will pass that cost on."

Other risks must also be considered, such as what happens if the wind doesn't blow when expected, Williams said.

If the turbines do not produce electricity at the anticipated rate, National Grid will buy it elsewhere. There is no penalty against Cape Wind, however, beyond the loss of revenue, a spokesman for the utility confirmed in an e-mail to the Times.

The loss of any anticipated revenue could be an important factor in Cape Wind paying back the money loaned to build the project.

"What this (agreement) clearly shows is that rates will go up," Williams said, adding that the state public utilities commission will be challenged to weigh the benefits of green energy versus its mandate to ensure affordable and reliable energy to residents.

National Grid will collect the costs of Cape Wind's power from all of its electricity customers in Massachusetts, as well as $6.3 million - or 4 percent of the contract's annual value - as an incentive under the 2008 Green Communities Act to buy electricity from renewable resources.

Spread across all of the utility's Bay State customers, the $72.8 million in excess costs over power from other sources will increase the annual bill for a residential ratepayer who uses 618 kilowatt hours a month - the average in Massachusetts, according to the federal Energy Information Administration - by about $24.

Cape Wind believes the extra costs for its power will be even lower than National Grid predicts, according to Rodgers.

"They are assuming very stable fossil fuel energy prices between now and 2013," he said, adding that if the economy rebounds as everyone hopes it does, the demand for coal, oil and natural gas will rise along with their prices and the cost of electricity. The project, Rodgers added, is also expected to exert downward pressure on the price of energy more broadly by knocking more expensive power sources out of the market.

A better deal?

National Grid also assumes that the price for renewable energy credits will be very low in the first year of the contract which Cape Wind and others find unlikely, he said.

The deal between the utility and Cape Wind to buy the renewable energy credits required to meet state standards includes a price of 6.7 cents per kilowatt hour or the so-called alternative compliance payment, a cap on the price for the credits.

"Maybe you could see prices cresting over the cap," said Michel DiCapua, an associate for renewable energy credits and carbon markets at Bloomberg New Energy Finance.

The price for the credits is at least expected to reach $40 or $50 per megawatt hour or 4 or 5 cents per kilowatt-hour, which means Cape Wind's price will be a better deal than National Grid is anticipating, DiCapua said.

"Regarding the forecast, we understand that Cape Wind has a different view of future price forecasts and would acknowledge that reasonable minds can differ on this point," National Grid spokesman Chris Mostyn wrote in an e-mail to the Times.

The utility used the same forecasting methodology that it uses for other electric portfolio planning, he wrote.

"We believe it is a reasonable forecast, but also understand that it could be wrong," he wrote.

"That is the nature of energy forecasting."

Opponents have said the price for the power is likely even higher than National Grid's predictions and amounts to a massive rate hike that could hit businesses especially hard. Cape Wind and others argue that National Grid customers would have to buy the power anyway and the increase to ratepayers is far less than the total cost.

The long-term stability provided by the contract is another advantage over purchasing power from fossil fuel plants where profits and pricing is tied to volatile global markets, Firestone said.

"No fossil fuel generator will give you a contract 15, 20, 25 years out," he said.

While natural gas prices - which drive the energy market in New England - are at historic lows, they are expected to rise as the economy rebounds, he said.

"What we'll probably see with this contract is that over time it will probably look like a better deal," he said.

Cape Wind eyeing incentives

There are other factors to consider with the use of fossil fuels versus wind power, such as the impact on health care costs and the environment, Firestone said.

But clean technology projects should be judged more on their economics and less on their environmental benefits, according to Paul Dickerson, an attorney who specializes in clean technology and a former high ranking official at the Department of Energy.

"Climate change shouldn't be the call to arms," he said, adding that the creation of domestic jobs in the clean technology industry is the most important reason to move forward with projects like Cape Wind.

Power purchase agreements are an important part of the financing process, he said, adding that private equity firms are justifiably risk adverse in making investments in clean technology.

"No one likes higher energy prices," but the future of the country's energy portfolio will need to be more diversified to secure energy independence from other countries and create needed jobs in the U.S., he said.

From an investor's perspective, the contract National Grid submitted to the state looks well negotiated and balanced, said George Humphrey, an attorney with Texas-based Andrews Kurth, which specializes in development and finance for energy projects.

"Their first concern is, 'Are we going to get paid?'" Humphrey said of investors. The contract contains a series of contingencies that cover the prospect of delays that could lead to reductions in tax benefits from the project, he said.

These also could mean a greater impact on the ratepayer.

If, for example, the project is not built before the so-called federal investment tax credit expires in 2012, the price per kilowatt hour will increase to 22.8 cents. If another tax credit that is accrued for energy produced by the project expires and is not renewed before it is built, the price will jump to 23.5 cents per kilowatt hour.

Cape Wind officials have said they expect to have the turbines in operation by the end of 2012 allowing them to take advantage of the incentives.

Lenders will also note the likelihood of successful legal action to stop or delay the project, Humphrey said.

A Canadian company has already filed suit against the state challenging its requirements that Massachusetts electricity utilities buy power from renewable energy projects in-state. The Alliance to Protect Nantucket Sound has said it is considering a similar suit.

Opponents have also threatened to sue based on the federal government's approval of the project in April.


Source: http://www.capecodonline.co...

MAY 16 2010
http://www.windaction.org/posts/26267-power-pact-buoys-cape-wind
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