Rhode Island PUC dumps offshore wind PPA as too pricey

In a blow to a pet renewable energy project of the state's governor, Rhode Island utility regulators last week rejected a proposed power purchase agreement under which National Grid was to buy electricity from a 21 megawatt demonstration wind farm off the state's coast, saying the prices were not "commercially reasonable" and that the project developer stood to reap excessive profits.

In the April 2 decision, the Rhode Island Public Utilities Commission also questioned what it called the "mantra" of state officials that the project planned near Block Island by Deepwater Wind LLC would be the first offshore wind farm in the nation and thus would provide a crucial "first mover" advantage to Rhode Island in establishing an offshore wind industry that would generate many jobs and substantial economic benefits for the state in the future.

While Deepwater Wind has also announced plans to establish a wind manufacturing facility at Quonset, R.I., and build a larger 385 MW wind farm off the state's shores, the commission said the demonstration project would provide only a handful of jobs, and that some of the project's components would be sourced from the Gulf of Mexico region.

Further, the commission said a consultant for the state's Division of Public Utilities and Carriers and state business leaders had testified that the demonstration wind farm would inflict painful electricity cost increases on Rhode Island ratepayers-and on the state's existing industries, potentially costing jobs.

The commission noted that state lawmakers and Rhode Island Gov. Donald Carcieri (R) had backed development of the demonstration offshore wind farm in a state law and signed a joint development agreement with Deepwater Wind in hopes of creating a "stepping stone" to a green energy economy. The commission also said the law offered National Grid some $25 million in "remuneration" payments to reach a power purchase agreement (PPA) with Deepwater Wind so that the project could get financing.

However, the commission said paying for Deepwater's pricey power would cost the state's 15 largest businesses an additional $2 million in the first year of the 20-year PPA.

"Recently, various public officials have used as their mantra to justify this project that the state is seeking to gain ‘first mover advantage' and to do so requires investment in offshore wind," the commission said.

But while agreeing that renewable energy and green jobs were obviously desirable, the commission said the costs of the Deepwater project would clearly take a toll on the state's existing businesses and economy.

"It is basic economics to know that the more money a business spends on energy, whether it is renewable or fossil based, and whether it is produced in Rhode Island or elsewhere, the less Rhode Island businesses can spend or invest, and the more likely jobs will be lost to pay for those higher costs," the commission said.

The regulators also noted that the state law backing Deepwater also required the PUC to determine whether a proposed PPA for the project was "commercially reasonable," which is defined in the law as a PPA having "terms and pricing that are reasonably consistent with what an experienced power market analyst would expect to see in transactions involving newly developed renewable energy resources."

The commission acknowledged the strong political support for the project, noting that Carcieri testified in favor of the wind farm in a March 9 appearance before the commission. Other Northeast governors also are strongly pushing offshore wind development as a desirable way to get clean energy and jobs for the region.

However, the commission said in its decision, "the fundamental question in this case is whether the PPA between Deepwater and [National] Grid is commercially reasonable, and if so, does this project provide other direct benefits to Rhode Island such as job creation.

"Based on the evidence, upon which this commission is legally bound to render all its decisions, the commission must regrettably, but unanimously, respond in the negative."

The commission placed substantial weight on testimony by the consultant for the state's Division of Public Utilities and Carriers on the PPA, which sets an initial rate of 24.4 cents per kilowatt-hour (kwh) in the wind farm's projected first year of operation in 2013, with a 3.5 percent annual escalator for the years thereafter.

The consultant, Richard Hahn, estimated the PPA over its 20-year life would cost ratepayers $521 million more than they would pay under normal wholesale market prices for power, which are mainly based on power from natural gas-fired plants.

The consultant also said the cost of power from the Block Island project would be considerably higher than for the Bluewater Wind project offshore of Delaware, which has a projected price of 13.9 cents per kwh under its state-approved PPA with Delmarva Power, and far higher than the average 4.8 cents per kwh average cost of onshore U.S. wind farms. Hahn said the only pricier form of renewable energy than Deepwater's project would be from photovoltaic solar facilities.

Further, the commission said the testimony from all parties showed that the PPA would not produce market-competitive prices at any point in its 20-year term, even if the project analysis factored in potential benefits of avoiding carbon emissions priced at a theoretical $80 per ton.

Deepwater projected much lower costs-in the range of $98.7 million to $152 million in over-market payments-and noted that it was bound by state law to build a small demonstration plant that would not enjoy the economies of scale of larger wind farms reviewed by the commission for comparative purposes.

However, National Grid put the over-market costs at $390 million and also said it did not agree with aspects of Deepwater's cost analyses.

And in a finding that was sharply disputed by Deepwater, Hahn said the internal rate of return (IRR) on the Block Island project for the project developer would far higher under the proposed PPA than for developers of other offshore wind farms. Using data supplied by the project developer, Hahn initially calculated Deepwater's IRR at 98.6 percent, well above the 12 to 15 percent return seen for similar renewable projects.

Deepwater objected to Hahn's analysis and submitted new cost and financing data to the commission, which Hahn acknowledged would bring the estimated IRR close to 12-15 percent. However, he said Deepwater was not committed to its new cost assumptions, and that the IRR could rise to 28 percent even with federal subsidies for the project.

The commission said no matter what Deepwater's IRR, the project was too pricey for the few dozen temporary and permanent jobs that Deepwater said would be created by its demonstration wind farm.

"Rhode Island ratepayers would be paying nearly $390 million more in energy costs over 20 years for no more than 50 temporary jobs and six permanent jobs," it said. "Admittedly, the commission is not an economic development agency, but this approach, on its face, does not appear to represent cost-effective economic development."