Department of Public Utilities Approves Contract for Offshore Wind Power
Finds 15-year contract between National Grid and Cape Wind, with consumer protections, to be cost effective and in the public interest
The DPU concluded that the contract is cost-effective because its benefits well exceed its costs. It found as well that approving it is in the public interest, because no other renewable resource in the region matches Cape Wind in terms of size, proximity to large electricity load, capacity factor, and advanced stage of permitting; and because its bill impacts are in the range of 1 to 2 percent.
"This contract fulfills a statutory mandate under the Green Communities Act to facilitate the development of renewable energy generation, and it does so with strong protections for ratepayers," said DPU Chair Ann Berwick. "It is abundantly clear that the Cape Wind facility offers significant benefits that are not currently available from any other renewable resource, and that these benefits outweigh the costs of the project. Not only does the contract support the largest renewable energy project proposed in New England, it provides protection for consumers against the volatility of fossil fuel prices for a portion of electricity purchases. We are fully persuaded that if Massachusetts is to meet its statutory renewables and greenhouse gas emissions reduction requirements, offshore wind, and Cape Wind in particular, will have to be part of the mix."
The contract, which is for 50 percent of the output of the Cape Wind offshore wind facility, sets the initial price - for electricity, capacity, and renewable energy attributes - at 18.7 cents per kilowatt-hour in 2013, and rising 3.5 percent annually for 15 years. After that, National Grid would have the right to a one-time extension of the contract for another 10 years on terms that could be below market rates.
The contract allows for upward and downward price adjustments based on a variety of contingencies. If Cape Wind is unable to tap certain federal subsidies, the price would go up, but under other circumstances the prices could go down, to the benefit of ratepayers. Specifically, should debt financing costs be reduced as a result of a U.S. Department of Energy loan guarantee, 75 percent of the savings would be passed along to customers in lower rates. Similarly, if actual project costs, as verified by an independent audit, fall to such an extent that the developer's rate of return on debt and equity exceeds 10.75 percent, the contract price of electricity will be reduced to give ratepayers 60 percent of the benefit of the lower costs; if actual project costs are higher than anticipated and reduce this rate of return, the developer absorbs those losses without impact on rates paid by consumers. This mechanism in the contract assures that the developers of the project will not reap windfall profits.
The 300-plus page order ( http://www.env.state.ma.us/dpu/docs/electric/10-54/112210dpufnord.pdf ) approving the contract was issued today, following three public hearings in the National Grid service territory held in June and 13 days of evidentiary testimony in September. The evidentiary record consists of 838 exhibits, 20 responses to record requests, and a 2,800-page transcript.
The order concluded that the contract met the DPU's standard for long-term contracts under Section 83 of the Green Communities Act, as well as the Department's standard for the public interest.
In terms of cost-effectiveness, the Department concluded that the costs would be outweighed by the benefits provided by the contract, namely assisting National Grid and the Commonwealth to comply with the state's renewable energy and greenhouse gas emissions reduction requirements; providing National Grid the option to extend the contract beyond 15 years at a price that covers the remaining costs of operating the facility plus a reasonable rate of return; enhancing electricity reliability in the state; moderating system peak load; and creating additional employment.
Notably, the DPU found that the contract and the Cape Wind project will moderate electricity peak load in the region. In that regard, the DPU observed that wind data show that Cape Wind's capacity factor would have averaged an impressive 76 percent during the region's top ten historic peak hours. It concluded further that the project will create an average of 162 jobs per year for the 15 years of the contract-but many more than that during the two-plus year construction period.
In terms of the public interest, the DPU found that the Cape Wind project offers "unique benefits relative to the other renewable resources available." In addition, the DPU found that the contract price was reasonable for offshore wind, which the Department determined to be needed to meet state renewable energy and greenhouse gas requirements. The DPU also found that the bill impacts that could occur as a result of the contract "are small relative to the volatility that electric customers regularly experience due to the fluctuations in wholesale electricity prices, and that the contract will mitigate that volatility."
A second power purchase contract for the other half of Cape Wind's power output, which did not specify a contracting party, was rejected by the DPU, but Chair Berwick said that any contract between other regulated utilities and Cape Wind on the same terms could be reviewed on a more expedited basis.
"The issues underlying this contract have been fully adjudicated in this proceeding," said Chair Berwick. "If an identical contract comes before us, not all of the issues would require the same level of review."