National Grid and Cape Wind announced that they will file a contract with the Massachusetts Department of Public Utilities on Monday, May 10. Though the press release is full of happy language, there are some numbers in there that should cause some significant concern.
According to the release, in 2013 National Grid will begin buying electricity, renewable energy credits, and “other potential market attributes” from Cape Wind at a price of $207 per megawatt hour. That price will rise on a schedule of 3.5% per year for the next 15 years. At the end of the contract, customers will be paying $335 per megawatt hour. I am still trying to figure out what causes the price of power generated by the wind to inflate, but I guess I am just dense.
In addition to those costs for the electricity customers, the press release makes it clear that all of the taxpayers in the United State will have an active role in supporting the project construction and operation. It states that the agreed price assumes “that existing federal tax incentives continue at their present level”. What that means is that Cape Wind expects to receive either 30% of the project cost as a grant from the federal government, or it expects to receive 2.2 cents per kilowatt hour in Production Tax Credits that can be traded to companies that are profitable and can actually use the credit. Those credits, under current law, are paid for the first ten years that the project operates.
It is pretty obvious why Cape Wind is interested in that kind of long term sales contract. Its existence will be a key component of the due diligence that any financial partner will conduct. It is less obvious why a bulk electricity supplier would be interested in paying more than six times the current going rate for electricity, especially since there is little firm capacity value available from a wind farm. (Note: At the time of the post, the energy price per megawatt hour posted at the ISO New England web site was $32.61. That price is updated regularly, so it might be different if you click the link to visit.)
Here is the key to understanding why National Grid is interested in doing the deal –
“According to King (Tom King, President of National Grid), by agreeing to purchase 50 percent of Cape Wind’s output, National Grid will more than meet the three percent renewable energy long-term contracting requirement of the Green Communities Act.”
In other words, elected officials from the state of Massachusetts have passed a law that forces the electricity supplier to be interested in signing a deal for high cost power that will meet a minimal amount of its need. I am sure that they passed that law to better serve their citizens. I am almost certain that the law favoring Cape Wind was not imposed because the developer of Cape Wind is a wealthy, generous, politically active man who made a fortune developing natural gas fired power plants during the boom in natural gas plant construction that occurred between 1995-2005, before the prices skyrocketed. (End sarcasm.)
Updates: (Posted on August 17, 2010 at 0555) – The Massachusetts Attorney General has issued a press release reporting that the initial price of power from the Cape Wind project has been renegotiated to $187 per megawatt-hour (18.7 cents per kilowatt hour).
(Posted on August 26, 2010 at 0553) – Questions raised about redacted report of wind energy cost comparisons used to support rate negotiation between Attorney General Martha Coakely and National Grid.