The Massachusetts Department of Public Utilities (DPU) on Monday gave approval to the 15-year power purchase agreement (PPA) between National Grid (NYSE: NGG) and Cape Wind Associates.
The approval follows a five-month-long adjudicatory proceeding, and represents the latest in a string of obstacles developers are working to overcome, including local opposition, lawsuits and even objections by Wal-Mart (NYSE: WMT).
Cape Wind and National Grid first signed a PPA in May 2010 for 20.7 cents per kilowatt hour, beginning in 2013. That agreement has since been amended.
The approved contract, which is for 50% 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% 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 rate is roughly three times the average wholesale power price in the region of $55.02 a megawatt-hour, or 5.5 cents per kilowatt-hour, according to Bloomberg.
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%.
“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.”
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% 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%, the contract price of electricity will be reduced to give ratepayers 60% 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 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.
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% during the region’s top ten historic peak hours.
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.”
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