Mega projects - Cape Wind future hangs on power purchase price

US: The mega offshore project off the US Northeast coast has won construction permission, but Cape Wind still has to overcome the major hurdle of its proposed power purchase agreement (PPA) being approved by regulators. The jury is still out as to whether the price will be too high for regulators to accept.

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Just weeks after the company won construction permission from federal regulators, Cape Wind filed to Massachusetts state regulators a PPA with regional utility National Grid for half the output of its proposed 468MW offshore wind plant, and PPA sale options for the remaining 50%.

Reaching a price agreement with National Grid is considered a big step for the developers. "The fact there hasn't been a public battle over price between the power developer and the utility is a positive sign and there is obvious government support from the federal government and the government of Massachusetts," says Matt Kaplan, an analyst for consultancy Emerging Energy Research.

However, it is conditional on approval from the Massachusetts Department of Public Utilities (DPU). With offshore wind considerably more expensive than onshore, the suggested power price for Cape Wind has received a mixed welcome from wind experts.

National Grid has agreed that, starting in 2013, it would buy half the wind project's output at 20.7 cents/kWh for 15 years, with annual inflation adjustments of 3.5% over the 15 years. This would bring it to 34.7 cents/kWh at the end of the contract.

"The price definitely strikes me as high," says Daniel Shreve, director of US research for Make Consulting. "However, the New England area has some of the highest electricity prices in the United States."

As power contract costs between generators and utilities are passed on to local electricity ratepayers, the DPU could decide the cost is too high. Cape Wind's projections show that the project will add $1.59 a month, roughly 2%, for a typical residential customer.

"There could be a scenario," says Shreve, "where state regulators come back and say this is too high, you can't do it. The developer will have to evaluate how they can make it cheaper, possibly through turbine pricing, or reducing project rate-of-return expectations."

Kaplan argues that the price is in line with expectations and offshore costs seen in Europe. "It's within the realm of what we expect an offshore wind project to cost," he says. "The fact National Grid has said this is acceptable to us, we'll buy power from the Cape Wind project, that's a very positive sign."

He adds that evaluating the cost should also take into account that the 20.7 cents/kWh is 12.5 cents/kWh for the raw power, 6.7 cents/kWh for the Renewable Energy Credits (RECs) and 1.5 cents/kWh for a financial hedge that insulates the parties from wide generation fluctuations (see chart, below).

Every utility serving Massachusetts must buy RECs to comply with the state's Renewables Portfolio Standard (RPS), which requires a rising percentage of power to be sourced from renewables. Current RECs in Massachusetts trade around 5 cents/kWh, and Cape Wind's PPA at a higher 6.7 cents/kWh likely reflects the contract starting in 2013, when RECs may be trading higher. As gas plant PPAs do not include RECs, even though they also need to buy them, it would be fairer to only compare the raw power costs.

Kaplan agrees that a base price of 12.5 cents is higher than the wholesale price for power and the retail price the customer is paying, but points out: "The state has the tenth-largest demand for renewables under its RPS of all states with such laws. There are not a whole lot of other options. (So) I would expect there would be some interest from a large number of different folks."

Shreve agrees: "Moving power from offshore wind farms to nearby load centres in coastal Massachusetts could be a more cost-effective means of harnessing large amounts of renewable energy versus some very extensive and extremely expensive grid upgrades and/or grid build-outs over land."

Generally, offshore projects are considered to be 30-50% more expensive than onshore. Cape Wind's cost is in line with prices seen in Europe. Analysis from Windpower Monthly's special report on European offshore wind (September, 2009) shows that the levelled cost of offshore power is EUR0.166/kWh or $0.209/kWh, almost identical to Cape Wind's price.

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