Massachusetts ratepayers may have scored a big victory this month. Massachusetts’ two largest electric utilities, who were set to purchase almost 78 percent of Cape Wind’s electricity, backed out of their commitment because of missed deadlines by Cape Wind.[i] Cape Wind is the wind project offshore Cape Cod, Massachusetts, that has been in the works for well over a decade. Because of the high cost of offshore wind energy, it has been difficult for Cape Wind to find buyers for its electricity despite the project contributing to the state’s renewable electricity mandate with qualified renewable power. Only due to arm-twisting, did NSTAR, Massachusetts’ second largest utility, agree to purchase 27.5 percent of Cape Wind’s output. That was added to National Grid’s 50 percent commitment to make the project a go and to obtain a loan guarantee from the U.S. Department of Energy last year for $150 million.[ii] Given that offshore wind is 2.5 times as expensive as onshore wind, if these two utilities can back out of their commitments, Massachusetts ratepayers will have scored a tremendous victory.[iii]
The Cape Wind Project
Cape Wind consists of a 130-turbine 468-megawatt wind project off the coast of Cape Cod, Massachusetts.[iv] It is estimated to cost $2.5 billion to construct. Cape Wind power is expected to cost ratepayers 18.7 cents per kilowatt hour when first in operation, and increase annually at 3.5 percent for 15 years. The initial cost is almost twice the average U.S. cost of electricity—10.08 cents per kilowatt hour in 2013. The Energy Information Administration (EIA) estimates the cost of offshore wind power to average 20.41 cents per kilowatt hour and could be as high as 27.1 cents per kilowatt hour – over 3 times the cost of a new natural gas combined cycle unit.[v] Although Cape Wind’s starting price is less than EIA’s prediction, the price of Cape Wind’s power will end up 50 percent higher than EIA’s prediction, as the price is set to increase at 3.5 percent per year according to the terms of a 15-year deal signed originally with National Grid, the state’s largest utility.
The two largest utilities in Massachusetts agreed to purchase 77.5 percent of the electricity generated by Cape Wind—National Grid agreed to purchase 50 percent and NSTAR agreed to purchase 27.5 percent. NStar, the state’s second largest utility, was holding out for less expensive onshore renewable energy to fulfill its state renewable mandate, but agreed to pay the excessively high price for power from Cape Wind in order to gain state approval for its merger with Northeast Utilities.
On January 6, 2015, these two electric utilities terminated their contracts with the Cape Wind developers because Cape Wind missed its December 31, 2014, deadline contained in the contracts to obtain financing and begin construction and did not put up financial collateral to extend the deadline. The Cape Wind developer, however, does not “regard these terminations as valid” because of provisions that would extend the deadlines. In letters dated December 31, 2014, to both utilities and state regulators, Cape Wind requested the power companies to hold off on voiding the contracts because of “extended, unprecedented, and relentless litigation by the Alliance to Protect Nantucket Sound,” a leading opponent of the project. Supposedly, the lawsuits prevented Cape Wind from meeting the milestones in the contract. Cape Wind believes there is a clause in the contract that allows for more latitude in meeting the deadlines.[vi]
What Cape Wind is experiencing is what has become standard operating procedure in the United States for those opposed to energy projects. The approach involves aggressively contesting every step of a many-step process in the government approval of a project, thus extending conditions and costs. The goal of opponents is to drive up costs until the projects are necessarily cancelled. This works for projects which seem to make little economic sense such as Cape Wind, as well as it does for projects requiring no subsidies or mandates, such as the Keystone XL pipeline.
Cape Wind’s problems reflect the challenging economics of offshore wind energy in the United States, since it cannot compete with cheaper forms of power generation, despite the Obama Administration goals of reaching 10 gigawatts of offshore wind by 2020 and 54 gigawatts by 2030. These goals are clearly an enormous stretch when offshore wind is so expensive. The power purchase deals for Cape Wind were seen as critical for Cape Wind’s viability because they showed there was demand for its power (even though one of the agreements was forced upon a utility by the government). But the two utilities and others see it as being unfair to consumers because of the large expense of the offshore wind-generated power.
Proponents of offshore wind technology like to point to European offshore wind projects as examples, but residential electricity rates in Europe are about 3 times higher than they are in the United States. This is in large part due to government mandates and fuel-choice directives, making such high-cost projects more profitable across the Atlantic than they are here. As such, there is unlikely to be much commercial development of offshore wind in the United States in the near term—a victory for U.S. electricity consumers….and common sense.
[i] Boston Globe, Two utilities opt out of Cape Wind, January 7, 2015, http://www.bostonglobe.com/metro/2015/01/06/major-setback-for-cape-wind-project/kggnYeAXRj03PyfIUn2iIM/story.html
[ii] Institute for Energy Research, DOE Provides Cape Wind with $150 Million Loan Guarantee, July 9, 2014, http://instituteforenergyresearch.org/analysis/doe-provides-cape-wind-150-million-loan-guarantee/
[iii] Energy Information Administration, Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014, April 17, 2014, http://www.eia.gov/forecasts/aeo/electricity_generation.cfm
[iv] Wall Street Journal, Mass. utilities Back Out of Plan to Buy Power Generated by Cape Wind, January 7, 2015, http://www.wsj.com/articles/mass-utilities-back-out-of-plan-to-buy-power-generated-by-cape-wind-1420663547?autologin=y
[v] Energy Information Administration, Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014, April 17, 2014, http://www.eia.gov/forecasts/aeo/electricity_generation.cfm
[vi] Boston Globe, Two utilities opt out of Cape Wind, January 7, 2015, http://www.bostonglobe.com/metro/2015/01/06/major-setback-for-cape-wind-project/kggnYeAXRj03PyfIUn2iIM/story.html