Mass. regulators approve Cape Wind power contract

Source: Nick Juliano, E&E reporter • Posted: Wednesday, November 28, 2012

Officials in Massachusetts yesterday gave their expected blessing to a power purchase contract between Cape Wind and a state utility, clearing another key hurdle in the long-running effort to construct the first offshore wind farm in federal waters.

The Massachusetts Department of Public Utilities yesterday approved a contract between Cape Wind, an affiliate of Energy Management Inc., and state utility NStar for 27.5 percent of the 468-megawatt wind farm’s output. The DPU last year approved a separate power purchase agreement (PPA) between Cape Wind and National Grid for 50 percent of the output, and the remaining generation remains unsold.

The 130-turbine project slated for Nantucket Sound continues to face lawsuits from opponents challenging several of its federal approvals, and it has yet to secure financial backing. The company has generally prevailed in lawsuits that have been decided so far, and officials say they expect to continue that streak with the remaining challenges. On the financing front, Cape Wind backers said yesterday’s contract approval will provide a substantial boost.

“Taken together, these two PPAs provide Cape Wind with the critical mass to continue securing project financing,” said Theodore Roosevelt IV, managing director of Barclays and Cape Wind’s financial adviser, in a statement distributed by the company.

A Cape Wind spokesman, Mark Rodgers, said the company is pursuing financing for the 77.5 percent of the project’s output that already has been sold, which would be generated by about 101 turbines. He said in an email that a financing deal is expected to be inked before the end of June, with construction also slated to begin next year. It remains to be seen whether the company will reach a financing deal before selling the rest of its power, he said.

In the statement, Cape Wind President Jim Gordon said, “We are very pleased with the favorable reception we have been experiencing from the financial community, and this approval of our PPA with NSTAR will further help Cape Wind secure financing and deliver all of the public benefits this important project will provide.”

Higher price justifiable, DPU says

While the PPA establishes electricity rates that exceed market costs, the DPU determined it would still provide an overall benefit to ratepayers because of unquantified benefits, including driving down electricity prices from other sources, aiding compliance with state-level renewable energy mandates, enhancing grid reliability and creating jobs.

“When these benefits are compared with the likely range of net (including price suppression) above-market costs of $438 million and $513 million, we find that the unquantified benefits exceed even the high end of the likely range of above-market costs,” the DPU concluded. “Therefore, we find that the expected benefits of the PPA to NSTAR Electric customers exceed the expected costs to NSTAR Electric customers.”

The DPU estimated the range of base costs for the NStar output at between 18.6 and 23.5 cents per kilowatt-hour, depending on the final size of the project, the availability of tax credits and the cost of financing. The total nominal cost of the 15-year contract is estimated to be between $1.6 billion and $1.98 billion, with its net present value estimated between $799 million and $973 million.

NStar estimated the market value of the contract — incorporating the electricity, additional grid capacity and renewable energy credits — would be between $366 million and $463 million, according to the DPU decision.

Under the terms of the NStar contract, Cape Wind must begin construction by the end of next year and place the wind farm into service by the end of 2016 or face financial penalties.

NStar agreed to purchase its allotment of the project’s output for 15 years, with the electricity price beginning at 18.7 cents/kWh and rising 3.5 percent per year. The contract includes mechanisms to increase that price if Cape Wind ends up not constructing the facility to its full planned capacity or if it becomes ineligible for tax breaks that are at risk of expiring this year.

The price could fall if Cape Wind secures cheaper-than-expected financing or other support that would cause its internal rate of return to exceed 10.75 percent, according to the contract.

Like most other wind companies, Cape Wind is closely watching Congress to see whether it extends the production tax credit and investment tax credit for wind beyond their scheduled expiration at the end of this year.

Industry lobbyists and supportive lawmakers remain optimistic that a one-year extension to the credits will be included in a deal to avert the so-called fiscal cliff, which would address a variety of tax increases and spending cuts scheduled to take effect at the start of next year. The Senate Finance Committee this summer approved a bill that would extend the PTC or ITC to projects that begin construction by the end of 2013.

For Cape Wind and other planned offshore wind projects, securing an extension to the ITC remains the top goal. That credit covers 30 percent of a project’s costs, regardless of how much electricity is generated, whereas the PTC provides 2.2 cents for every kilowatt-hour. Because there are no operating offshore wind farms in the United States, there is lingering uncertainty over how often a project will actually produce electricity, making the flat ITC a more attractive option for developers.

If only the PTC were available to wind projects, the price of Cape Wind’s output would rise by about 10 percent, whereas if no tax credits were available, the price would rise by about 13.5 percent, according to the contract.

The contract also includes adjustments if Cape Wind produces more electricity than anticipated. If it exceeds its projected 37.1 percent capacity factor, the price of electricity beyond that level would be cut in half.