Cape Wind Is Dead! (U.S. offshore wind stuck at zero)

By Lisa Linowes -- January 12, 2015

“Cape Wind was wrong project, wrong time, wrong place. It was too big and costly. Its impacts were poorly mitigated and its benefits highly questionable. In the end, it was the regulatory arrogance of the Massachusetts Gov. Deval Patrick and the Obama Administrations that did the most harm. A lot of people were offended and willing to stand up to the abuses. Remember, it was Massachusetts’ spirit that triggered the Revolutionary War.”

Cape Wind was supposed to be America’s first offshore wind project. Chief sponsor Jim Gordon labored since 2001 (14 years!) on his vision of 130 massive spinning fans sited in shallow federal waters off New England’s historic coastline (468 MW at maximum capacity). Mr. Gordon was the darling of environmental groups and green-minded politicos who pushed big wind at any price.

Last week, the project was dealt a fatal blow when utilities who contracted to buy the energy terminated their agreements. Cape Wind will never be built, and no amount of green-colored optimism will change that fact.

To understand why, look back at history, beginning in Spring 2010.

Patrick/Obama Push Shove

Progress was slow. The FAA declared the turbines a hazard to air navigation and military radar. The Wampahoag Tribe was arguing the project would destroy archaeological evidence of their history throughout Nantucket Sound. [1] Project opponents just filed the requisite 60-day notice of intent to sue for violations of the Endangered Species Act, and TransCanada was taking Massachusetts to court for discriminating against out-of-state electricity suppliers. (State law had mandated utilities sign power contracts with renewable generators sited in-state or adjacent state and federal waters — a provision meant to ensure a buyer for Cape Wind’s energy. [2])

Massachusetts Governor Deval Patrick was furious with the delays. Cape Wind was a signature component of his agenda. He wanted it built on his watch. The time had come to intervene.

President Obama did his part. That April, then Interior Secretary Ken Salazar was dispatched to Boston where he defiantly declared “I am approving the Cape Wind project. … This is the final decision of the United States of America.” Any remaining opposition would be crushed by the weight of government documents propping up the project.

Next came project financing. Gov. Patrick couldn’t hand Gordon the $2.5 billion to build Cape Wind, but he could certainly grease the skids.

National Grid’s Contract Came First …

In response to TransCanada’s discrimination complaint, Massachusetts suspended the geographic restrictions on projects, but only after a 15-year no-bid contract was signed by utility giant National Grid for 50% of the energy. [3]

The bundled wholesale price started at a whopping $0.187/kwh with a 3.5% annual escalator. [4]. By the 15th year, Cape Wind’s energy cost $0.325/kwh in a region with annual wholesale prices at around $0.05/kwh. Massachusetts ratepayers would be gouged to the tune of billions of dollars in above-market energy costs, but that didn’t seem to matter. The MA DPU happily approved the contract; Cape Wind was on a roll.

To lessen the sticker shock on monthly electric bills, the entire cost of the project would be allocated to the delivery side of the electricity bill. In a deregulated state, this meant all consumers in Grid’s service territory paid for Cape Wind’s output regardless of their energy supplier.  This incensed big business who sued but lost. The judge ruled that if everyone enjoys the ‘environmental benefits’, everyone pays.

… Strong-arming NSTAR

Next came NSTAR, the other large utility in Massachusetts. With the in-state requirement for renewables gone, Patrick lost his leverage to force a contract, but fate intervened.

In late 2010, NSTAR filed an application with the MA DPU for approval of its merger with Northeast Utilities (NU). The Massachusetts Department of Energy Resources (MA DOER), the agency responsible for implementing the state’s renewable energy priorities, intervened and urged DPU to require NSTAR purchase offshore wind as a condition of approval. NSTAR and NU protested but ultimately caved fearing the merger agreement would collapse altogether.

In March 2012, NSTAR agreed to purchase 27.5% of Cape Wind’s output under terms virtually identical to Grid’s contract. In April, the NSTAR-NU merger was approved.

Ready For Financing

The lucrative energy contracts backed 100% by Massachusetts ratepayers meant finding investors would be easy. PensionDanmark stepped up first with $211 million in debt.  Soon after, Danish export credit agency EKF provided a $600 million loan guarantee followed by a $150 million guarantee from the U.S. Department of Energy. Bank of Tokyo-Mitsubishi UFJ, Natixis and Rabobank were retained to raise the rest of the funding while Siemens, the turbine provider, expressed interest in investing equity.

But by fall 2014, Cape Wind was still $1 billion plus short.

Running Out of Time

Critical project milestones cited in the contracts had to be met to avoid being in default. A key deadline was December 31, 2014, the date by which project construction was to start. Lesser known was the requirement that the project secure financing by the same date, December 31, 2014. These dates could slip in six-month increments provided Cape Wind paid consideration. Extending both contracts for one six-month period meant paying $1.29 million.

Remarkably, money was not offered. Six days later, the utilities terminated the contracts.

Why Not Pay?

There is dispute over Cape Wind’s fate. Supporters optimistically argue this is just one of many storms the project has had to weather. But in this case, Jim Gordon created the storm by blowing off his once-in-a-lifetime contracts .

Did the company run out of money? Maybe, but unlikely. If that were the case, we would have expected to see new negotiations over the contract terms. Instead, Cape Wind jumped to the ‘Force Majeure’ clause and blamed on-going litigation — litigation that’s been ever present for a decade.

Perhaps the company ran out of patience. Last week also marked the end of Deval Patrick’s days in office. Incoming Governor Charlie Baker, a Republican, is less likely to intervene, preferring to let the market define the outcome. Or maybe Cape Wind’s  opportunity just slipped away. The decision to proceed with Siemens SWT-3.6-107 turbines was made years ago. Offshore wind technology has advanced. Re-opening the record to consider larger, newer turbines would invite more scrutiny. Meanwhile, investors may not be interested in throwing money at dated machines.

No doubt, Cape Wind was wrong project, wrong time, wrong place. It was too big and costly. Its impacts were poorly mitigated and its benefits highly questionable. In the end, it was the regulatory arrogance of the Massachusetts Gov. Deval Patrick and the Obama Administrations that did the most harm. A lot of people were offended and willing to stand up to the abuses. Remember, it was Massachusetts’ spirit that triggered the Revolutionary War.

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[1] The National Park Service ruled in January 2010 that Nantucket Sound was eligible for listing on the National Register as a traditional cultural place.

[2] TransCanada Power Marketing Ltd. challenged the limitation in federal court under the dormant Commerce Clause. See TransCanada Power Mktg. Ltd. v. Bowles, No. 4:10-cv-40070-TSH (D. Mass. filed April 16, 2010).

[3] This included generation, capacity and renewable energy credits (RECs).

[4] An additional 4% per kWh was also paid National Grid as an incentive to buy the energy. The full cost of the contract, including the incentive to National Grid, would be borne by ratepayers. If the project failed to secure either the federal investment tax credit (ITC) or production tax credit (ITC), the price would be even higher.

[5] The NSTAR-Cape Wind contract is currently in litigation. Opponents of the project initially sued the State over approval of the contract under the dormant Commerce Clause. The lower court ruled against the plaintiffs. That decision was quickly appealed. As long as a legal proceeding is pending against Cape Wind, investors are likely to take their money elsewhere.