Offshore Wind’s $0.24/kWh: Deepwater Project Nears Launch (states, ratepayers take note)

By Allen Brooks -- August 31, 2016

“Now that Deepwater Wind is close to starting operation, ratepayers can compare its 24.4 cents per kilowatt hour versus their latest power bill showing an energy cost of 8.7 cents per kilowatt hour – a 15.7 cent difference…. So why is Rhode Island building this project?“

The wind turbines offshore Block Island, Rhode Island, the Deepwater Wind project, are rising faster than expected due to favorable weather and wind conditions. In fact, the last blade was installed on the fifth wind turbine two weeks ago.

The U.S. renewable energy business will soon enter a new era when these turbines generate electricity. Many people may wonder why it has taken the U.S. so long to start an offshore wind industry, given the perceived success of projects in Western European countries. But cost matters, and the cost of offshore wind defines a new high for US ratepayers.

US Offshore Wind: Some Background

Deepwater Wind Company started working in 2008 to secure the rights to construct the Block Island wind farm project. The idea of offshore wind farms was pushed by then-Rhode Island Republican Governor Donald L. Carcieri. He believed wind farms would sprout up and down the East Coast, and Rhode Island possessed one of the best locations for constructing the components necessary for creating these wind farms.

Governor Carcieri was wrong about the number of wind farms that would pop up, but he was right that Quonset on Narragansett Bay conveniently assembles wind farm components. That base has been utilized by Deepwater Wind for its project, and they plan to use it for future wind farms that they are hoping to construct.

The biggest problem for offshore wind is cost. The first proposed offshore wind project – Cape Wind – was bedeviled with challenges from wealthy homeowners on Martha’s Vineyard and Cape Cod, including the late Senator Edward Kennedy and his family; a Koch brother, and relatives of numerous influential Washington legislators from both political parties.

As the battles continued, the cost of building the 100-turbine project escalated and financing was difficult to secure, causing the electric utility buyers to void their power purchase agreements.  While rising costs and lost customers dogged the project, securing the financing may also have been hurt by the on-again/off-again federal tax credits afforded to renewable energy projects.

The Deepwater Wind project had its trials in reaching completion. The project initially was rejected by the Rhode Island Public Utilities Commission (PUC) in April 2010 after being assessed as “not commercially reasonable.” The PUC ruled that the Deepwater Wind plan would impose an increased burden on ratepayers who would be “paying $390 million more for electricity.”  The PUC also described the project’s benefits as “based on speculation.”

How could this have happened? The governor had testified for Deepwater Wind, and the state’s Economic Development Commission (EDC) recommended it. However, during the PUC hearing, officials of the EDC disclosed that they had not done any economic studies of the project’s costs and benefits. It was just assumed that the economic benefits outweighed the costs.

As a result, the PUC decision shocked Rhode Island politicians and set them off to find a way to overturn the ruling. In fact, it took less than 60 days for the Rhode Island General Assembly to pass legislation changing the definition of “commercially reasonable.” As a result, the PUC was forced to review the project in a second hearing using the newly “watered down” definition of “commercially reasonable.”

The gamesmanship ongoing with the project was not lost on the PUC. It wrote in its 2-1 decision approving the project under the new standard:

Apparently dissatisfied with the Commission’s findings, on June 10, 2010, both chambers of the General Assembly passed amendments” to the original legislation. In the rehearing, the PUC was still reluctant to approve it, but was challenged on its questioning of the basis for the evaluation. Lawyers for National Grid (NGG-NYSE), the dominant electric utility in Rhode Island and the purchaser of the wind farm’s power, wrote the following in a commission filing in response to questions by the PUC.  (Emphasis added.)

In contrast, when Section 7 was amended, the General Assembly only sought a finding from the Commission that economic development benefits were likely.  There was no cost/benefit condition placed on this inquiry.  For the Commission to now employ a test which mirrors the one contained in Section 8 is for the Commission to ignore the statute.  There are many occasions when the General Assembly has enacted law where it leaves the Commission a considerable amount of discretion to set policy and establish the parameters through which it should be implemented.  But Section 7 of Chapter 26.1 is not one of them.  The General Assembly required the parties to return to the Commission with a new contract.  But, in doing so, the General Assembly set forth some very clear standards.

It is not the role of the Commission in this case to create a higher bar for the approval of the power purchase agreement than otherwise exists in the plain language of the amended Section 7.  While the Commission had to employ a standard that was not separately and explicitly set forth in Section 7 in Docket No. 4111, the new amended Section 7 does not contain such an interpretative gap.  The gap has been filled and the standard is now clear and unambiguous.  The Commission should not re-write and expand the standard to establish a virtually insurmountable hurdle, as the opponents would prefer.

It is clear from National Grid’s response that it was doing the politicians’ bidding and was not interested in being held to a higher standard than the General Assembly established in the revised legislation.

The National Grid lawyers went on to further dismantle any objections.  They wrote:

The opponents will argue that a net benefits test should be applied and find case law from other contexts in which courts have required agencies to apply a net benefits test, even when the statute does not otherwise specify it.  But the statute in this case is quite unique. It is not establishing a standard that will be applicable to a multitude of future applications, the implications of which could create undesirable results. This statute pertains to one project and one agreement.

There is a specific history that must be taken into account. To ignore the limited application of this law and employ reasoning that is suited to regulations that have wide scope and application is simply an excuse to ignore the will of the General Assembly in this case. While some of the Company’s customers who oppose the project may be understandably concerned about an agreement which is likely to result in a rate increase, this concern is not a consideration under the law.

The opponents may not like the law. But the law must be implemented as written. The General Assembly has spoken with a policy judgment that this small demonstration project is important to the state of Rhode Island, even though they were aware that a rate increase is likely to accompany it. That policy judgment must be accepted, and the plain language of the amended law implemented.

What the National Grid lawyers were saying was: Don’t you guys understand? You only need to find that there are economic benefits in this project. It doesn’t matter whether they are less than the costs inflicted on all the ratepayers in the state. You got your marching orders from the General Assembly and are to approve this power purchase agreement, even if you have to hold your nose while doing it. It’s all about creating a new industry for Rhode Island and the cost of that effort should be borne by the residents of the state.

Surprisingly, the decision was only 2-1. Rhode Island Attorney General Patrick C. Lynch was stunned by the decision, calling it an “inside deal.” He and several other ratepayers appealed the PUC’s decision to the Rhode Island Supreme Court. In 2014, the court was forced to affirm the decision, but the justices wrote that they hoped it turned out to be as good for Rhode Island as Seward’s Folly was for Alaska.

Now that Deepwater Wind is close to starting operation, ratepayers can compare its 24.4 cents per kilowatt hour versus their latest power bill showing an energy cost of 8.7 cents per kilowatt hour – a 15.7 cent difference

Project Economics: Bad to Worse

In 2010, during the first PUC hearing, the estimated cost of the wind farm, which was then composed of eight turbines with a total nameplate capacity of 28.8 megawatts (MW), was $181.98 million without the cost of the transmission cable.  The economic model suggested that the bundled energy price was $229.03 per megawatt hour (MWh), or 22.9 cents per kilowatt-hour (kWh).

That cost estimate was between the comparable German wind price of $214/MWh and that of the UK at $233/MWh.  With the inclusion of the $42 million cable cost, the bundled energy price was above the UK price, acknowledged to be the highest market price at that time.

Based on the $229.03/MWh bundled energy price, estimated for 2009, with the annual 3.5% escalation, in 2032 the cost to ratepayers would be $505.27/MWh, or 50.5 cents/kWh. That pricing schedule was estimated to create $440 million in above-market payments by rate payers over the 20-year life of the contract.

Now, the project cost is $300 million for five turbines with 30 MW capacity, without the $42 million cable paid for by the power buyer. The price is still scheduled to start at 24.4 cents/kWh. But as time has passed, the cost escalation plus the lower current energy cost has escalated the ratepayer over-payment to $497 million as reported in a 2014 PUC filing and then over $500 million in a 2015 filing. So why is Rhode Island building this project?

Massachusetts Developments

In neighboring Massachusetts, the frustration about the pace of renewables penetration into the state’s power supply mix and concerns about the loss of generating capacity as the Pilgrim nuclear plant closes in May 2019 and several coal-fired power plants have or are about to close, the state legislature enacted An Act To Promote Energy Diversity.

The legislation, which was signed into law by Governor Charlie Baker (Republican), carves out of the Massachusetts renewables mandate a new requirement for utilities to contract 1,200 megawatts (MW) of imported Canadian hydroelectricity and an additional 1,200 MW of offshore wind.

To put the wind mandate into perspective, the Rhode Island project is 30 MW and the proposed Cape Wind project on Horseshoe Shoal in Nantucket Sound would have had a nameplate capacity of 468 MW.

So what might the Massachusetts wind energy cost?  Based on Deepwater Wind, there needs to be 40 of them at an estimated cost of $12 billion.  Cape Wind was estimated to cost $2.5-$3.0 billion so you would need three, at a cost of $7.5-$9.0 billion.  Massachusetts seems to be staking its mandate on a new study from The University of Delaware that projects that developing offshore wind at scale through 2030 could reduce the price to 10.8 cents/kWh.

That cost estimate is based on further improvements in the performance of wind turbines and the hope that larger projects will lead to economies of scale.  The real problem with this cost estimate is that it is based on levelized cost analysis that assumes all power is of equal value regardless of when it is produced.  The levelized cost analysis also ignores the cost of backup power, which is an important consideration since wind is an intermittent power source.

Rooftop Solar: Another Ratepayer Issue

So with offshore wind being expensive and costly for ratepayers, as shown by the cost differential Rhode Island ratepayers will pay, a new renewables issue is emerging. That issue is the subsidy being paid for solar power by various states.

Louisiana has just announced it has run out of money for solar facilities.  In mid-July, Louisiana’s Department of Revenue said it was almost $30 million short of funds to pay already submitted claims for rooftop solar systems and that there were no funds to pay future claims, even though the program is not scheduled to end until Dec. 31, 2017.  The 2015 law capped the state’s credit program for 2015-2016 and 2016-2017 at $10 million and $5 million for 2017-2018.

With a generous plan – 50% of system costs, capped at $25,000 for a system – and a utility rate structure that has a block pricing structure with the first power being the most expensive, solar power has been popular in Louisiana. The state also provides cash payments for those with incomes too low to use all their tax credit rebates.

According to the Solar Energy Industries Association, 32 MW of solar power was installed in Louisiana in 2015, up 3 percent from the prior year.  The industry association expects another 208 MW to be installed over the next five years.

New Mexico is ending its solar tax credit that was put in place in 2008 with a 2016 sunset date.  The plan was capped at $3 million per year, which was exceeded in each of the past four years. The cap was met earlier in each successive year.  Utah is seeing solar power booming due to its generous tax credit program. From 3,000 rooftop solar installations in 2015, the government expects to process 12,000 applications this year.

If all those applications are processed, then more rooftop solar installations will occur in 2016 than in all prior years combined.  With a tax credit equal to 25 percent of the cost of a system, capped at $2,000 per system, the rapid growth in installations has state officials concerned.

When the tax credit program started in 2012, it was a $1 million program. This year it will reach somewhere between $25 and $40 million.

Utah’s tax credit comes up for review in 2017.  People recognize that the solar, as well as wind, tax credits were put in place to help promote the growth of the industries. Now that they are becoming mature, state officials have to consider whether and when to shut down the programs. Those decisions are not easy or popular given the environmental movement, but state budgets are beginning to drive the decisions.

Conclusion

With Deepwater Wind, the renewable energy business in the United States enters a new era. How much will the cost of these renewables – wind and solar – strain government budgets, let alone ratepayers?

Additionally, there will be the issue of the growth of intermittent power and the ability of the grid to handle that power variability. It also ignores the need for new power transmission for wind and industrial solar, an issue is divisive within the environmental movement.