Deepwater cost higher than necessary, says consultant

Mon, 02/15/2010 - 5:00am
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2/13/10 — The price that Deepwater Wind would receive for the power from eight turbines planted three miles off the southeast coast of Block Island is at the “high end” of comparable projects, the rate of return to the project’s developers is almost 100 percent, and Deepwater’s estimate of operation and maintenance costs is “very high,” says an expert witness in the Deepwater-National Grid rate contract case.

These criticisms are found in the testimony of Richard S. Hahn, a consultant with La Capra Associates of Boston, working for the state Division of Public Utilities and Carriers. (Richard La Capra, consultant for the town of New Shoreham in the case, has left the La Capra Associates firm and now works independently in New York City.)

Hahn’s testimony has been filed with the Public Utilities Commission, which will hold a hearing in March to determine if the contract is “commercially reasonable.”

National Grid has agreed to pay Deepwater Wind 24.4 cents per kilowatt-hour with a 3.5 percent annual escalation or, as Hahn puts it, $235.75 per megawatt hour in 2012 rising to $469 per MWH in 20 years, the term of the contract.

The going price for electricity on the mainland is 9.2 cents per kilowatt-hour for energy from conventional sources. Deepwater has acknowledged that the price of power from the wind farm will be high, largely because it’s a small demonstration project. The effect of the wind power contract on the typical Rhode Island electricity bill would be about $1.35 a month, it’s estimated (it does not affect Block Island, however).

The Deepwater price is higher than any other renewable energy price except those based on solar technology, Hahn points out. “As proposed, the (contract) results in total costs that are more than $520 million higher than the market value of the output of the Deepwater project.”

The project would be viable at about 20 cents per kilowatt-hour, Hahn says, “saving $109 million for Rhode Island ratepayers while still allowing the project to be built.” That would provide a “more just and reasonable balance between the interests of rate payers and the desire to jump-start a nascent renewable energy business in Rhode Island.”

Also, “the rate of return to the project’s developers is higher than would be expected.” Using all of Deepwater’s assumptions and its stated intention to finance the project with 80 percent debt to 20 percent equity, Hahn estimates the rate will be 98.6 percent. Using an alternate operation and maintenance figure “based upon recent research” raises the return to 103.6 percent.

A typical return for similar projects would be “in the 12 percent to 15 percent range…,” Hahn writes.

Cable high and low

The contract between Deepwater and National Grid actually means little to customers of Block Island Power Co. The wind power would flow from a substation on Block Island through a cable to the regional power grid on the mainland, ISO-NE. BIPCo would buy power from ISO at a price to be negotiated. When the turbines are not spinning, power would flow from the mainland to the island.

What does have meaning for the island is the share it must pay for the cable, the total cost of which is currently estimated to be $42.5 million. That issue is expected to come before the PUC at a later date.

Hahn sketched out two of several possible methods for calculating that share; they range from near zero to a hypothetical 11 percent, which he called the probable “high and low boundaries.” The high number is based on the savings to island customers as a result of using the cable to get power from the mainland.

In a separate matter Michael and Maggie Delia have pulled out as intervenors in the current docket.