Deepwater rebuts critic, says wind farm rate of return reasonable

Mon, 03/08/2010 - 5:00am
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3/06/10 — Deepwater Wind says that the criticisms of its deal to sell wind power from its proposed Block Island wind farm to the mainland National Grid, which are found in testimony filed with the Public Utilities Commission, are way off base.

Richard S. Hahn of La Capra Associates in Boston, working for the state Division of Public Utilities and Carriers, had testified that the negotiated price 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.”

Deepwater turned to its chief executive officer, William M. Moore, and its consultant, David P. Nickerson of the Mystic River Energy Group, for rebuttal. To the non-expert, the exchange has a “he said-she said” quality; more facts may emerge in a fuller context during the PUC hearing scheduled for next week, March 9-12.

National Grid has agreed to pay Deepwater Wind 24.4 cents per kilowatt-hour with a 3.5 percent annual escalation. The going price for electricity on the mainland is 9.2 cents per kilowatt-hour for energy from conventional sources. The PUC will have to decide if the Deepwater-National Grid contract is “commercially reasonable.”

No ‘triple digit’ profits

The main purpose of Moore’s testimony is to refute Hahn’s calculation that Deepwater’s rate of return under the contract would be almost 100 percent. No such thing, Moore says; the estimate rate of return is “in a range from the high single digits to the low teens.”

Moore declines to be more specific because Deepwater’s calculations must remain confidential while Deepwater negotiates for equipment, materials and services. These negotiations would become very difficult if suppliers know the company’s cost and cash flow assumptions, he says.

Moore charges that Hahn made “a number of very significant errors” about how federal tax credits are calculated and capital expenditures are made. The details are arcane but suffice it to say that wind project developers can claim a tax credit of up to 30 percent of the value of their project, and this credit has been converted into a cash grant under a program running through this year.

This gives Deepwater a deadline; it must purchase “certain equipment” this year in order to qualify for the grant.

Moore claims that Hahn has overstated the value of the federal cash grant, and assumed that all of it will be distributed to investors. No, Moore says, it will be used to pay down debt.

Moore picks numerous other nits in Hahn’s calculations and assumptions and concludes that the rate of return “would be nowhere near the triple digit figures suggested by Mr. Hahn, as it would take many more years before Deepwater Wind can even recover its principal, must less start to collect profits.”

As a result, Deepwater’s projected rate of return is “well within the range of market-appropriate returns and has been disclosed to National Grid, the Division and the Commission.”

Comparables not comparable

Nickerson’s testimony is largely devoted to Hahn comparisons of Deepwater’s proposed price with prices from other renewable energy projects.

In the first place, he points out, Hahn includes the cost of the cable from Block Island to the mainland in his cost analysis, and then compares the Block Island project with other projects “with differing technologies, locations and size, without including the cost of a cable …”

Nine of the 17 comparable projects that Hahn cites, Nickerson says, are “generic,” meaning not yet functioning.

One by one, Nickerson dismisses the “benchmark” projects as incomparable, for reasons of scale and technology. Solar power projects are small scale and costly; tidal power “has tremendous potential” but no commercial-scale projects are available for comparison and the cost is “speculative.” Nearly all of the commercially viable waterpower sites in New England have been developed. Burning of biomass for energy faces “many current, serious challenges.” Importing renewable energy from New York or Canada is unlikely because other states and provinces have their own requirements to fulfill. Nuclear power expansion in New England “can only be considered as speculative” and very distant.

The only offshore wind farm project with a negotiated contract other than Deepwater is the proposed Bluewater project off the coast of Delaware. But it has a different kind of contract with the mainland power company, is to be much larger than the Block Island wind farm and is to be built in shallower water with “monopile” masts, a less expensive installation than the “jacket” towers that Deepwater plans.

Doing the two-step

In addition to rebutting the Hahn testimony, Moore adds some narrative to the Deepwater story. It “can be built sooner than any other offshore wind farm currently being developed in the United States,” he says, and is the only offshore wind farm that can qualify for the federal incentives mentioned above.

As is well known, the Block Island wind farm is the first of two steps by which Rhode Island expects to develop wind power. The second step is a large “utility scale” wind farm in federal waters to the east of the island.

Moore gave three reasons for building the small Block Island wind farm first. A larger project would be “more challenging” to finance as a “first-of-its-kind” in the nation. The permitting process for federal waters would be “less certain and almost certainly lengthier” than for state waters.

And third, while Europe has developed a “supply chain” for wind farms, it doesn’t exist in the U.S. The small Block Island project will allow Deepwater and its suppliers to begin developing such a supply chain and learn about infrastructure needs and costs.

Moore makes the point in his testimony that the Block Island project is not a “demonstration” of technology, which he says is proven, but a demonstration of a “regulatory, political and stakeholder environment … that needs to be established” in the U.S.

The benefits to Block Island, he says, are a “zero emission source of power” in contrast to the diesel generators currently in use, a reduction of fuel oil deliveries with less risk of spills, greater reliability of power and prices for electricity that are lower and less volatile, being less dependent on oil prices.