Weighing the wind farm costs
03/20/10 - As four days of hearings came to a close last Friday, state Public Utilities Commission Chairman Elia Germani posed the “$640 million question” to energy analyst Richard Hahn: are the terms and pricing of the power agreement between Deepwater Wind and National Grid “commercially reasonable?”
The 20-year contract would be for electricity generated by eight wind turbines proposed for within three miles of Block Island.
Hahn said the 24.4 cents per kilowatt-hour price, with annual 3.5 percent escalations, was high compared to other renewable projects he considered for comparison, excepting solar.
“But there’s the potential of other economic benefits to the state,” Hahn said. “Are those benefits worth the price?” He left the question hanging, and the PUC is scheduled to answer it March 30.
Hahn appeared on behalf of the Division of Public Utilities and Carriers. He submitted written testimony saying the agreed power price, when combined with the yet to be determined cost of a cable stretching from Block Island to the mainland, could bring above-market costs of nearly 500 million dollars to Narragansett Electric customers over the length of the 20 year contract.
He also suggested that Deepwater could enjoy a nearly 100 percent internal rate of return.
Over the course of the four-day hearing, the commission heard a variety of testimony about how the contract was reached and what it would cost ratepayers. The range of above-market cost estimates ranged from $150 million to Hahn’s high of a half billion dollars.
Deepwater CEO Bill Moore said that while the price for the eight-turbine farm was high, it must be considered as a stepping stone for the much larger farm planned for east of Block Island and a new green industry for the state.
He also said Deepwater expected a rate of return approaching 20 percent, which he characterized as low considering the risk.
Throughout the week, commissioners struggled with how they could render a decision with so little comparative data to consider; they also asked how they could decide on the power price without knowing what the cable would eventually cost.
Hahn agreed that it was difficult to make a comparison, especially in the absence of other bids. He said that in Massachusetts at least three bids are required for a public procurement of similar size; he said he did not know of a contract with a $700-million face value to be awarded with only a single bidder.
“With procurement, you want to know you’re paying a fair price,” said Hahn.
In the absence of other bidders’ estimates to use as a comparison, Hahn said he considered above-market costs and internal rate of return.
He calculated above-market costs by considering energy and capacity costs, as well as renewable energy credits. Hahn said his formula showed that 11 cents of the 24.4 cents per kilowatt-hour price was above-market.
Hahn was asked about the a disparity between his above-market calculations and those of David Nickerson, Deepwater’s analyst, who predicted a $150 million above-market cost.
Hahn said Nickerson relied on the Energy Information Administration Forecast, while he looked at the EIA for the long-term costs and also at the New York Mercantile Exchange (NYMEX) to ascertain prices for one or two years out.
Commissioner Paul Roberti lamented that it was “very difficult to compare offshore projects to even other offshore projects, let alone land-based, landfill or other renewable projects.”
As far as Deepwater’s critiques of his written testimony, Hahn said he was not likely to change his conclusions about rates of return.
“[CEO Moore] thinks it inappropriate to include full cash flow value in accelerated depreciation — I don’t. He says they can’t; I say they can,” Hahn said, adding, “it’s very common to assume those benefits in an internal rate of return calculation.”
On Thursday, the New Shoreham’s representative Richard LaCapra said that the island’s primary interest at this juncture was the transmission cable; the town did not take a position on the viability of the wind farm or the power price.
Daniel Glenning, senior project manager for National Grid, estimated that the 34-kilovolt, bi-directional submarine cable connecting Block Island to the mainland should cost between $35 million and $50 million. He reached this number by taking the $40 million cost of a Nantucket electric cable and adding a 25-percent contingency.
He did allow that a unidirectional cable designed only to deliver electricity to the island from the mainland would be much cheaper. (The island’s peak demand is about four megawatts; the cable conceived for this project would be required to carry nearly 30 megawatts.)
Moore said that he thought the proceedings went “as well as could be expected.”
He said all the issues were on the table and that the project “only makes sense in the context of a larger industry.”
Moore, who has been in the wind industry for nearly two decades, brought a 325-megawatt land-based wind farm to fruition in upstate New York. That project also started with a 10-megawatt demonstration project.
“Smaller projects are always more expensive,” said Moore.
The PUC announced Wednesday that it had scheduled another hearing on the island for March 26 at 10:30 a.m.