WIND FARM *UPDATED*: PUC questions costs, benefits
3/11/10 — Block Island could meet most of its electricity needs through clean energy generated by the eight-turbine wind farm proposed for southeast of the island, at reasonable prices usually associated with fossil fuel generation, Deepwater Wind CEO Bill Moore testified to the Pubic Utilities Commission Wednesday.
However, that does not factor in the cost of a cable connecting Block Island to the mainland — essential to the viability of the project — or the above-market costs that mainland ratepayers would have to shoulder.
While relatively inexpensive clean energy would certainly be attractive to island ratepayers — encumbered as they are with costly diesel-generated power — the Block Island Wind Farm can only happen if the PUC agrees it is reasonable to ask Narragansett Electric customers to pay the lion’s share of the above-market costs, estimated to be $150 million to $390 million, for the Block Island wind farm’s electricity.
Including the transmission cable costs — estimated to be between $35 million and $51 million — the above-market costs could reach half a billion dollars.
PUC commissioners and their staff sharply questioned witnesses this week about how the negotiated price between Deepwater and National Grid was reached and if it was “commercially reasonable.”
The commission is expected to reach a decision by March 30. It must weigh whether the Block Island wind farm, which would provide approximately one tenth of one percent of the state’s demand — but may also kick-start a new industry in the state — is worth it.
This current round of hearings does not address the cable costs or what island ratepayers will ultimately pay for electricity. These matters will be considered in separate dockets at a later date.
Moore acknowledged that the Power Purchase Agreement price of 24.4 cents per kilowatt-hour, with a 3.5 percent annual hike, was unusually high. But he said those costs are due to the small size of the demonstration project — they should not be seen as a benchmark for wind projects on the whole. He insisted the commission consider the Block Island farm as a “stepping stone” to the much larger farm planned for east of Block Island. He said there is 5,000 megawatts of potential wind capacity in Rhode Island Sound, and its proximity to population centers makes the state ideally placed for the wind industry.
Moore also said that the 24.4 cents price was the lowest the company could go without risking its ability to secure financing. He explained that Deepwater had initially suggested an “open book” — as opposed to fixed — pricing structure to National Grid. This approach would have entailed Deepwater making all its costs transparent to National Grid, and the power price could be adjusted up and down accordingly. This might have resulted in a lower PPA price, he said.
Compared to what?
PUC Chairman Elia Germani asked for an explanation for how lower prices were reached for a proposed wind farm off Delaware. Developer Bluewater Wind and Delmarva Power reached a power agreement of 13.9 cents per kilowatt-hour, with a 2.5 percent annual escalator.
“Why such a disparity?” Germani asked.
Moore explained that the scale of the projects were much different. He also allowed that many in the industry were concerned that Bluewater would have difficulty bringing in the project at that price.
“Most don’t think they can pull it off,” he said.
Deepwater consultant David Nickerson further explained that the Delaware price was arrived at partly through some regulatory sleight of hand. The lower price, he said, was reached by offsetting costs with potential revenue coming from renewable energy credits that accompany renewable projects. The value attached to those credits was allowed to be inflated in Delaware, Nickerson suggested, providing the illusion of “an extra revenue stream,” which artificially brought down the apparent cost of the project.
What came up repeatedly in the first two days of hearings is that there were not many similar projects in the world to compare the Block Island farm and its costs to.
Nickerson said he used the offshore wind farms in Europe for comparison. The costs in Europe were approximately $5 million per megawatt, compared to Deepwater’s contemplated costs of $6.9 million per megawatt. Nickerson attributed the difference to the established supply chain in Europe. He said Deepwater’s “installed price is reasonable.”
Rate of return, above-market costs
Moore challenged written testimony from consultant Richard Hahn, supplied on behalf of the state Division of Public Carriers Utilities and Carriers, which suggested Deepwater stood to see a rate of return approaching 100 percent. Moore said Hahn had “done a disservice to us all” by suggesting “super normal rates of return,” which were “simply impossible to achieve.” (Hahn was scheduled to testify Friday, March 12.)
After correcting what he called Hahn’s “five specific errors,” having to do primarily with how federal tax credits are applied, Moore said Deepwater contemplated a rate of return of 13 to 18 percent, which he said was at the “low end for so much risk.”
As far as above-market costs over the 20-year span of the contract, witnesses provided a range of estimates.
Nickerson contemplated above-market costs to ratepayers to be from $113 million to $152 million.
“No excessive returns, but it is expensive,” Nickerson said.
National Grid’s Madison Milhous, who created the Request for Proposal for the wind farm, said he expected the above-market costs to be in the range of $390 million. Milhous said that Grid stopped negotiating at 24.4 cents because that price had forced Deepwater to begin chipping away at its expected rate of return.
Asked if he agreed with Hahn’s estimate that above-market costs to ratepayers could approach $500 million once the transmission cable is added, Milhous said that it was a reasonable assumption.
The commissioners struggled with how they could approve the power agreement without knowing the ultimate cost of the cable, which is estimated to add tens of millions of dollars to the overall cost of the project
Chair Germani called the wind farm energy price and the transmission cable to Block Island “inextricably linked, like love and marriage.”
National Grid attorney Ronald Gerwatowski said Tuesday that by approving the PPA, the commission would not automatically be approving the entire project; it could still deny any agreements reached on the transmission cable.
On Wednesday, commission members were still struggling with the notion. It was said that to approve the PPA was to tacitly approve the larger farm (which will be handled in a separate docket).
Commissioner Paul Roberti asked Milhous whether state legislation mandated that a 10-megawatt renewable energy project — in this case the demonstration wind farm — actually be connected to Block Island. Or, Roberti asked, did the law merely state that Block Island was to receive a transmission cable to benefit from whatever renewable energy project the state selected? The implication being that a 10-megawatt geothermal project on the mainland, for example, would fulfill the parameters of the law as long as Block Island received a transmission cable.
Milhous said that he wrote the RFP calling for the renewable project to connect to Block Island, because that was how he had read the legislation.
Later in the hearings, Roberti said he was concerned that the contemplated cost for the transmission cable was likely to be much higher than predicted.
Roberti also questioned why National Grid would move forward on such an ambitious and expensive project armed with only a single bid from one developer. Milhous conceded that more competition would have been preferable. However, he said the state’s vetting effort — whittling eight proposals down to one preferred developer — led to the single bid.
John Farley, Executive Director of the Energy Council of Rhode Island, provided public comment decrying the PPA’s cost to ratepayers. Farley’s organization represents the larger electricity users in the state, such as Rhode Island Hospital and Brown University. If the PPA were approved, Farley said, it would raise electricity costs for businesses precipitously, which could make Rhode Island less attractive to business and cost jobs. He said the bill’s impacts would be “punitive” for the larger ratepayers.
For example, Farley said the agreement could cost Toray Plastics in North Kingstown an additional $200,000 or more in annual electricity costs.
Farley challenged the commission to find any commensurate benefit that would accrue to ratepayers.
Benjamin Riggs, a former corporate executive from Newport, also questioned the viability of the project. He said unknowns in terms of cost and effects on sea life made the project too risky. “And all for a relative trickle of very costly, unreliable energy. There are better ways,” he said.
The Block Island demonstration project, it was pointed out later, would provide the equivalent of one-tenth of one percent of the ratepayers’ demand.
At the outset of the hearings, Governor Don Carcieri spoke in favor of the PPA, saying it would be the first step in creating green industry jobs for Rhode Island. To underscore how important he thought the matter was to the state, Carcieri pointed out that it was only the second time he had appeared before the PUC as governor.
• Germani asked if Deepwater could turn around and sell its contract if the power agreement is approved. Moore initially said the agreement allowed for that, but later reconsidered and said it would not be quite so easy.
• Why not a full Environmental Impact Study? Moore said it would extend the process and put federal tax incentives, which are essential to the financing of the project, at risk. However, he said that both the U.S. Army Corps permitting process and the Special Area Management Plan should address all environmental issues.
• Moore said Deepwater would pay no municipal fees, but contemplated paying the state for the use of the sea floor.
• A decommissioning fund would be created to ensure that the turbines aren’t abandoned in the event the project doesn’t work out.
Further testimony was scheduled for Thursday and Friday.