Updated: price doesn’t change in new wind farm contract

Wed, 06/30/2010 - 10:15pm

July 1, 2010. National Grid filed a new Power Purchase Agreement signed with Deepwater Wind Wednesday that, from a price standpoint, is not significantly different from the one the state Public Utilities Commission rejected in March.

The opening price for electricity from a proposed eight-turbine wind farm off Block Island would remain 24.4 cents per kilowatt-hour, escalating 3.5 percent each year of the 20-year contract.

The primary change is that any savings in the project would go to the ratepayers of Rhode Island, not to the developer. Also, an “open book” provision calls for a third party selected by the state Division of Utilities and Public Carriers to act as a verification agent to confirm the project’s costs “within 90 days of commercial operation.”

According to the amended PPA, the projected cost of the wind farm is $205,403,512, “with all savings flowing to National Grid and its customers if that Total Facility Cost is less than the current projection …”

In its own filing with the PUC Wednesday, Deepwater pointed specifically to the “open book” provision as an “unprecedented” benefit to ratepayers.

“One of the significant effects of the open book pricing provisions required by the new law is a heightened level of transparency that directly impacts Deepwater Wind’s projected [rate of return]…. To the extent there are cost overruns, the [price] is capped and is not increased, but Deepwater Wind’s return will be negatively impacted. Unlike a typical open book pricing mechanism, the risk associated with any cost overruns is borne entirely by Deepwater Wind. This one-way pricing feature, and the associated ratepayer benefit and protection, is unique to the New PPA: ratepayers benefit from cost savings and are at the same time protection from cost overruns.”

According to Deepwater, the current project cost estimates would result in a 10.5 percent unlevered rate of return for the company.

Paul Rich, chief development officer for Deepwater, called the new contract “truly different.”

Deepwater has made “unprecedented concessions to make this affordable,” said Rich. Not only do any savings go to the ratepayers, he says, but the “wind outperformance adjustment credit” would mean ratepayers would receive more value for the money. As Rich explained it, the prices are based upon the wind farm operating at 40 percent efficiency. However, with Block Island’s robust wind resource, Rich says the farm would be likely to generate far more electricity than the price is based upon; Deepwater would not stand to make any more money even if it delivers more electricity than estimated.

This arrangment, according to Rich, “puts all the risk on [Deepwater] to do this correctly.”

In the run up to the new legislation and contract, it was said that Deepwater’s price was to be “capped” at 24.4 cents per kWh. Per this new contract, the “cap” means that Deepwater will not be paid more than 24.4 cents per kWh in the first year of the farm’s life — all savings go to the ratepayers — and so on with each annual escalation.

In March, the three-member PUC unanimously denied the contract because the members considered the 24.4-cent per kWh price commercially unreasonable.

The matter is back before the PUC after the General Assembly created a law calling for the agency to reconsider the contract with specific instructions to weigh the potential benefit to the state, and to understand “commercially reasonable” to mean that the costs are what would be expected for such a project.

Per the legislation, commercially reasonable means “terms and pricing that are reasonably consistent with what an experienced power market analyst would expect to see for a project of a similar size, technology and location, and [that meets] the policy goals.”

Another change is in the realm of “assignment.” During the PUC hearings last fall, Chairman Elia Germani expressed concern that Deepwater could win the contract then essentially hand it over to another entity. In the new proposed contract, Deepwater would be required to gain PUC approval before any changes in assignment.

Governor Donald Carcieri, who has spearheaded the wind farm effort, offered his praise of the new contract.

“I commend Deepwater Wind and National Grid for acting quickly to move this project forward, assuring Rhode Island remains the leader in developing the nation’s first offshore wind project,” said Carcieri. “We have the opportunity to once again control our economic destiny, to lead the nation in the creation of a new industry, and to create hundreds, if not thousands, of good paying jobs for Rhode Islanders.”

The office of Attorney General Patrick Lynch offered an initial critique of the filing late Wednesday:

“Although we’re still making our way through this document, it looks an awful lot like the proposal that the PUC already reviewed and rejected,” said Lynch spokesman Mike Healey. “Attorney General Lynch will have much more to say about it when our office intervenes in this docket before the PUC.”

In an email, National Grid spokesman David Graves said, “This is the same contract as the first one. The only exception is a statement that the cost of the power may be lower if Deepwater is able to achieve cost savings.”

Ronald Gerwatowski, attorney for National Grid, writes in the letter accompanying the filing, “The company believes that the Amended PPA promotes the important public policy goals articulated in Rhode Island General Assembly Laws Section 39-26.1-7. It also contains terms and conditions that are ‘commercially reasonable’ for a small-scale offshore wind demonstration project, even though there may be other energy alternatives in the region that could produce electricity at a lower cost.”

The PUC has 45 days to render a decision on the new contract. To see the schedule and associated filings, go to www.ripuc.ri.gov/eventsactions/docket/4185page.html.

A meeting to discuss motions to intervene has been changed from Friday, July 9 to Thursday, July 8, at 3 p.m., according to PUC spokesman Tom Kogut.