Alliance, Cape Wind Spar Over Report Claiming Savings From Wind Farm
By: Michael C. Bailey
One of the central questions about the proposed Cape Cod Wind Farm has been whether it would have a positive or negative impact on electricity prices, but the two sides of the debate disagree whether a new report sufficiently answers that question.
The issue of Cape Wind’s effect on energy prices took the spotlight late last year after Cape Wind Associates announced it was entering into negotiations with National Grid for a long-term power supply contract.
Project opponents insisted that the wind farm would only increase energy costs for consumer. Yet in the Final Environmental Impact Statement (FEIS), the US Minerals Management Service stated that the presence of the wind farm “will not increase energy prices in New England and could help to lower energy prices, should it supply energy at lower prices per megawatt hour” than other facilities contributing to the power supply.
The new study by Charles River Associates, an economic consulting firm, supports that claim. The study used wholesale power price forecasts from 2013, the year in which the wind farm is tentatively set to go online, through 2037 and created scenarios in which the wind farm was operative and in which it was absent.
The report predicted that the wind farm would “lead to a reduction in the wholesale cost of power averaging $185 million annually over the 2013-2037 time period, resulting in an aggregate savings of $4.6 billion over 25 years.”
The wholesale price of power for New England would drop by $1.22 per megawatt hour (MW/h), and would be “even more pronounced for Southeastern Massachusetts, where the project will be interconnected with the New England grid,” according to the report, which said southeastern Massachusetts would see a price reduction of $1.82 MW/h.
Energy costs in the New England region are determined on an hourly basis, with the price-per-hour set by the generation facility with the highest cost of generating energy for that hour. All generators in the region are paid based on that amount, so facilities with very low operating costs, such as natural gas-fired plants, make a greater profit.
“The variable operating cost of wind turbine generators is almost zero, so electricity from Cape Wind will be offered at the bottom of the regional supply stack in every hour it is available,” the report stated.
The Alliance to Protect Nantucket Sound argued that facility’s fuel source, wind, may indeed be free, but the cost of energy generated by the wind farm is not based on its fuel source alone, but the project’s construction and operational costs (the former of which is estimated to be in excess of $1 billion).
The FEIS, which examines the project’s economic model, states that in order for the wind farm to meet a theoretical debt-to-equity ratio of 75:25 percent – the amount of revenue going to satisfy debt while still maintaining a positive cash flow – it would have to charge a wholesale prince of at least $122 per megawatt hour (MWh) for power, about twice the average wholesale price of electricity in the southeastern New England market in 2007.
At that price the wind farm would not be profitable, the Alliance stated.
Thomas A. Hewson of Energy Ventures Analysis Inc., an energy industry consultation firm, concurred, stating that the report assumed a cost of energy based only on the facility’s “variable operating costs” (fuel) and did not factor in fixed costs (capital expenses, construction, maintenance, salaries for staff, etc.).
According to Audra Parker, president and CEO of the Alliance, the report’s flaw is its assumption that Cape Wind would sell its power on the wholesale market rather than through a long-term power supply contract, but the report does address that issue.
Scott W. Neimann of Charles River Associates described the effect in layman’s terms: power purchased through a supply contract is still factored into the wholesale market as if it were purchased directly from the producer, and thus would have the same suppressive effect on prices. The $1.22 MW/h reduction cited in the report would still apply under a power supply contract scenario, he said.
Yet according to Mr. Hewson, this claim represents a “fundamental flaw” in the report because energy purchased through a long-term power supply contract (a “bi-lateral contract”) is not factored into the wholesale market. That energy would be directed entirely to National Grid customers, who could see a spike in their electric bills.
Ms. Parker said that at an estimated premium of 10 cents per kilowatt hour, the typical electric bill for a National Grid customer would increase $150 a year. “Electric customers on Cape Cod and Martha’s Vineyard are not served by National Grid and would not see the increase,” she added.
Mr. Hewson said that, in theory, Cape Wind could still have a suppressive effect on the market under a power supply contract scenario, since power purchased under contract is not being drawn off the ISO New England grid, and so power production is reduced.