Analysis: Cape Wind’s Big Break

Editor’s Note: EarthTechling, always looking to forward the cleantech revolution discussion, is proud to present this column via a cross post from our partner Offshore Wind Wire. Author credit goes to Todd Griset.

Offshore wind developer Cape Wind appears poised to secure a second buyer for the electricity to be produced by its proposed project off Massachusetts.

Governor Deval Patrick’s administration and other key players have advanced a plan to allow two major utilities to merge on the condition that the resulting utility agree to buy part of Cape Wind’s output. While the deal still faces regulatory approval by the Massachusetts Department of Public Utilities, the prospect of having buyers for most of the project’s output is promising for Cape Wind and may enable financing needed for construction.

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image via Shutterstock

First proposed in 2001, Cape Wind Associates intends to develop an offshore wind project in federal waters in Nantucket Sound. The project would cover about 25 square miles centered around Horseshoe Shoal, and would consist of 130 turbines, each of which could be rated at 3.6 megawatts (MW). Total nameplate capacity could be as high as 468 MW, but due to cable and transformer losses and station service load the maximum deliverable net capacity is closer to 420 MW.

In average wind conditions, the project is expected to produce 182 MW; according to federal regulators, this average expected production could provide about 75 percent of the electricity demand for Cape Cod and the nearby islands of Martha’s Vineyard and Nantucket. Ten years later, Cape Wind has obtained its environmental permits, and in 2010 became the first U.S. offshore wind project to receive a commercial lease from the U.S. Department of Interior.

Cape Wind is not a traditional electric utility with a franchised service territory, but rather would be a standalone or merchant generator. These non-utility projects typically require financing prior to construction, which in turn typically requires a developer to have power purchase agreements (PPA) in place for most if not all of the project’s output. Cape Wind already had a buyer for half its output, as the Massachusetts Department of Public Utilities approved a PPA between Cape Wind and utility National Grid. Prices for the National Grid deal start at 18.7 cents per kilowatt-hour, escalating 3.5 percent annually over a 15-year term. Despite legal challenges, that agreement was upheld by the Massachusetts Supreme Judicial Court in 2011.

Though the National Grid deal gave Cape Wind a buyer for 50 percent of its output, it struggled to find a buyer for the rest of its production. Other utilities, such as NSTAR, declined to enter into PPAs for the project’s output, turning instead to land-based wind projects for renewable power. While Cape Wind could sell energy at wholesale into the New England market at the prevailing rates, PPAs with utilities or other electricity suppliers facilitate financing by giving investors greater certainty over a project’s revenue streams. PPAs can also benefit developers by locking in above-market prices, such as those contained in Cape Wind’s PPA with National Grid, as long as utilities are willing (or required) to enter into such deals to achieve state environmental goals or other objectives.