Utility National Grid said that it has agreed to buy half of the electricity produced by Cape Wind, a controversial offshore wind project planned for Cape Cod, at a price that will add about $1.59 to the monthly electricity bills of National Grid customers in Massachusetts.
At a press conference on Friday, National Grid U.S. president Tom King said that National Grid will pay 20.7 cents per kilowatt-hour for the electricity from Cape Wind starting in 2013. Currently, comparable prices are about 8 to 10 cents per kilowatt-hour, King said.
National Grid agreed to the 15-year contract, where prices will go up 3.5 percent annually, to meet the state mandate to purchase a portion of its power from renewable sources. The project will also act as a "catalyst" to more offshore wind and renewable energy in the U.S. and in the region, King said.
"If we keep stalling because of the existing price scenario, we'll never move forward. We'll keep falling behind," King said. He said northern Europe and China are moving ahead with offshore wind and that Massachusetts and the U.S. need to act now to keep pace economically.
"There's a cost of inaction. We know that our present energy system...imposes costs on us that do not show up on our energy bill," King said.
The $1.59 average monthly increase, which is about a 2 percent increase, assumes a rate of 500 kilowatt-hours per month for residential customers. Full details of the proposed contract will be submitted on Monday to the Massachusetts Department of Public Utilities, which has to approve the power purchase agreement.
The price of 20.7 cents per kilowatt-hour includes the price of electricity, transmission, the value of wind as a hedge against fossil fuel volatility, and renewable energy certificates, which are the environmental attributes of renewable energy. The power from Cape Wind would represent about 3 percent of National Grid's power.
Now to the regulators
The deal with National Grid is a key stepping stone for Cape Wind, which received federal approval from Interior Secretary Ken Salazar last week.
The project developer, Cape Wind Associates, expects that it can sign power purchase agreements with other utilities and energy wholesalers in the region, said Jim Gordon, the president of Cape Wind Associates.
With an "anchor" customer, it can continue negotiating with banks, project financiers, and the Department of Energy to get the debt and equity needed to build the offshore wind farm, Gordon said. It is projected to cost about $2 billion, according to reports.
The controversial project calls for construction of 130 turbines on a shallow shoal off the coast of Cape Cod and north of Nantucket and Martha's Vineyard islands. At its closest, it will be about five miles offshore.
Even with federal approval and a power purchase agreement for half the farm's output, Cape Wind still faces legal challenges from groups who have opposed the project in its nine years of development.
The capacity of all those turbines will be 468 megawatts with an average of about 182 megawatts. The project's developers said that's enough to supply about 75 percent of the residents on Cape Cod, although National Grid only serves Nantucket and not Cape Cod.
The wind farm will primarily displace natural gas, which Gordon expects to go up in price in coming years. Because the farm can produce power at peak times, it could also eliminate the need to bring on "peaker" power plants in the region that run on oil, he said.
The price per kilowatt-hour is a crucial question for Cape Wind and any offshore wind projects in the U.S., which cost about twice as much as onshore wind. Adjusted to 2010 prices, the cost is 18.7 cents per kilowatt-hour, Gordon said.
The Massachusetts Secretary of Energy and Environment, Ian Bowles, told the Boston Globe on Thursday that the state was expecting the power purchase agreement to fall between 17 to 21 cents per kilowatt-hour.
A proposed offshore project in Rhode Island was effectively scuttled because the estimated purchase cost was 24.4 cents per kilowatt-hour, which regulators blocked on the grounds it was too high. King said that the Rhode Island project and Cape Wind are not comparable because Cape Wind is much larger and not in deep waters, which adds significantly to the cost.