Cape Wind notched several major milestones in 2010. Approval of its power purchase agreement with National Grid by the Massachusetts Department of Public Utilities (MDPU) occurred November 22. This approval followed the long-awaited announcement of federal approval of Cape Wind's proposed 468 MW offshore wind project in Nantucket Sound by the U.S. Secretary of the Interior in April 2010, and subsequent signing by Cape Wind of the first commercial lease for an offshore wind project issued by the federal government in October 2010.

Cape Wind's PPA commits National Grid to purchase 50 percent of the energy, capacity, and renewable energy credits (RECs) associated with the project for a period of 15 years following commercial operation. The bundled price for energy, capacity, and RECs under the PPA is $187/MWh, commencing in 2013 and escalating by 3.5 percent on January 1 of each year thereafter. The price assumes that the wind generation facility is placed in service on a date when the facility qualifies for the investment tax credit (ITC) established pursuant to Section 48 of the U.S. Internal Revenue Code, regardless of whether the tax credit is claimed. The PPA provides for price adjustment in the event the facility does not qualify for the ITC. The PPA also provides for adjustments in the event that the project exceeds the target net capacity factor of 37.1 percent (a “Wind Outperformance Adjustment Credit”) and/or if Cape Wind receives any payments or credits for contract capacity sold in the Forward Capacity Market. The PPA also includes a provision allowing National Grid to extend the contract beyond 15 years at a potentially reduced price.

The MDPU decision approving the Cape Wind PPA notably grants approval despite concluding that the contract could increase the bills of National Grid residential customers by roughly 1.3 to 1.7 percent, and the bills of large commercial and industrial customers by roughly 1.7 to 2.2 percent, when other, less expensive renewable energy resources are available. However, MDPU also concludes that Cape Wind project offers significant benefits that are not currently available from any other renewable resource, and that these benefits outweigh the costs of the project.

In considering the cost of the proposed contract to customers, MDPU includes the effect of price suppression, which MDPU believes will offset at least some of the contract's above-market costs to National Grid's customers, and reduce prices for all of the other electricity customers in the state and the region. MDPU anticipates that price suppression will result when Cape Wind bids into the wholesale energy market at zero cost, on account of zero fuel costs, thereby establishing a lower energy price in the wholesale market. Although there were differing views on the magnitude and duration of the price suppression effect, all the parties to the proceeding agreed that there would be a downward effect on market prices in general as a result of the contract.

Balancing the overall cost of the contract are numerous “unquantified” benefits, according to MDPU. These include the following:

  • Assisting National Grid and the Commonwealth to comply with (i) the state's renewable portfolio standard, which requires 15 percent of the state's electricity supply to come from renewables by 2020, with an additional one percent requirement each year thereafter; (ii) the state's Global Warming Solutions Act, which requires a reduction in greenhouse gases of (1) 10 percent –25 percent by 2020 and (2) 80 percent by 2050, with interim target levels in 2030 and 2040; and (iii) the state's Green Communities Act, which establishes a goal of meeting 20 percent of the state's electric demand through renewable and alternative energy generation by 2020. Given these requirements, as well as the similar requirements of neighboring states, MDPU concludes that the demand for renewable resources during the next 15 to 20 years will far outstrip the current supply. In considering the practical limitations on the development and potential scale of alternative renewable resources in the region, MDPU determines that development of offshore wind resources is the only viable means to achieve these statutory requirements.
  • Enhancing electric reliability in the state, due to its location and fuel source. The Cape Wind project will interconnect at a point very close to the largest electricity loads in New England, which MDPU concludes is advantageous from a reliability standpoint, especially compared to typically more remote renewable resources in transmission-constrained areas. As for the project's “fuel,” MDPU notes that wind is especially plentiful in the winter, when natural gas is at a premium for heating purposes.
  • Moderating system peak load, due to (i) higher expected capacity factors of offshore wind facilities, with greater coincidence to both summer and winter peak loads, than onshore wind or solar facilities, and (ii) the fact that Horseshoe Shoal, where the project will be located, has one of the strongest and most consistent wind regimes in New England.
  • The creation of additional employment. MDPU concludes that the net positive impact of the contract on job creation will be 162 new jobs per year for the 15-year term of the contract. MDPU also cites a number of studies that conclude that the project overall will have a positive impact on long-term employment and on resulting economic activity in the region.

MDPU's analysis of the costs and benefits of Cape Wind's offshore wind energy contract will likely establish precedent for evaluation of future alternative energy supply arrangements, especially in jurisdictions where cost relative to other available resources has been the driving consideration. However, in most cases, public utility commissions are statutorily constrained in the scope of factors they may consider in conducting a review of proposed power supply arrangements. MDPU's authority to conduct the cost-benefit analysis it relied upon in reaching its decision was granted under Section 83 of Massachusetts' Green Communities Act. Before we see a widespread adoption of the approach taken by MDPU, legislative initiative will be required, taking action to broaden the “unquantified” benefits of renewable energy contracts that public utility commissions may consider in reaching their decisions.