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Cape Wind Project is a Good Deal for Massachusetts

Posted by Joseph M. Kwasnik at Apr 05, 2012 11:10 AM |
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The Cape Wind project has received two positive jolts in recent weeks. First came the Massachusetts Supreme Judicial Court decision upholding a long-term power agreement for National Grid to purchase half of Cape Wind’s 454 megawatts of wind power for at least 15 years. Yesterday the second came – Massachusetts regulators gave final approval to a merger between NStar and Northeast Utilities.

The Cape Wind project has received two positive jolts in recent weeks.

First came the Massachusetts Supreme Judicial Court decision upholding a long-term power agreement for National Grid to purchase half of Cape Wind’s 454 megawatts of wind power for at least 15 years.

Yesterday the second came – Massachusetts regulators gave final approval to a merger between NStar and Northeast Utilities, which includes a commitment by NStar to buy slightly more than a quarter of Cape Wind’s project’s electricity for 15 years.

With these key contracts in place, Cape Wind can secure the financing it needs to begin construction next year. After a tortuous decade-long journey, the project’s football-field sized wind turbines will start producing electricity as early as 2015. That’s an enormous breakthrough for homegrown renewable energy powering the Massachusetts and New England economies.

The rest of Cape Wind’s power will be sold into the competitive daily wholesale electricity market overseen by New England’s electric grid operator, ISO-New England. Cape Wind’s bids into the market will be among the lowest-priced electricity because generators can only bid the actual production costs of their electricity. For Cape Wind, their electricity has a close to zero cost because their fuel, wind, is free. On the other hand, generating plants fueled with coal or natural gas must include their fuel costs in their bids, thus making their electricity more expensive than Cape Wind’s.

Because of this Cape Wind will provide much needed downward pressure on electric wholesale rates in New England. This pattern is well documented in organized wholesale energy markets such as ISO-New England, the Eastern US grid and many European markets.

In these regions, wholesale market prices for electricity are set by the bid submitted by the highest cost generator used that day to meet demand, usually a coal plant or a less-efficient natural gas-fired combustion turbine plant. Because low-cost renewable resources such as Cape Wind (which have no fuel costs) typically submit wholesale electricity bids that are much less expensive than those of fossil-fueled generators, these low cost resources tend to bump higher cost generators from the market - thus establishing a lower price for electricity.

The net result is that Cape Wind will keep the region’s wholesale electricity bills down – by an estimated $286 million a year, according to Charles River Associates - while helping to keep our air clean.

This downward pressure comes at a critical time; costs of producing electricity from regional coal plants and older natural gas plants are rising due to increasing fuel costs (for coal) and the increasing operating costs of aging power plants and new pollution controls required to keep them in operation.

The Cape Wind project brings other additional benefits, including 162 permanent jobs to operate the facility and a stable source of local, clean electricity for Cape Cod and the Islands.

Ceres, in its recent report, The 21st Century Utility: Positioning for a Low-Carbon Future, that for electric utilities to compete in the coming decades they must diversify their energy mixes with more renewable energy.  National Grid and NStar have done just that with their support of Cape Wind.

Although fossil-fueled power plants will continue to play an important role in the region’s future energy needs, we need to boost renewable energy projects here in our backyard, including other offshore and land-based wind farms, utility-scale solar power generating sources and smaller solar sources on roofs in our neighborhoods.

And clearly, we should also be scaling investment in energy efficiency. Since 2007, Massachusetts has dramatically expanded its investment in energy efficiency for a simple reason: Reducing consumer demand for electricity is three to four times less expensive – and cleaner - than building new power plants, as well as consumer-friendly. The American Council for an Energy Efficient Economy recently ranked Massachusetts first in the nation for its energy efficiency performance.

So Cape Wind is a major step forward in a tremendous all-around success story. Every link in the chain, from enlightened state policymakers to informed regulators, far-sighted utilities, thoughtful courts, and a small, independent clean energy developer who refused to quit, deserves credit for making Cape Wind a reality. Massachusetts consumers should be embracing it too.

Joe Kwasnik is senior advisor for electric power programs at Boston-based Ceres

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Mark Rodgers says:
Apr 06, 2012 03:30 PM

Great piece Mr. Kwasnick. Actually Cape Wind's effects on price suppression will be the same regardless of whether the output is sold in power contracts or on the wholesale market, as contracted power is still factored into wholesale market power auctions.

Mark Rodgers, Communications Director, Cape Wind

Anonymous says:
May 08, 2012 03:28 PM

"For Cape Wind, their electricity has a close to zero cost because their fuel, wind, is free" --ignores both capital costs and operating maintenance costs and is therefore an imprecise exageration

Joe Kwasnik says:
May 08, 2012 05:45 PM

Thanks for your comment.

Although there is no doubt that Cape Wind has substantial capital costs and will be a challenge to maintain, the project will clearly result in downward pressure on wholesale power rates in New England. This is because the ISO-NE rules for bidding into the daily electricity market can only be based on the actual cost to produce the electricity...in this case the price of fuel which for wind is essentially zero.

Cape Wind will recoup its capital (financing) and maintenance costs from its long term contracts with National Grid and NStar and the "clearing price" for energy in the daily electricity market.

You can read more about electric power markets in New England here: http://www.iso-ne.com/markets/index.html"

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Sharlene directs the Sustainable Water Infrastructure Program at Ceres, a national nonprofit helping institutional investors to integrate sustainability into the capital markets. With Ceres, she works with water service providers to build business models that are resilient to weather extremes, climate change and resource depletion.

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