Editor’s note: Notwithstanding some recent gains, e.g. Cape Wind’s Interior Department permit, the projected U.K. Thames Array, and the politically motivated Danish pronouncement of renewed offshore installations, global offshore wind has progressed very slowly, especially in Germany. This article by Ms. Linowes, founder of the Industrial Wind Action Group, provides some of the reasons why offshore wind is such an environmental and economic troublemaker.
After nine years of debate and millions of public and private dollars, the decision to permit America’s first offshore wind project fell on the shoulders of one man, U.S. Department of the Interior Secretary, Ken Salazar. Hindsight notwithstanding, there was no chance Salazar could disapprove the Cape Wind application. Does anyone doubt the Obama administration would dare to ignore the tsunami of political favoritism already bestowed on the project, no matter how unjustified? And given the administration’s stated goal to nurse the U.S. economy back to health through the green movement, a denial of the permit would have unleashed a public firestorm virtually impossible to contain.
Let’s face it, the Alliance to Protect Nantucket Sound had an uphill battle in the message war from the beginning. As early as 2003, even before Windaction.org was organized, everyone knew about the wealthy ‘NIMBYs’ (“Not in my backyard”) on the Cape waging war against the one opportunity in the region to see renewables built in a substantial way.
At the time, New England had less than ten megawatts of wind installed, and most people were convinced Cape Wind represented an environmentally safe, low cost, economically beneficial development that could lead the nation in eliminating our reliance on fossil fuel. The NIMBYs, even those with the Kennedy name, were discredited in the press as little more than self-serving hypocrites unwilling to take one in the view for the betterment of the whole.
This attitude still prevails today in some quarters but the realities of wind energy’s flaws are beginning to take hold and we believe the Alliance and its supporters will ultimately be vindicated.
‘Finally’
The announcement of Salazar’s decision opened an emotional relief valve and pressure built-up over nine years was volcanically released. Stories about Cape Wind’s approval flooded the web with words like ‘Finally!’ splashed across the screen. The public was informed in no uncertain terms that Cape Wind would be built, offshore wind in the U.S. was on the upswing, and the country had officially established itself as a player in the offshore arena.
From my perspective, Salazar’s action was significant, but not for the reasons stated above. Rather, from this point forward, politics and public opinion will no longer drive the discourse. The Cape Wind decision and the public record on which it’s based will be challenged on the facts to determine whether the project is commercially reasonable and whether it will operate in compliance with existing laws. To be frank, there is no assurance Cape Wind will survive the scrutiny.
Pending Issues
There are several issues still pending that require resolution before the project can proceed as follows:
RADAR SAFETY. The FAA has assigned the 130 wind turbine structures (heights of 440 feet) a “presumed hazard determination” given their proximity to airports and radar stations in the Northeast. The military has already stepped up its concerns involving the moving blades interfering with radar for surveillance and weather tracking.
IMPACT ON WAMPANOAG TRIBES. The Mashpee Wampanoag Tribe and Wampanoag Tribe of Gay Head (Aquinnah) contend that the project will destroy the archaeological evidence of their history throughout Nantucket Sound, including Horseshoe Shoal. Further they argue that the eastern horizon over Nantucket Sound must remain unaltered in order to perform their spiritual rituals and ceremonies.
FEDERAL LAW VIOLATIONS. Various stakeholders including the Alliance and Windaction.org have filed the requisite 60-day notice of intent to sue for violations of the Endangered Species Act, the Outer Continental Shelf Lands Act, and other laws. Regarding the Endangered Species Act, the parties will show that Salazar’s approval ignored the Fish and Wildlife Service’s original recommendations to minimize and/or avoid impacts, a clear violation of the law.
COST. All of the above are legitimate and serious concerns, but Cape Wind’s true Achilles heel lies in the cost of the project. Few in the State of Massachusetts, including the ratepayers, fully understand what Cape Wind will do to electricity rates and whether the cost can be sufficiently offset by the project’s expected benefits. We develop the data on this issue in more detail below.
Project Costs
With no offshore wind built in the U.S., there is limited information on record to determine the economics of such a project. However, lessons learned during the recent proceedings before the Rhode Island PUC (RI PUC Docket 4111) are useful. In Rhode Island, the State reviewed the unsigned long-term power purchase agreement negotiated between Deepwater Wind Block Island, LLC and National Grid (also referred to as Narragansett Electric Company). With the backing of RI’s governor and legislature, Deepwater proposed to construct a pilot wind project in shallow water off Block Island consisting of 6-8 turbines and a nameplate capacity of up to 30 megawatts. The purchase agreement contained an initial bundled energy price (energy, capacity, renewable credits) of $244 per megawatt hour (MWh) with a 3.5% escalation factor each year. According to pre-filed testimony submitted to the PUC, the cost was compared to long-term prices of $80 and $120 per MWh established for renewables located elsewhere in the region. The RI PUC ultimately determined the agreement was not commercially reasonable and withheld its approval.
During this same time, Cape Wind and National Grid initiated negotiations on a long term power contract. Under the Massachusetts Green Communities Act signed into law in 2008, Massachusetts utilities are required to enter into long-term contracts with renewable energy projects located within state boundaries, including state and adjacent federal waters.
Any power purchase agreement between Cape Wind and National Grid would have to be approved by the State. In February, MA Secretary of Energy and Environmental Affairs Ian Bowles cautioned the two parties this way: “Let me be clear. Our expectation is that the Cape Wind project must produce electricity at a substantial discount to the Rhode Island offshore wind project.”
The problem for Cape Wind is its upfront capital costs. According to the latest figures from Europe, the cost to build offshore wind is approximately $5,000 per kilowatt. At 468 MW, Cape Wind will come in at a cool $2.3 billion (Most press accounts grossly understate the cost of the project).
That’s a hefty expense for single power project, especially one expected to deliver only 39% of the time with no guarantee its generation will arrive when most needed. With high upfront costs and fewer hours to spread the cost over, power purchase agreements that lock in the energy and renewable credit prices are now a requirement in order to attract investor financing.
Impact on Electricity Rates
As noted above, renewable resources within the New England region carry a bundled energy price between $80 and $120 per MWh. If we assume Cape Wind can discount its costs to $200 a MWh, $44 off Deepwater’s higher price, the above-market cost passed on to Massachusetts ratepayers will range between $128 million and $192 million per year. That’s as much as $81 per year per household above any other renewables.
A provision in the Green Communities Act tilts the scale in favor of projects like Cape Wind by requiring MA utilities to enter into long-term contracts with renewable energy projects located in the state, including state and adjacent federal waters. This requirement openly discriminates against renewable generation located elsewhere including lower cost options that import from Canada or New York. This provision in the law is designed to restrict competition and place increased emphasis on the development of in-state renewable energy even if such resources are more expensive and/or more environmentally harmful. If Cape Wind were made to compete with outside resources, we suspect the project would have substantial difficulty proving its worth. But that may be what eventually happens.
TransCanada Power Marketing Ltd just filed a suit challenging several provisions of the Green Communities Act including the section that mandates contacts be entered with generators located in Massachusetts.
Uncertain Benefits
Earlier this year, Cape Wind Associates released a report authored by the Charles River Associates (‘CRM’) that analyzed the impact of Cape Wind on New England energy prices. The brief nine-page report concluded that “Cape Wind 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.” Interestingly, CMR’s stated annual cost savings is in line with what we would expect Cape Wind to cost the ratepayers in above-market rates.
Aside from being thin on data, the Charles River analysis is highly speculative, at best, and fails to fully articulate the interaction between the real-time and day-ahead energy markets.
The New England ISO (ISO-NE) typically operates using a day-ahead auction where generators are required to offer firm levels of production for each hour of the next power day. The energy price, in turn, is determined based on those bidding into the system; all generators receive the same price per megawatt hour of production. Significant penalties are applied if a generator is unable to meet his commitment.
Because of its intermittency, a wind generator wishing to operate in the day-ahead market would need to contract with other dispatchable resources, most likely inefficient gas peakers, in order to “firm” their capacity commitments and avoid penalties.
A more likely scenario would be for a project like Cape Wind to operate exclusively in the real-time market i.e. a pure spot market carrying no penalties for non-performance and where prices are generally less than the prices paid for the day-ahead energy market. Those selling into the real-time market are normally paid at the clearing price of the real-time market. However, any long-term power purchase agreement will assure Cape Wind receives steady revenue at contracted price. When National Grid sells the wind energy to the grid, the energy will be sold at the lower cost spot energy market price, Cape Wind will be paid the above-market contract price, and the ratepayer will cover the difference.
The day-ahead market for the New England region represents roughly 90% of the available generation with the real-time market holding less than a 10% share. Since the price paid for ninety-percent of the generation is established twenty-four hours in advance of the power day, any participation from wind will have only a marginal impact on prices limited to those resources operating within the real-time market. Generators that bid in day-ahead who can back down are likely to do so to the greatest extent possible in order to save fuel and other costs. For New England this would be efficient co-generation natural gas, biomass, and large hydro. Since generators in the day-ahead market are still guaranteed payment, any price suppression from wind would be limited to the spot market. Thus, any downward pressure on pricing will impact inefficient single-cycle gas plants, pump storage, must-take landfill gas, small hydro, and other intermittent resources.
Assuming the New England region maintains its current policies for the scheduling and dispatch of energy on the grid, ratepayers and regulators in Massachusetts would be wise to demand tangible proof of Cape Wind’s economic benefit. At the very minimum, the State’s consumer advocates should lose the rose-colored glasses and evaluate Cape Wind against other renewable projects in the region that can deliver reliable low/no carbon generation at a price commensurate with market value.
Conclusion
The economics of this project should settle the environmental issues in favor of the environment. Spending enormous sums on Cape Wind only benefits Cape Wind at the expense of the taxpayer, the ratepayer, and any potential developer who can build a better, more commercially reasonable project.
Lisa:
Good overview. My comments:
1- The Nantucket Alliance (SOS) almost immediately was labeled as NIMBYs due to their own poorly thought out public position on wind energy. Essentially they said wind energy was OK in other places, just not in their area. This is not only a false premise, but was guaranteed to be a losing public relations tactic. In my view the Salazar result was assured by their strategy.
2 – The issue of whether a wind project should go forward should consider FAR more than whether it is “commercially reasonable and whether it will operate in compliance with existing laws.” For instance, there are few “existing laws” that adequately protect citizens health concerns — e.g. from such effects as low level noise.
3 – You made several good observations about cost, but in doing so it seems that you are implying that wind energy is an equivalent to our other conventional sources. In other words it seems that you are saying that if wind energy is competitively priced, then it would be OK to “substitute” it for a conventional source (e.g. nuclear).
The problem with that premise is that we are comparing apples and oranges. It is like saying it makes sense (to save fossil fuel) to substitute sailing ships for 20% (let’s say) of our current military ocean going vessels.
This is all explained in detail at EnergyPresentation.Info.
I’m a tad surprised by CRM analysis, as they most often do credible work. In this instance they failed to provide a complete analysis of the benefits/costs–they only did half the work (yes, there’s another term, somewhat impolite.) They did not loook at the value impacts (aka benefits) which are negative given wind patterns as Lisa alludes to. They also did p.p. work on the cost side and were overly optimistic. If cape Wind could lower costs, why are the ratepayaers being FORCED into buying the output under long term contracts? The question provides the answer.
A well written, subtle, nuanced analysis, providing a glimpse into the market realities of ISO New England, which has one of the most opaque information disclosure apparati in the country. Given the pandering politics at both the national and state levels that Lisa Linowes mentions, no one should have been surprised by the Interior Secretary’s decision on the Cape Wind farrago. This is especially true given the block-headed opposition mounted by the Alliance to Protect Nantucket Sound, which embraced perhaps the dumbest modern energy idea imaginable while urging that Cape Wind would be better situated in someone else’s backyard.
Lisa fairly well describes the socio/economic/political tap dance that would attend the integration of the Cape Wind project into the pricing system of ISO New England. Her tale reminds ever so much of the intricacies involved in Wall Street’s use of bundling worthless securities in the derivatives market, gambling away billions in risk proof ways, since taxpayers would cover the cost of investments gone wrong. She touches on how the Charles River Associates wind impact report mirrors the way AIG gave high ratings to the questionable casino schemes of Goldman Sachs. She thumbnails the blowback expected from an assortment of opposition groups, not least from her own organization and, most intriguingly, from TransCanada Power. And, very importantly, she exposes the reality of the capital cost of Cape Wind–at minimum, $2.3 billion, although perhaps she should have mentioned that most of those dollars would be revenues lost to the federal treasury, meaning reductions in public services or increased tax bills to make up the difference.
The blowhards who endorse the Cape Wind scam shamelessly tout the LLC’s claim of a 39% capacity factor, the evidence for which remains enshrouded in “proprietary confidentiality.” (So much for transparency.) Although the ocean winds swirling around Nantucket Sound may be stronger and steadier than most onshore locations, offshore conditions are often more environmentally hostile, increasing downtime for maintenance. Cape Wind LLC would be lucky to get a 30% capacity factor.
And here’s more blowback for the blowhards. With an installed capacity of 468MW and a more reasonable annual capacity factor of 30%, the wind LLC would generate a yearly average of 140MW into the ISO NE grid, which has a peak demand generation of over 28,000MW. Those 130 skyscraper-sized wind turbines are likely to produce less than 140MW 60% of the time, and, around 10% of the time, they would likely generate nothing, especially at peak demand times. To infill the constantly skittering yield, they would have to be continuously entangled with conventional generators at up to 90% of the installed wind capacity, most likely open cycle natural gas units, operating thermally and economically in highly inefficient ways–thereby subverting both greenhouse gas offsets and lower consumer rates. Moreover, the $2.3 billion projected cost would not include new transmission lines and voltage regulation systems necessary to bring the wind to market.
It’s a mell of a hess. Few things illustrate the intellectual lacuna at the soul of the Republic better than the wild rumpus for wind. If this massive wind project gets built, what people entering Cape Cod from the ocean will see is not the natural beauty of Nantucket Sound, nor anything like the inspiration of the Statute of Liberty–but rather the spawn of Enron, signifying a whole lot of dumb and ugly.
Cape Wind will ultimately fail to achieve any of the goals claimed for it – decreasing CO2 emissions, increasing energy independence, etc. Such a failure would almost be worth its cost in resources and environmental damage if there were any chance that wind proponents would learn from it. Unfortunately, that will never be. The environmental religion offers its adherents feelings of moral and intellectual superiority over nonbelievers, and that is something few of them will relinquish, regardless of the environmental damage that results.
Feedback is essential to any action. Consider, for example, how dangerous the world is for a person who has lost the ability to feel pain, as happens with certain forms of leprosy. Imagine placing your hand on a hot stove and not realizing it until you smell your own flesh burning.
Those in the Left’s environmental movement have created a sort of moral leprosy for themselves by ignoring any facts that do not support their world view. But it is rarely their flesh that gets burned.
Richard:
Interestingly, a prominent Italian journalist last spring began referring to what he dubbed “the leprosy of wind” threatening contagion around the Italian countryside. Works for me.
I wish that the wind mess was only a creature of the Left’s environmental movement, which it partly is, to be sure. But there is bipartisan support that puts the blame squarely on the Right as well. And on the Center. As Glenn Schleede and others have shown on this forum, wind is a win win for politicians of every stripe, who benefit from giving the impression they’re opposing the badasses from the fossil fuel industry by supporting wind, while all the while knowing that the more wind, the more need for fossil fuels. It’s a lose lose for rate and taxpayers, for more enlightened energy policy, and for the environment.
And, rather than exposing what a disreputable player wind is, conventional power corporations have welcomed wind into their fold, knowing it’s not a competitor, knowing that it will increase the need for their products and services, and serve as a nifty PR tool while rather substantially reducing their corporate tax obligations–a la GE and Florida Power and Light, among others.
To see the 2008 capacity of the UK’s offshore wind farms go here, page 21. It looks to be about 35%.
http://www.clowd.org.uk/Downloads/UK%20Renewable%20Energy%20Generation/2008/UK%20Annual%20Renewable%20Generation%202008%2819April2009%29.pdf
Great! We needed more bird swatters on the horizon!
Nofreewind’s observation appears correct for 2008. For those who focus solely on this measure, this puts UK offshore wind at the high end of projections for onshore and the low end of that for offshore.
It must be remembered though that average production over a year of a highly volatile output (within short time periods of often considerably less than an hour) is not a realistic measure of value. Using averages in this way is like saying with your head in a freezer and your feet in a turned-on oven that on average you are OK.
To balance this volatility and produce useful electricity, fast-reacting (but inefficient in terms of fuel use and CO2 emissions produced) fossil-fuel generation of about twice the wind plants’ output is needed. More of such wind capacity is not an improvement: less is.
The other observation to make here, Kent and Nofreewind, is is that one year of performance is not an adequately informed metric. Let’s see the UK’s offshore performance average over five years, say, to confirm that 35%.
Good point Jon. Year to year variations are common. Again for those who want to focus on this metric, in 2006 the total UK offshore wind fleet capacity factor was 29.3%. I did not mention this before because it is not central to the issue of the value of utility-scale wind power, as nofreewind would indicate.
Lisa Linowes essay is quite valuable. We do know more about the economics, however. The recently released AEO 2010 from the U.S. Energy Information Administration provides data on both conventional and offshore wind. In 2008 dollars the cost differential is striking — $1,996/kW versus $3,937/kW. To an economist, the question is not “why wind?” so much as it is “why offshore wind?” NIMBY issues are a reality wherever wind is placed, but conventional wind provides nearly a $2,000/kW cost advantage to mitigate local disadvantages. Bluntly put, move the turbines onshore and some lucky community will get a share of the $1 billion is cost savings.
On the integration issue, wind works best when coupled with hydroelectric storage or a nearby rapidly dispatchable gas unit. Cape Cod is not known for either of these advantages. The operatng issues connected with Cape Wind will be both interesting and challenging.
Agree with your final comment, Robert McCullough. But your recommendation about putting the damned thing onshore and expecting a “lucky community” to get a share of the “cost saving” seems, well, delusional, given that the project is basically a tax shelter for large corporations. No responsible CFO of the project would short-shrift investors by cost sharing much with the locals–no matter where a wind project would be located.
As for wind and hydro, sure, this is a great tandem, if you like environmental pillage at no savings of CO2 emissions. Hydro without wind, simply as an energy source, is much better than hydro with wind, since the latter can only very marginally “improve” the production of the former.
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