May 17, 2010 - Cape Wind inks another contract

Monday, May 17, 2010

The next chapter in the continuing story of Cape Wind: a mirror contract, and questions about the linkage between renewable portfolio standards and power pricing.

National Grid has signed a second contract with Cape Wind, this time to enable National Grid to assign the remaining 50% of the project's output to another wholesale customer -- a "mirror contract" for National Grid's primary $3 billion, 15-year contract to buy 50 percent of the electricity that will be produced by Cape Wind. This would leave National Grid with rights to the entire output of the Cape Wind project.

Mirror contracts are relatively common in the industry. As a financing tool, them allow the project developer to demonstrate to banks and capital sources that they have a guaranteed offtake for 100% of the project's production. This makes banks more willing to finance the project.

So who did National Grid have in mind as the other wholesale purchaser? If you know the regional market, Boston-based utility NStar jumps out as one potential purchaser, although there are of course other possibilities. In fact, National Grid itself apparently has the rights under the mirror contract to retain 100% of the power for itself -- although doing so magnifies its ratepayers' exposure to the elevated costs, triggering a tough burden on National Grid to demonstrate that this is just and reasonable and in the public interest.

Some commenters are noting that the Cape Wind was made possible by the Commonwealth's Green Communities Act and related legislation establishing a renewable portfolio standard (or renewable electricity standard) for the largest investor-owned utilities. But clearly there's a huge price premium figured in over the existing mix of resources -- about 8 cents for power today, versus 20.7 cents and rising for the Cape Wind output. Is a renewable portfolio standard enough to explain the acceptability of this significant price increase? Other states like Maine have had renewable portfolio standards for years, and although some renewables might be priced higher, there has been enough qualified capacity coming online at near-market costs that Maine has not seen much activity from significantly above-market contracts.

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