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Price cap could see Massachusetts lose offshore wind lead

Tue 26 Feb 2019 by David Foxwell

Price cap could see Massachusetts lose offshore wind lead
Legislation signed by Governor Charlie Baker requires that each procurement of clean energy results in a price lower than the one that preceded it

Massachusetts has led the way developing offshore wind projects in the US, but legislation enacted in 2016 could mean that it struggles to maintain its pre-eminent position as an offshore wind state.

Sea areas off the coast of the state of Massachusetts have seen what has been likened to a ‘gold rush’ of interest as the location for future offshore windfarms. Would-be windfarm developers are bidding aggressively in federal auctions to win the rights to build in the area.

To date, four commercial wind energy leases have been awarded and recently three more proposed leases have been sold by the federal government at a price of US$135M each.

Carbon-free power generated there could be sold to consumers in Massachusetts, Rhode Island, Connecticut, New York or New Jersey. To date, Massachusetts has been leading the way with state-mandated procurements of power, but as David  O’Connor* and Thomas R Burton III** explain, state law may make it difficult for Massachusetts to maintain its lead.

The state led the way with the first competitive procurement of a 20-year power supply agreement for 800 MW of wind energy to be delivered to its consumers. The winning bid, submitted by the Vineyard Wind Project in mid-2018, set a record low price of US$0.065/kilowatt hour (KWh).

Although this low price created optimism for the future supply of clean, affordable power for the region, it revealed a conundrum for future wind energy procurement in Massachusetts. That is because state law requires that each subsequent procurement result in a price lower than the one that precedes it.

The problem this presents for future Massachusetts contracts was illustrated by the next procurement. On 7 February 2019, Rhode Island approved a 20-year wind energy power supply contract to serve its consumers. National Grid and Řrsted US Offshore Wind were awarded a 20-year power supply contract for 400 MW of energy to be delivered by the Revolution Wind windfarm. The project, located northeast of the Vineyard Wind project and 24 km south of Rhode Island, has a levelised price of US$0.074/KWh.

Herein lies the problem for Massachusetts. The Revolution Wind price is almost a full cent higher than Vineyard Wind’s inflation-adjusted contract price of US$0.065/KWh.

The price indicates that future projects in the area will not be able to meet the current requirement that they be lower than the Vineyard Wind price. If not, bidders won’t be eligible to receive a long-term contract to supply Massachusetts with energy.

An Act to Promote Energy Diversity, signed by Governor Charlie Baker in August 2016, put Massachusetts at the forefront of offshore wind development in this deep water ocean area. However, the act stipulates that “the department of public utilities shall not approve a long-term contract that results from a subsequent solicitation and procurement period if the levelised price per megawatt hour, plus associated transmission costs, is greater than or equal to the levelised price per megawatt hour plus transmission costs that resulted from the previous procurement.”

Massachusetts is obligated by this same law to initiate another procurement for an additional 800 MW of wind energy by June 2019. But the state cannot approve a contract with a levelised price greater than US$0.065/KWh.

Massachusetts faces the prospect that prices bid in this and subsequent procurements will not meet the requirements of the act.

Legislative leaders and the Baker administration are understandably concerned. The legislature could fix this problem by altering or removing the price cap, and a bill (HD 697) has been already filed by House Speaker Pro Tem Patricia Haddad to do just that. However, the legislature is just beginning a new session and it is not clear when an amendment to the 2016 law could be accomplished.

A subsequent law, An Act to Advance Clean Energy, enacted in 2018, requires the Department of Energy Resources to file a report with the legislature this year on the need to conduct additional solicitations, of up to 1,600 MW of wind generation. That report is likely to confirm the need to amend the existing law.

Until the current law is amended to alter or remove the pricing requirement, Massachusetts is in danger of having to watch other states mine the energy ‘gold’ in the waters just off its shores.

*David  O’Connor is senior vice president for energy and clean technology at ML Strategies

** Thomas R Burton III is an attorney at Mintz

This article is an edited version of a ‘Mintz Viewpoint’ that first appeared in the law firm’s ‘Mintz Insights.’

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