NStar Corp. agreed to pay a roughly $500 million premium for less than a third of Cape Wind’s power output over the next 15 years, a deal that will boost the typical customer’s bill by $1.08 a month under the most favorable conditions.
The deal was hammered out in just a week, a feat that was made possible because NStar accepted the same terms National Grid negotiated with Cape Wind in 2010. NStar agreed to those terms to win the support of the Patrick administration for its merger with Northeast Utilities. That merger is expected to be approved as soon as next week.
NStar’s contract with Cape Wind calls for the utility to pay 18.7 cents a kilowatt hour for the proposed Nantucket Sound wind farm’s electricity, with a 3.5 percent escalator clause for each year of the contract. The cost will be passed along to NStar’s customers, who currently pay 7.928 cents per kilowatt hour for power.
The deal also allows NStar to assess its customers a fee equal to 4 percent of the contract’s annual value. The value of the deal in its first year is expected to be $81.1 million, which means NStar would net a $3.2 million fee. Attorney General Martha Coakley calls such fees “sweetheart deals” and the Senate is currently debating legislation that would reduce the fee from 4 percent to 1 percent.
In current dollars, NStar estimated the above-market cost of its contract with Cape Wind would be $489 million. In nominal dollars, the cost would be $940 million, NStar said. (Cape Wind issued a press release saying its project, once fully operational, would drive down electricity prices across New England and save customers about $7.2 billion over 25 years.)
Despite the high cost, the state Department of Public Utilities is likely to approve the NStar’s contract with Cape Wind, just as it approved the National Grid deal in 2010. The DPU acknowledged in 2010 that Cape Wind power was expensive, but said it was desperately needed to help the state meet the renewable energy requirements of the Green Communities Act and the greenhouse gas emission mandates of the Global Warming Solutions Act.
Since 2010, when the DPU issued its last ruling on Cape Wind, the environment for green energy projects in Massachusetts has deteriorated because the price of natural gas has fallen. Natural gas is the fuel used to produce about half of the state’s electricity. As the price of natural gas drops, higher-priced green energy projects tend to become less competitive.
In 2010, the DPU estimated National Grid’s contract for half of Cape Wind’s output would boost residential customer bills by 1.3 percent. The impact of the NStar contract is expected to be about the same in percentage terms, even though NStar is buying only 27.5 percent of the wind farm’s output and its customers pay higher prices for electricity than National Grid customers.
The similarity in bill impacts reflects the fact that the size of customer electric bills has been shrinking as the price of natural gas has fallen. So even though NStar is planning to buy less of the expensive Cape Wind power, the impact of that power on customer bills will be the same.
Cape Wind has faced enormous difficulties in finding customers for its power and as a result has had difficulty arranging financing for the project. The Patrick administration used the leverage created by the NStar-Northeast merger negotiations to pressure NStar to buy a chunk of the Cape Wind power. Cape Wind officials say once the NStar deal is approved a financing package for the wind farm should be forthcoming.
Critics of the deal are already lining up, urging the DPU to reject the contract because it was effectively forced on the utility. Robert Rio, a senior vice president at Associated Industries of Massachusetts and a critic of Cape Wind, said in testimony filed with the DPU that the Patrick administration should have allowed NStar to negotiate better terms for its contract with Cape Wind rather than insisting that the utility follow the same script National Grid used in 2010.
“The agreement between National Grid and Cape Wind was filed in 2010,” Rio’s testimony says. “Since then, much has changed. Prices have fallen for wind turbines, comparative prices for natural gas have made the cost of Cape Wind even more expensive,… and federal tax credits are in jeopardy. All of these should be used by NStar to negotiate a lower contract price.”
