THE BAKER ADMINISTRATION is pushing ahead with plans to double the procurement of offshore wind power over the next several years, a move that will increase wind’s share of the state’s energy portfolio to 30 percent while locking Massachusetts into long-term contracts for nearly two thirds of its electricity.
The announcement was another sign of just how bullish the state is on offshore wind, but it also highlighted some of the risks involved in negotiating 20-year contracts directly with electricity suppliers instead of relying on the region’s competitive wholesale electricity market. Right now offshore wind appears to be a great fit in terms of price and environmental benefits. But if new technologies emerge in the near future driving down the price of solar or other emerging renewables, ratepayers could be stuck paying above-market prices for their power.
Legislation approved on Beacon Hill in 2016 authorized the state’s utilities, acting on behalf of their ratepayers, to negotiate contracts for 1,600 megawatts of electricity. The first contract for 800 megawatts was awarded to Vineyard Wind last year and another 800 megawatt procurement is expected to be awarded by the end of this year. Under legislation approved last year, the state Department of Energy Resources was required to analyze the market for offshore wind and decide whether it made sense to double-down and procure another 1,600 megawatts.
The report released on Friday concludes it makes sense to do procurements for the additional 1,600 megawatts in 2022, 2024, and again in 2026 if necessary. The report also recommends conducting a solicitation in 2020 to see if it would make sense to construct an independently built transmission line that would serve all of the new wind farms. Until now, wind farm operators have preferred to build their own individual transmission lines to shore, but state officials think there may be environmental benefits from minimizing the number of transmission lines as the industry expands.
The state report portrays offshore wind as a very good deal for the state, providing renewable power at an attractive price point. The report said offshore wind farms, on an annual basis, operate at 50 percent of their capacity (meaning they generate half the electricity they are capable of generating because the wind isn’t always blowing ) and tend to reliably generate power during the winter months when natural gas for power plants can sometimes be in short supply.
A chart in the report noted the Vineyard Wind contract price was 6.5 cents per kilowatt hour in 2017 dollars, slightly higher than the price of Quebec hydro-electricity being purchased in a separate procurement and double the price of electricity produced with natural gas. The offshore wind price was half the price of the state’s least-subsidized solar power option. The report estimated the contracts for an additional 1,600 megawatts of electricity will save the state’s ratepayers between $670 million and $1.27 billion over the life of the 20-year contracts.
Patrick Woodcock, the deputy secretary of energy, said it’s unclear whether the energy savings would continue if more than 3,200 megawatts of offshore wind electricity were procured. He said the analysis by the Department of Energy Resources indicated savings from offshore wind would begin to diminish at some point.
The report also raised concerns about the state’s growing reliance on long-term contracts for renewable energy. The operator of the region’s power grid currently runs two energy markets (one day to day and the other longer-term) that in broad terms pit power generators against each other, with business flowing to those able to deliver electricity at the lowest price. The markets have had difficulty accommodating offshore wind farms because the wind farms have significant upfront construction costs that are difficult to recoup in the regional energy markets.
With Massachusetts in need of clean energy to meet its emissions targets, the state has increasingly negotiated long-term deals outside of the regional power markets to get offshore wind farms and other renewable projects built. According to the state report, the state’s three utilities currently have 62 long-term contracts with renewable energy suppliers for a total commitment of $22 billion. With the extra 1,600 megawatts, 60 percent of the state’s electricity load will come from long-term contracts, the report said.
The long-term contracts change the regional market dynamic considerably. With the regional power markets, generators vie for sales and have to absorb any financial losses if their power plants are unable to compete for business. With the long-term contracts granted to renewable energy suppliers, the risk for any financial losses shifts back to ratepayers.
“The high amount of energy tied up in long-term contracts may impact wholesale markets and may shift risk to ratepayers as energy markets change,” the state report said.
Woodcock said the offshore wind market itself illustrates how quickly the market can change. He said Vineyard Wind originally planned to populate its wind farm with 6.5 megawatt turbines, but turbine technology has changed so much over the last 1 ½ years that the company is moving to a 9.5 megawatt turbine. “That just signals how much change is happening,” he said.
The report recommended the Legislature give the Department of Energy Resources the option of including other renewable resources in future solicitations to increase competition for long-term contracts and to take advantage of technological changes as they arise.
Another concern raised by the report is that competition is increasing from other states for the onshore economic development associated with offshore wind farms. Many on the South Coast have been worried that the focus on price in the state contracting process has hurt efforts to convince companies to build more production facilities in Massachusetts.
Other states are pursuing the industry aggressively. The report said New Jersey has a $100 million offshore wind tax credit program, New York is spending $200 million on port infrastructure, and Connecticut is investing $35.5 million in the New London port.
The Department of Energy Resources said the state should consider separate investments in onshore infrastructure to entice more of the industry food chain for offshore wind.
“The assumption that economic development will be secured solely through procurements no longer holds true,” the report said. “It is worthwhile to continue to look at economic development outside the procurements to enable an ‘industry cluster’ to develop in the Commonwealth.”