Deepwater eyes fed. lease prize in summer auction

As Deepwater Wind LLC fights to install five wind turbines off Block Island, a much bigger contest to harness the wind in southern New England waters is about to begin in earnest.
This summer, the U.S. Bureau of Ocean Energy Management, federal gatekeeper of the nation’s offshore power resources, is slated to auction wind-development rights for 257 square miles of Atlantic Ocean south of Rhode Island and Massachusetts.
Located in a windy area close enough to population centers and large enough to host up to 200 turbines, the Rhode Island-Massachusetts federal lease is Deepwater’s ultimate goal in the region, the motivator behind the five-turbine Block Island “demonstration project” and partnership the company has struck with the state as its preferred wind developer.
Deepwater pledged $3.2 million to assist Rhode Island in the creation of its marine-zoning Ocean Special Area Management Plan and has signed a lease with the Quonset Business Park to base its construction and staging operation there.
But how much Deepwater’s investment in Rhode Island will mean to the federal government is unclear.
Terms of the auction, including the rules the government will use to judge each bid, and which of the companies seeking a lease will be eligible, are going to be set in a final sale notice next month. Those rules have drawn attention from Rhode Island leaders who back Providence-based Deepwater and are concerned that another company will win the development rights at auction.
In addition to Deepwater, eight other energy companies have registered with the Bureau of Ocean Energy Management to participate in the auction for the Rhode Island-Massachusetts offshore wind-energy site, one of six sites in federal waters around the country identified for wind-development leases.
The Bureau of Ocean Energy Management auction rules published in December would give a 15 percent credit to companies with a Joint Development Agreement with a state.
Companies that have reached a deal with an electric utility to sell the energy produced by the wind farm get a 25 percent credit in the auction scoring system, in which the cash offered up by the bidder is the biggest factor in the decision.
Deepwater’s agreement with Rhode Island is the only one held by any of the companies seeking the federal lease and none of the others is expected to reach a power-purchase agreement before the auction. But Rhode Island leaders don’t think the 15 percent credit in the proposed rule respects the state’s stake in the wind-power question enough.
In a letter to Bureau of Ocean Energy Management Director Tommy Beaudreau last winter, Gov. Lincoln D. Chafee asked for the agency to amend the auction format to give the state’s agreement further weight.
It pointed out not only the $10 million Rhode Island has spent on ocean planning, and $25 million Deepwater has put into the Block Island wind farm, but that Ocean State power customers will likely pay higher rates for electricity as trailblazers in the nation’s bid for renewable energy.
“I am disappointed that the revised auction format does not offer sufficient weight to Rhode Island’s strategic priorities regarding the establishment of public-private partnerships that support the sound and effective development of offshore wind energy,” Chafee wrote. “It is my understanding that the current auction format is designed to maximize the financial return to the federal government, but it does little to address the significant risk of high electricity rates for Rhode Island ratepayers as a result.”
Unlike Deepwater, the other companies interested in the lease have been quiet. So it’s difficult to evaluate what kind of advantages or disadvantages they may have.
Although states can’t compel the federal government to award leases to particular companies, they can block any company from selling electricity to customers within their borders.
Deepwater has identified Long Island as the largest potential market for power from the Rhode Island-Massachusetts wind farm and the Bay State second, so the project could theoretically go ahead detached from Rhode Island.
Tracey Moriarty, spokeswoman for the Bureau of Ocean Energy Management, said the agency “enjoys a positive, productive relationship with both Rhode Island and Massachusetts,” but that federal law requires it to get the most rent it can for the development areas.
Whichever company is awarded a lease still faces a long federal permitting process – including antitrust, technical and environmental reviews – in addition to the work of reaching power-purchase agreements with utilities and states. Negotiations with the town of Narragansett over the cable that would connect the Block Island turbines with the mainland have been suspended until late June because of resident concern.
In Narragansett and throughout the state, the price of electricity generated by offshore turbine farms has been a major concern of residents and business leaders.
Under the Deepwater power-purchase agreement approved by Rhode Island, the rate utility National Grid will pay for electricity from the Block Island farm starts at 24.4 cents per kilowatt hour and rises to 45 cents over 20 years.
The Cape Wind project in Nantucket Sound is charging rates starting at 18.7 cents and rising to 30 cents.
Several years ago, those rates were expected to be competitive with traditional sources of power, but the boom in domestic natural gas production has driven rates down. Natural gas rates are now approximately 8 cents per kilowatt hour.
Fearful that buying a large share of Rhode Island’s electricity from wind farms will drive up utility bills for local businesses, the Energy Council of Rhode Island, which represents corporate power users, has opposed Deepwater.
For the same reason, North Kingstown manufacturer Toray Plastics (America) Inc. tried to get the Deepwater power-purchase agreement thrown out in court.
Deepwater CEO Jeffrey Grybowski says Rhode Islanders should not expect the rates in place for the Block Island or Cape Wind farms will carry over to the federally leased, 200-turbine farm.
Advances in technology – such as larger turbines – and the economies of scale created by the larger project should cut rates in half from the Block Island project, to the “high teens to low 20s,” Grybowski said.
“At that price level, we can make the case that we are directly competitive with any other fuel source,” Grybowski said. “And the sticker price doesn’t tell the whole story. Gas and coal are emitting carbon and when you account for carbon and pollution-free power, you make up that differential quickly.”
Grybowski said if Deepwater is awarded the federal lease, he would expect to begin building turbines in North Kingstown by 2016 and installing them in the Atlantic by 2017 or 2018. •

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