A Stunningly Low Price for Offshore Wind: Massachusetts Moves Forward

September 26, 2018 | 9:28 am
Photo: Erika Spanger-Siegfried/UCS
John Rogers
Energy Campaign Analytic Lead

When the winning bid for Massachusetts’s first request for offshore wind proposals was revealed recently, it was a whole lot lower than any of us had imagined. That matters now, and for years to come.

Pricing to win

The winning bid was from Vineyard Wind, a joint venture of Copenhagen Infrastructure Partners and Avangrid Renewables, and one of 27 bids from three bidders (the three entities holding offshore wind leases off Massachusetts). And that winning bid was really—impressively—low.

The 800 megawatt (MW) bid was broken into two 400 MW pieces, based on the construction timeline. The first tranche was priced at an initial $74 per megawatt-hour (MWh)—7.4 cents per kilowatt-hour (kWh)—and the next tranche at $65/MWh. Each contract goes out 20 years, and goes up by 2.5% per year.

Average out those contracts in nominal dollar terms, then bring it back to present day so that we can understand it in our current reality, and, according to the independent evaluators, you end up at $64.97/MWh (2017$).

While expected prices for electricity from new power facilities in this region aren’t often public, that figure is lower than the headline-grabbing prices of around $80/MWh a few years ago for in-region wind and solar projects. And it’s cheaper than most other options for new electricity in New England, renewable or fossil. It looks impressive even in the context of options/prices available nationally.

And that price wasn’t just impressive; it caught us really off-guard. I had been expecting a price about twice as high, based on the prices and price trajectories in Europe, the most advanced market for offshore wind. And I wasn’t alone in being surprised: Reports on the announcement called the price “well below analyst expectations”, and quoted analysts saying it was “extremely low”, even “shocking”.

It’s a fine day when you can catch that many people by surprise in a good way.

What’s included

So what’s included in that price? In terms of inputs, some of the price-dropping pieces:

  • Investment tax credit (ITC). The federal ITC support for renewable energy projects is phasing out, but this project is aiming to move quickly enough to capture a portion of it.
  • Turbine size. Though the project developers haven’t specified what equipment they’ll be using, projects leading on price elsewhere in the world are using larger turbines and the economies of scale they bring. It’s a safe bet that this project will use turbines of at least 8 MW.
  • Project size. It’s notable that the project picked through the state bidding process is an 800 MW one, not one of the 200 or 400 MW proposals that were also on the table. That’s also important for economies of scale.

In terms of outputs, it’s important to consider that we’re not talking about just energy, but also renewable energy certificates (RECs), used for complying with renewable portfolio standards (RPSs) in Massachusetts and other states.

Not included in all the discussion of the bid is the remuneration that the Massachusetts utilities get for entering into long-term renewable energy contracts, a (somewhat controversial) recompense for what it means for them financially to be in deals like this. In this case, it’s 2.75% of payments made annually under the contract.

On the flip side, also missing from discussion of that low $64.97/MWh price are the range of pieces that Vineyard Wind committed to as part of the bid:

  • $10 million for an “Offshore Wind Industry Accelerator Fund”
  • $3 million for a “Marine Mammals and Wind Fund”
  • $2 million for offshore wind workforce development
  • $15 million ($1M/year for 15 years) for establishing a “Resiliency and Affordability Fund”, which will support solar+storage projects for resiliency and low-income ratepayer benefit in communities hosting pieces of the project

Overall, quite a package.

What it means for electricity bills

The next issue is what that bid like that means for our electricity bills. And there’s good news there, too.

The state’s Department of Energy Resources to the Department of Public Utilities strongly encouraged approval of the deal and the related contracts, suggesting that they “provide a cost-effective source of reliable offshore wind energy for Massachusetts customers, meet the requirements of Section 83C [of the 2016 Energy Diversity Act], and are in the public interest.”

And they make a strong case, including in terms of the bill impacts from the contract price:

This total price [energy plus RECs] is materially below the levelized projected costs of buying the same amount of wholesale energy and RECs in the market, which is projected to be a total levelized price of 7.9 cents/KWh in 2017 dollars over the 20-year term of contract. Over the life of the contract, the 800 MW Vineyard Wind Project is projected to provide an average 1.4 cents/KWh of direct savings to ratepayers.

The indirect benefits, they say, include the reductions in wholesale prices that come from adding a zero-fuel resource like this onto the system, reduced RPS compliance costs (from increased REC supply), and “the benefit of price certainty through a fixed cost contract.”

And that all adds up:

Overall, the total direct and indirect benefits to Massachusetts ratepayers from the long-term contracts with Vineyard Wind are expected to be 3.5 cents/kWh, or $35.29/megawatt-hours on average over the term of the contract, with total net benefits of approximately $1.4 billion.

They project, on average, that these contracts “are expected to reduce customer’s monthly bills, all else being equal, approximately 0.1% to 1.5%.” (The spread in price impacts has to do with the customer type, the particular utility, and the fact that the wholesale electricity supply is just one piece of a customer’s electricity bill.)

Given that this might be the first large-scale project in the country, what’s really remarkable is the fact that it’s projected to save ratepayers money at all.

What it means for the future of offshore wind

The next step for this project is to go through the rest of its permitting process, so that all the pieces can be better understood, and concerns can be assessed/addressed. And then it would need to get built—no small task, certainly; they’re shooting for a 2019 start date for construction.

But the contract price announcement has already made a difference; as big as this project is, its potential impact is much bigger, in a least a couple of ways.

First, having that price benchmark out there is going to really excite a lot of decision makers, and the public at large (maybe even beyond those who read blogposts like this). The new reality this creates in people’s minds changes the offshore wind conversation from “maybe a bit expensive at first but worth trying” to “so worth doing.”

Second, the next project to serve Massachusetts will have to be even cheaper. The state’s 2016 Energy Diversity Act put in place a 1600 MW offshore wind requirement, and this is the first piece. It also requires that each subsequent project cost less than the previous tranche. This project has set a really high (low) bar for every one that follows.

And, if things go according to plan, there’ll be a lot more following: According to the US Department of Energy’s latest offshore wind market assessment, the “pipeline” of potential projects in this country is up to 25,464 MW off 13 states.

This latest pricing is a strong testament to the power of technology, innovation, markets, and policy to really move the needle on clean energy and economic progress. Kudos to everyone from our legislators on Beacon Hill to the entrepreneurs, investors, and visionaries who are making offshore wind happen.

About the author

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John Rogers is energy campaign analytic lead at the Union of Concerned Scientists with expertise in clean energy technologies and policies and a focus on solar, wind, and natural gas. He co-managed the UCS-led Energy and Water in a Warming World Initiative, a multi-year program aimed at raising awareness of the energy-water connection, particularly in the context of climate change, and motivating and informing effective low-carbon and low-water energy solutions.