A proposed wind farm off the coast of Martha’s Vineyard in Massachusetts has indicated that it can produce electricity starting at 7.4 cents per kilowatt hour. This will purportedly save Massachusetts customers $1.4 billion dollars over 20 years and reduce monthly bills by between 0.1 percent and 1.5 percent. Whether they can fulfill that pledge is questionable, but to even attempt to do so requires huge subsidies from the government paid for by the American taxpayer. Federal tax credits and a long-term power-purchase agreement are what make the project feasible. The costs of installing turbines in the ocean are very high, but the investment tax credit can significantly cut the capital costs for developers—by 30 percent. Thus, a $2 billion project would receive $600 million from the federal government in the form of tax credits.
According to the Massachusetts Department of Energy Resources, the Vineyard Wind project will generate an increased renewable energy credit supply at 6.5 cents per kilowatt hour and thereby lower energy market prices. The project is estimated to save the Massachusetts ratepayer approximately 3.5 cents per kilowatt hour over standard energy sources with a total net benefit of $1.4 billion over 20 years. Massachusetts has the highest residential electricity prices in the lower 48 states.
Massachusetts has fought the offshore wind battle before with a proposed wind farm off of Cape Cod that was canceled after a prolonged fight with local residents. The only offshore wind farm in operation in the United States is off of Block Island—a 30-megawatt facility off the coast of Rhode Island that cost $10,000 per kilowatt to construct—over 10 times more than the cost of a new natural gas combined cycle unit. According to the Energy Information Administration, the cost of unsubsidized offshore wind is 13.8 cents per kilowatt hour—about double what Vineyard Wind is projected to cost.
The 800-megawatt proposed wind farm will be located 15 miles (24 kilometers) south of Martha’s Vineyard. Construction is expected to begin in 2019 because the investment tax credit expires for developments that begin construction after 2019. The Vineyard Wind farm is proposed to be built in two stages. The first 400 megawatts slated to go into commercial operation in 2022 would start at 7.4 cents per kilowatt hour; the second 400 megawatts, going into operation in 2023, would start at 6.5 cents per kilowatt hour. The price of each contract is expected to increase by 2.5 percent annually over the contract’s 20 years (the wind turbines’ lifetime), resulting in the two deals having an average price of 8.4 cents per kilowatt hour. Each phase will be covered by 20-year power purchase agreements with three utilities operating in Massachusetts: National Grid, Eversource Energy, and Unitil.
The large drop in price for this large U.S. offshore wind farm is surprising since in Europe, where the bulk of the world’s offshore wind industry is located, offshore wind prices dropped only recently below 10 cents per kilowatt hour. And Europe has been able to install offshore wind turbines in much more shallow waters than those proposed for U.S. offshore areas. Vineyard Wind is owned by two Europe-based companies—Copenhagen Infrastructure Partners and Avangrid Renewables—each with a 50-percent interest.
The large decline in the price of offshore wind is attributed to several factors. Vineyard Wind plans on using turbines capable of generating at least 8 megawatts and perhaps as much as 10 megawatts, compared to turbines that previously generated 2 or 3 megawatts each. Because installation accounts for much of the project’s cost, increased size helps offshore wind achieve an economy of scale.
Besides technology improvements, increased competition and the lower cost of capital have helped to lower prices. The cost of borrowing money to finance offshore wind projects has declined as those investments are seen as less risky.
Also helping economy of scale is the selection of an 800-megawatt proposal over a 400-megawatt proposal for Vineyard Wind by the Massachusetts Department of Energy Resources. The Department indicated the 800-megawatt proposal was “superior to other proposals,” and was likely to produce significantly more economic benefits to ratepayers. Economy of scale arises due to the project’s fixed costs being spread over a greater amount of turbine capacity.
Along with the subsidies and purchase power agreements are the renewable energy credits that are a result of the Regional Greenhouse Gas Initiative (RGGI), of which Massachusetts is a member. Massachusetts has an initial goal of installing 1,600 megawatts of offshore wind by 2027, but the state’s lawmakers recently approved legislation to double that figure.
Other State Initiatives
New York, New Jersey, and Maryland are targeting a combined addition of over 6 gigawatts of offshore wind capacity by 2030. Maryland’s Public Service Commission has committed to subsidizing two wind farms off Ocean City with a combined cost of over $2 billion. But local officials are leery about the projects due to fear of the town losing its commercial fishing industry or having tourism decline. New Jersey has a goal of building 3,500 megawatts of offshore wind by 2030. New York’s plan is for 2,400 megawatts. Connecticut is proceeding with a solicitation for 200 megawatts of offshore wind capacity, while Rhode Island is focused on 400 megawatts.
Whether Vineyard Wind can live up to its price forecast is yet to be seen. In its favor are subsidies and mandates that include the federal investment tax credit, the state’s renewable energy mandate, power purchase agreements, RGGI, among others. But as noted above, subsidies are just a transfer from the consumer to the taxpayer and are not a free good. As more and more projects are added, the costs to the taxpayers for these sources grows rapidly.