Maine regulators look to offshore wind

Maine state regulators have found "tangible economic benefit" from Statoil North America's proposed offshore wind Hywind Maine Project that weighs in favor of approving the project's associated revised term sheet

Apr 1st, 2013

Maine state regulators have found "tangible economic benefit" from Statoil North America's proposed offshore wind Hywind Maine Project that weighs in favor of approving the project's associated revised term sheet.

"Although we recognize that there is an inherent risk in approving the proposal in that Maine may not see all of the economic benefit that is promised, that is a risk that the legislature was aware of when it passed [the Ocean Energy Act during its 2010 session] and approved the use of ratepayer money for the purpose of facilitating the development and operation of offshore wind power and tidal power projects," the state Public Utilities Commission (PUC) said in its Feb. 26 order.

The project is a 12 MW deep-water floating offshore wind facility to be built in the Gulf of Maine at a location where the ocean is at least 300 feet deep, and which is no less than 10 nautical miles from any land area of the state.

The transmission interconnection to Maine is contemplated to occur in the Boothbay region, and the project is expected to begin commercial operation in 2016, the PUC added.

In October 2011, Statoil submitted a request for a commercial wind lease on the Outer Continental Shelf off the shore of Maine to the Bureau of Ocean Energy Management (BOEM) identifying the proposed location of the project as a 22.2 square mile area located 12 nautical miles from the coast and 18 nautical miles from Boothbay Harbor.

Term sheet information

In August 2012, Statoil proposed a term sheet containing the essential terms of a long-term contract for energy and capacity from the project for PUC consideration. The initial term sheet included two pricing options, including one with a starting contract price of $290 per MWh with a fixed annual escalator of 1 percent and a yearly adjustment for the annual rate of change in the aggregate retail sales of distribution voltage customers of Central Maine Power (CMP), Bangor Hydro Electric and Maine Public Service.

In January, Statoil proposed a revised term sheet for a long-term contract for the project that provides for a contract term of 20 years beginning on the commercial operations date and contains an initial price of $270 per MWh for energy provided during the first year of the contract.

For each subsequent contact year over the contract term, the contract energy price escalates at 1 percent per year plus the yearly growth in the aggregate retail sales to distribution voltage customers, the PUC added.

The quantity of energy to be bought under the contract is subject to an annual cap of 41 GWh.

The revised term sheet also includes non-pricing terms including a commitment by Statoil to use commercially reasonable efforts to expend at least 40 percent of the capital investments and 40 percent of the operating expenditures for the project in Maine and to establish and maintain the operations center for the project in the state, the PUC added.

"We find that Statoil has the technical and financial capacity to develop, construct, operate and decommission and remove the project," the PUC said, noting that any commercial lease authorized by BOEM must contain provisions for decommissioning and site clearance procedures.

The PUC also said that it finds that Statoil has shown a commitment to invest in manufacturing and other facilities in Maine, and that it has taken advantage of all federal support for the project, including subsidies and tax incentives. For instance, Statoil has been awarded a $4 million U.S. Department of Energy grant to commercialize the Hywind technology.

Benefits to state

"Statoil's good-faith commitment to utilize Maine suppliers in a future, larger Northeast Wind Farm has the potential to bring economic benefits to the Maine economy beyond the scope of this pilot project," the PUC said.

The PUC said it estimates the present value (NPV) of the above-market costs of the Statoil long-term contract to range from $52 million to $76 million, or $190 million nominally. The project will involve investment of just over $120 million initially in 2013-2016 to build the project and then just over $4 million annually in operations and maintenance expenses for 20 years.

The quantified economic benefits to Maine for the project are estimated by Dr. Charles Colgan of the University of Southern Maine to be $33 million (NPV) and $63 million (nominal) assuming that the expenditures made by Statoil in Maine reach but do not exceed the level committed to by Statoil of 40 percent of the capital investments and 40 percent of the operating expenditures.

The PUC also said that the overall project investment is estimated at $140 million to $150 million on a present value basis, with Statoil financing the initial investment in the project from its own funds and other sources, including DOE grants.

"[T]he above market costs to be paid by Maine ratepayers of $52 million-$76 million will leverage as much as twice that amount in additional investment in the Maine project," the PUC said, noting that payments under the Statoil contract would not begin until the project is operational and be made only when the project is generating electricity.

Conditional approval

The PUC said the contract should include a provision to address the risk of the contract violating a statutory rate impact limitation, and there should be a capacity term in the contract. "However, we do not expect CMP to have any significant role or exposure to risk in matters related to qualifying or bidding the capacity in the [ISO New England] market, and direct that the contractual terms regarding capacity ensure that result," the PUC said.

Also, the PUC's approval is conditioned upon a provision in the contract that requires Statoil to elect or waive its termination right within 90 calendar days of being notified of an adverse DOE funding decision with respect to the project. Furthermore, the project must be built and operating within five years of the date the contract is finalized.

The PUC also said that Statoil is to submit, before Dec. 1, 2015, a business case for the development and construction of an offshore wind farm no less than 100 MW in the Gulf of Maine.

Commissioner dissent

Commissioner Mark Vannoy dissented from the majority decision saying that rather than encouraging Statoil N.A., to take on the risk to advance to an economically viable commercial technology, the term sheet compensates Statoil, at about seven times the current wholesale market rate, for what amounts to a conservative reproduction of the Hywind concept.

The primary area of risk in getting the project built is that of permitting, Vannoy said, adding that the term sheet mitigates that risk by allowing the company to opt out of the project at any stage before Dec. 31, 2015.

Vannoy also said that the ratepayer costs do not flow until the project reaches the commercial operation phase and the company begins receiving payment for the electricity that the pilot project produces. At that point, based on the amount of power produced, the above-market payments begin to flow at about $9.5 million a year for 20 years, Vannoy said.

Among other things, he said the company's term sheet falls short in the area of significant advancement beyond the Hywind prototype that shows that the Hywind approach holds the promise of commercial viability through future expansion from a pilot to a full-scale farm.

To bring its risk into a more commensurate relationship with its compensation, the company could have maximized generator size per floating structure, for instance, Vannoy said.

This report is republished by permission from TransmissionHub

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