BOSTON (Reuters) - Two companies aiming to build wind farms off the U.S. northeast coast expect the cost of electricity generated from sea-based turbines to fall as the industry grows.
No offshore wind farms have yet been built anywhere along U.S. coasts, and the rates that Deepwater Wind and Cape Wind have proposed charging consumers for the electricity they would generate are much higher than the public had expected.
Those rates — about three times higher than the prevailing cost of electricity in New England over the past five years — reflect the poor economies of scale of a nascent technology and are also inflated with renewable energy tax credits that utilities would be able to resell, executives told the Reuters Global Climate and Alternative Energy Summit in Boston.
They argued that wind farm operators, who have high capital expenses but no fuel costs, would help to push down electricity prices across the region over time.
“Prices are coming down,” said Bill Moore, the chief executive officer of Deepwater Wind, which plans to build a small installation of five to eight turbines off Block Island, as well as larger projects further off Rhode Island and off New Jersey.
“If you look back over the 20 years that commercial wind has been built onshore, over that time we saw declines in pricing that were on the order of 60 to 80 percent and I think over a similar period we’ll probably see declines in our pricing of a similar amount,” Moore said. “It just has to do with scaling up the industry.”
The developer of Cape Wind, a 130-turbine installation planned for Nantucket Sound off Massachusetts’ Cape Cod beach area, had a similar prediction.
“With the learning curve, with developing the port infrastructure, developing the manufacturing supply chain, getting engineering, procurement and construction contractors more familiar with the execution and risks of building these things, over time the cost of these types of projects will drop, just as what happened in the land-based business,” said Jim Gordon, Cape Wind’s CEO.
Deepwater, which is backed by hedge fund D.E. Shaw, plans to sell electricity to utility National Grid (NG.L) at a rate of up to 24.4 cents per kilowatt hour. That is higher than the 18.7 cents per kilowatt hour rate the larger Cape Wind project has agreed, also with National Grid.
“Block Island is an expensive project. It has some obvious dis-economies of scale,” Deepwater’s Moore said. “We knew that going in, but it still serves a useful purpose.”
The upside to starting with a small-scale wind farm is that it will be cheaper to build, Moore said. The developers expect the installation to cost $205 million and plan to seek $150 million in construction loans to fund it.
That’s far lower than the tab of more than $1 billion it will likely take for Deepwater’s other proposed projects, installing about 100 turbines off the coasts of Rhode Island and New Jersey.
“We’re looking at pricing that is, for these larger projects that we’ll be submitting to various power competitions this fall, maybe as much as one-third lower than the Block Island price,” Moore said.
Deepwater Wind plans to build its larger installations about 15 miles off the coast, a costly decision but one that will make them all but invisible from the coast — and head off one of the major complaints raised about Cape Wind.
Both projects will also push power electricity prices down across the region through a process called price suppression.
Electric grid operators meet demand by buying power from a range of producers, from operators of coal and gas-fired plants to wind farms, which have a range of prices. Grid operators then meet demand — which varies with temperature and time of day — by bundling the offers of the lowest-priced power producers. All of the accepted bids are paid at the price quoted by the most expensive of the accepted bids.
Wind farms, which have minimal operating costs once their facilities are built, undercut the traditional electric producers in this process by offering a bid price of zero.
“Every hour that Cape Wind operates, it will displace a higher cost, more heavily polluting power facility,” said Cape Wind’s Gordon. “If we bring in 300 or 400 megawatts of Cape Wind’s power, we can help knock off 300 or 400 megawatts of the highest priced unit.”
Four hundred megawatts of electricity is enough to meet the needs of 3.2 million typical American homes.
As demand in the United States rebounds from its recessionary level and the rapidly growing economies of India and China demand ever more energy, prices of traditional fossil fuels including coal, natural gas and oil will likely march upward over the coming decades, making their initial rates seem more competitive the executives said.
Cape Wind, which plans to use Siemens AG (SIEGn.DE) turbines, and Deepwater, which has not yet chosen its suppliers, are two of more than a dozen proposed offshore wind farms that aim to be the first in the United States.
Reporting by Scott Malone; Editing by Derek Caney, Gary Hill