Posted on September 29, 2008 by Robert Whetzel
The nation’s first offshore wind farm may soon be built off the coast of Delaware. Although climate change and clean energy issues were part of the debate over this project, the Delaware wind farm project finds its origins in energy reliability and price stability legislation.
In 2006, consumer energy prices in Delaware increased dramatically, following the State’s deregulation of electricity generation. As part of the deregulation process, a three year freeze had been placed on energy rate increases in Delaware. When the freeze expired, energy prices across the United States were spiraling upward and rates in Delaware were adjusted to market prices. The result was a significant increase in consumer electricity prices, with the attendant public outcry and legislative demand for reform.
In an attempt to stabilize prices, the Delaware General Assembly enacted the Electric Utility Retail Customer Supply Act of 2006. The Act established a bidding process for long-term purchase power agreements, and directed Delmarva Power & Light Company (“Delmarva Power”), the State’s largest electricity service territory provider, to solicit bids for such an agreement. The legislation also mandated an integrated resource planning process in order to ensure the availability of sufficient and reliable resources over time to meet customers’ needs at a minimal cost.
The Delaware legislation required Delmarva Power to issue a request for proposals (“RFP”) for the construction of new generation resources within Delaware along with a proposed output contract for a term of no less than 10 years and no more than 25 years. The Delaware Public Service Commission (the “PSC”) and the Delaware Energy Office were tasked with ensuring that the RFP elicited and recognized the value of proposals that: (a) utilized new or innovative baseload technologies; (b) provided long-term environmental benefits to the state; (c) had existing fuel and transmission infrastructure; (d) promoted fuel diversity; (e) supported or improved reliability; and (f) utilized existing brownfield or industrial sites. The PSC, the Director of the Office of Management and Budget, the Controller General, and the Energy Office (the “State Agencies”) were tasked with evaluating the bids and determining whether to approve one or more of them.
Three bids were submitted in response to the RFP: one for an offshore wind farm, one for a combined cycle gas turbine, and one for a coal-fired integrated gasification combined cycle (“IGCC”) unit. After evaluation of the bids, both Delmarva Power and an independent consultant concluded that none of the bids met the evaluation criteria because, among other things, each of them proposed prices that were projected to be above market when the new generation facilities went on-line. The State Agencies, however, fashioned a hybrid energy supply approach, and directed Delmarva Power to negotiate for a long-term agreement for wind power with Bluewater Wind, LLC (“Bluewater”) and, concurrently, for an agreement with another generator to provide back-up power. These negotiations were to take place under the oversight of an independent third-party, who would be responsible for reporting to the State Agencies on the parties’ efforts to negotiate the agreements.
Delmarva Power and the bidders were unable to negotiate concurrent agreements for the wind farm and the “backup” generation source. The State Agencies next directed Delmarva Power and Bluewater to negotiate a final agreement for the wind farm. When the deadline for a this agreement was reached in December 2007, the parties had not agreed upon many important terms, relating to the capacity, price, and risk for the project. After reviewing the status of negotiations, the PSC staff recommended approval of the proposed terms with the condition that the cost of the wind farm be spread over all of Delmarva Power’s customer base. The PSC staff also recommended that legislation be pursued that allocated the costs of the wind farm across all energy consumers in Delaware. At that point, the State Agencies tabled the matter because there was not a consensus to approve the agreement.
The Delaware legislature then became involved in considering the wind farm power agreement, and conducted legislative hearings regarding the agreement and alternative energy technology and market trends. A legislative committee ultimately concluded that, while wind generation should be a significant component of the State’s electricity supply portfolio, Delaware citizens should not assume the large risk or pay the large premium contemplated in the (then) proposed wind farm agreement. This conclusion was not without opposition in the legislature.
During May and June, 2008, renewed negotiations took place between Delmarva Power and Bluewater, under the ever-present threat of further regulatory or legislative action. Ultimately an agreement was reached for the purchase of power and renewable energy credits (“RECs”) from the wind farm by Delmarva Power. This agreement coincided with legislation in the State that enabled the cost of the wind farm to be spread across all of Delmarva Power’s customer base, not just residential consumers and small businesses, and that substantially increased the value attached to the RECs for the wind farm. Under the agreement, Delmarva Power will purchase energy from the wind farm equal to the amount generated by a 200 MW nameplate facility (approximately 50 percent less than in the proposed December 2007 agreement.) The wind farm, however, may produce three times this capacity (i.e., up to 600 MW), and may secure additional customers for its power. The final agreement also provides termination rights to Bluewater, including termination based upon the content of final regulations to be promulgated by the Department of the Interior with respect to the permitting and siting of offshore wind farms.
The Department of the Interior proposed regulations on July 9, 2008, and comments were due by September 8, 2008. The American Wind Energy Association, of which Bluewater is a member, submitted comments arguing against a provision that would require developers to pay 2 percent of their operating revenue to the government. Bluewater has stated that such a provision will not be a “deal killer” for the Delaware project, but has also recognized as problematic the impending expiration of federal renewable energy subsidies.