The contract signed by Bluewater Wind and Delmarva Power came with a clause that allows Bluewater to walk away without penalty if the project doesn’t look economically feasible within the next two years.
Monday’s $800 million, 25-year contract is for a wind farm planned a dozen miles offshore of Rehoboth Beach.
Jim Lanard, a Bluewater spokesman, said Tuesday the escape clause should not be a big concern, because the company can’t envision a scenario where it would be forced to void the contract.
And Bluewater doesn’t have to recruit other customers and build a bigger wind farm to make it profitable, even though it plans to pitch it to other customers to enable the project to grow in size and output.
Already the company is exploring how the Delaware project might be meshed with Bluewater’s submission in New Jersey’s bid process for a company to build a separate wind farm in the Atlantic Ocean.
And with the Delmarva contract established as a foundation, local corporations including the DuPont Co. are evaluating whether wind power might fit into their future plans.
But Lanard said the reworked contract with Delmarva works for Bluewater and its parent, Babcock & Brown.
“It may be that the project is perfectly sized now,” Lanard said.
Those close to the long negotiations say the contract is much different from earlier versions both in terms of the amount of electricity Delmarva agreed to buy and in the financing.
Bluewater had long contended that the bigger the project, the better its viability. But the project announced Monday was for a Delmarva purchase of up to 200 megawatts of electricity – a purchase half the size of what Bluewater proposed, and Delmarva rejected, in December.
That would translate into a wind farm with fewer turbines, with construction costs spread over a smaller sale contract. Several factors allow that to work, Lanard and outside observers said.
Lanard said building a smaller wind farm may keep vessels and workers at sea for less time, costing less money. And the contract was revised to give Bluewater a potentially lucrative second stream of revenue to help defray costs.
For each unit of electricity produced, wind farm developers get a subsidy called renewable energy credits that are tradable on Wall Street.
Under the earlier contract, Delmarva would have bought all 1.1 million credits associated with the project, leaving Bluewater with nothing to sell. The new contract calls for Delmarva to buy just 200,000 credits at a much higher price, leaving Bluewater with 400,000 to sell.
Assuming today’s credit values, that could fetch Bluewater $8 million a year over 25 years.
The smaller number of credits reflects the smaller size of the project: It’s down from 150 turbines to between 55 and 70. Delmarva would buy no more than 200 megawatts of power at any given time, down from 300. The price for the electricity purchase remains the same.
Bluewater still would need to sell the credits to reap the revenue, and needs a healthy regional market for the credits.
Most utilities in the region operate with state mandates that a certain percentage of their power is bought from non-fossil-fuel generators in future years, or purchase renewable energy credits.
Estimates and costs
Bluewater officials said the viability of the project also remains at the mercy of costs that still are estimates.
The company will be moving forward with detailed engineering that will help pin down what it will cost to build the wind turbine farm, move the electricity to shore and connect it to the power grid through a substation.
Nathaniel Bullard, a Washington-based senior analyst with New Energy Finance of London, said one critical factor will be the the price of steel.
“Everything in a wind turbine is steel: the tower, the gears, the control systems,” Bullard said.
The price of iron ore, a key ingredient in steel, has risen roughly 80 percent since last year. Lanard said Bluewater can build the project even if the price of steel increases.
Jeremy Firestone, a University of Delaware associate professor, said building a bigger wind farm doesn’t always translate into more profits,
A smaller wind farm requires less infrastructure, including fewer cables to shore, and fewer substations on shore, he said.
Looking for other buyers
Bluewater is working with its government supporters to find additional buyers, reaching out to talk with other electric utilities in the mid-Atlantic region, industrial users, governments and universities.
One candidate is close to home: the state of Delaware is considering buying power from the project when its existing contracts expire in two years.
And Lanard said Sen. Tom Carper, D-Del., is speaking to fellow senators and governors in other states to try to find additional buyers. New Jersey Gov. Jon Corzine also will be asked to consider buying power from the Delaware project for his state, he said.
New Jersey is planning to build its own, separate offshore wind project, and Bluewater is one of the bidders to build it.
Lt. Gov. John Carney, who was involved in the negotiations between Bluewater and Delmarva, imagined a larger wind farm in which one transmission line went to shore in Delaware, and other went to New Jersey.
“It’s in everyone’s interest for the project to be built as large as possible,” Carney said.
His opponent for the Democratic governor’s nomination, Treasurer Jack Markell, said residents of other states may find it in their interest to buy from the Delaware project rather than build their own.
“There is such an advantage to scale when you’re building big infrastructure projects like this,” he said.
Meanwhile, area businesses are weighing whether it makes sense for them to buy in.
DuPont spokesman Dan Turner said: “We’re going to review the full agreement in a little bit more detail, and work with the appropriate organizations moving forward.”
By Aaron Nathans
25 June 2008