This week, the state’s Department of Public Utilities approved a deal between NStar and the offshore wind farm that would raise residential customers’ bills by roughly $1 per month on average for the first year. Although the increases may not be welcome, officials involved in the project say the environmental benefits are worth it. And, they say, more offshore energy development is bound to bring prices down eventually.
In New England, most electricity is sold on the wholesale market, which is administered by a nonprofit organization called ISO-New England (ISONE).
In the market, there is a uniform clearing price that is used for all electricity being sold, regardless of whether it is generated by fossil or renewable fuels.
The price of energy sold on the market changes literally every five minutes based on fluctuations in demand, according to ISONE spokeswoman Marcia Blomberg.
Every day, ISONE predicts how much energy is needed in the region, then receives offers submitted by generators to sell their electricity. In the bids, the generators include price per megawatt of energy.
ISONE starts buying at the cheapest bid and continues to buy more expensive energy until it has all of the megawatts it needs. It then pays each generator the same price as the highest bid it purchased.
“It may seem counter-intuitive that we pay them all the same price, but that’s the model that is used in all organized competitive wholesale markets,” Blomberg said.
Demand can influence the price paid, but Blomberg said that, more often than not, the generators that can produce a lot of energy at a low cost drive the market.
“This is a system that encourages efficiency,” he said. “People who can produce low-cost units do better.”
In the past few years, the market has been driven by generators using natural gas as fuel. Hydraulic fracturing, also known as fracking, is a new practice in the gas industry that uses high-pressured water to shatter shale and provide drillers access to natural gas that was previously unreachable. The now widespread practice has driven down the cost of energy overall nationwide.
In New England, at $34.65 per megawatt hour, wholesale electricity prices were an average of 12.6 percent lower in October 2012 than they were in October 2011, in part due to widespread fracking, according to an ISONE report.
NStar spokesman Michael Durand said lower wholesale prices mean there is “more of a difference now between the traditional and renewable energies because the price of traditionally generated electricity went down when fracking became the next big thing.”
Most renewable energy is not sold on the wholesale market because its prices are not competitive enough. Instead, Durand said, contracts are negotiated between the developer and utilities or other organizations that want to purchase power directly from renewables.
Durand said the utility, which will purchase electricity from Cape Wind for 18.7 cents per kilowatt hour (or $187 per megawatt hour), “enters into contracts for the Abest price we can get while doing our part to have a diverse portfolio and support renewable energy.” He said the prices of renewable energy are generally more expensive because of construction costs.
With energy from fossil fuels, the cost of constructing a plant is relatively fixed, and the largest expense during production is largely determined by the cost of the raw materials that go into the plant, like coal or gas.
The opposite is true for renewable energy generation: The sun or wind is free, but building panels and turbines can be expensive.
Durand said he believes renewable energy will become more competitively priced as more wind farms are developed.
“As you develop more wind farms, especially offshore, there will be more research and development that will bring the prices of the different components down,” he said.
Even within wind energy, there is some price fluctuation.
Mark Rogers, Cape Wind’s spokesman, said the construction cost for offshore wind farms makes the resulting energy “about twice the price of land-based wind power.”
Nationally, the Department of Energy estimates that in 2012 onshore wind energy will cost $2,090 per kilowatt, as compared to offshore wind, which is projected to cost $5,440 per kilowatt.
The difference is rooted in the increased cost of developing offshore wind energy. Unlike onshore wind, offshore turbines have to be grounded in heavy and expensive foundations to be able to withstand the force of ocean currents.
But, Rogers said offshore wind does have its advantages. One of the highest peak times for energy demand is during hot summer months. During those months, there is less wind on land, putting onshore wind farms at a disadvantage. By contrast, sea breezes would keep offshore turbines spinning during peak periods.
“The location of the turbines is key to how much power they produce,” Rogers said. “It makes offshore more valuable during the summer.”
He added that while energy prices may be more expensive for renewable overall, he believes it is worth it.
“There are a lot of external costs that don’t show up on your energy bill that you avoid with wind,” he said. “You don’t have as much pollution in the air, which reduces health-care costs. You aren’t importing as much fuel, so you don’t have to pay taxes for the related national defense.”
Correction: Cape Wind
A report Thursday on Cape Wind and energy prices misconstrued the price of offshore and onshore wind energy. Nationally, the Department of Energy estimates that in 2012 the total cost to construct an onshore wind-powered electric generating system will be $2,090 per kilowatt of system capacity, as compared to an offshore wind facility, which is projected to cost $5,440 per kilowatt of capacity. ISO-New England also sells power, or megawatt hours, not energy.
Additionally, the report incorrectly attributed a quotation: Mark Rogers, spokesman for Cape Wind, said the prices of renewable energy are generally more expensive because of construction costs and that more research and development will bring the prices of offshore energy down.