Cape Wind and the fiscal cliff; The wind farm’s tax credit insulation 

The last-minute fiscal cliff agreement not only resolved the debate in Washington over tax rates, it also extended the nation’s wind energy tax credits for another year. The extension was a big break for Cape Wind, but not as big as you might think.

With the blessing of state regulators, Cape Wind had already protected itself financially in case the credits were allowed to lapse. The fine print of the power purchase contracts Cape Wind negotiated with National Grid and NStar guarantees the Nantucket Sound wind farm a base rate for its electricity if it qualifies for the tax credits and higher, compensatory rates if it does not.

Now, with Congress extending the wind tax credits and Cape Wind likely to qualify for them this year, the higher electricity rates will probably be avoided. In other words, federal taxpayers will pick up a significant chunk of the cost of Cape Wind instead of Massachusetts utility customers.

The federal wind energy credits were scheduled to expire on December 31, but at the last minute a one-year extension was tucked into the broader fiscal cliff agreement on income tax rates. Congress made any wind project that begins construction by the end of this year eligible for either a production or an investment tax credit. The production credit pays up to 2.2 cents per kilowatt hour for the first 10 years of a project. The investment tax credit is equal to 30 percent of the cost of a project. The estimated cost to federal taxpayers of the two credits is $12 billion.

Most in the wind industry let out a sigh of relief when the credits were extended. Industry officials told the Globe that the deal will put the industry into overdrive this year. State officials also hailed the wind tax credit extension as crucial to the continued growth of the industry.

But Mark Rodgers, the spokesman for Cape Wind, was more restrained. He issued a statement that said nothing about the impact of the tax credit extension on Cape Wind, which is scheduled to start construction this year. Instead, his statement said the wind incentives would allow the wind power industry to continue creating jobs and producing clean electricity. He also noted the wind incentives have bipartisan support in Congress.

What Rodgers didn’t mention in his statement was that Cape Wind had already partially insulated itself from any Washington inaction on the wind credits. The wind farm’s contracts with National Grid and NStar require the utilities to pay Cape Wind higher rates if the wind farm fails to qualify for the tax credits. Those higher rates would be passed along to the utilities’ customers.

According to the National Grid contract with Cape Wind, the wind farm will be paid 18.7 cents per kilowatt hour initially, a price that rises 3.5 percent a year for 20 years. If Cape Wind qualifies for the production tax credit but not the investment tax credit, the initial price paid to Cape Wind would be increased to 22.8 cents per kilowatt hour. If Cape Wind qualifies for neither tax credit, the price would be increased to 23.5 cents per kilowatt hour. In other words, the price of Cape Wind power would go up 25 percent if the wind farm failed to qualify for the tax credits. In testimony before state regulators, utility officials said the price increases would offset only about half of Cape Wind’s revenue loss from a failure to secure a federal tax credit.

James Daly, director of electric and gas energy supply for NStar, told regulators last year that the pricing arrangement benefits customers. “Whereas for other renewable energy facilities the absence of the federal tax credits will be absorbed and reflected in their internal pricing, in the case of the Cape Wind power purchase agreement, only about half of the corresponding amount will be reflected in the project’s pricing,” he said in written testimony. “In this manner, the proposed power purchase agreement treats this contingency in a way that is more likely to be favorable than would be found in long-term power purchase agreements with other renewable energy facilities.”