Federal regulators approved on Wednesday a permit for the nation’s first offshore wind farm, a project located off the coast of Cape Cod, Massachusetts.

The decision for the 130-turbine farm comes after nine years of review, and is a $1 billion shot in the arm to the American offshore wind industry, which is far smaller than those in Europe and China.

The permit was awarded by Interior Secretary Ken Salazar to private venture firm Cape Wind Associates, and paves the way for utilities to power homes and businesses using electricity generated by powerful ocean breezes.

The project’s turbines would be located five miles offshore in Nantucket Sound, and cover 24 square miles.

They will be 440 feet above the water at their highest point, the blade tip.

But the project is far from completion. Several regulatory challenges remain for the project to even begin, according to a New York Times report:

The Cape Wind project has been a matter of fierce contention for years, splitting politicians and environmental groups. While some environmentalists are prepared to go to court to stop the project, other major groups, including the Sierra Club and Greenpeace, support it.

Senator Edward M. Kennedy of Massachusetts, whose family compound overlooks Nantucket Sound, had opposed the project, saying it was a giveaway to a private developer. But Mr. [Deval] Patrick, also a Democrat, has supported it.

According to that article, Ian Bowles, secretary of the Massachusetts executive office of environmental affairs, called the news “the shot heard ’round the world for American clean energy.”

Several more offshore wind farms have been proposed along the East Coast and around the Great Lakes, whose shallow floors are optimal for such projects.

The arguments for such projects:

• lean, renewable energy that means less reliance upon fossil fuels.
• Fewer greenhouse gases emitted.
• Hundreds of new construction jobs.

UPDATE:National Grid Given Approval To Buy Half Of Cape Wind Power

NEW YORK (Dow Jones)–The Massachusetts utility regulator approved the sale of half of the power generated by a long-planned wind farm off Cape Cod to National Grid PLC (NGG) Monday.

The Massachusetts Department of Public Utilities approval is the latest milestone for what’s expected to be the nation’s first offshore wind project, allowing National Grid to buy the power under a 15-year contract at a price that’s about double current market prices.

Regulators, however, denied the company’s petition to approve a second power-purchase agreement for the remaining output from the project, known as Cape Wind, because it did not specify a buyer.

Cape Wind, a 130-turbine project that will span 25 square miles of the Nantucket Sound, is expected to begin construction next year, after more than nine years of planning. The controversial project has faced opposition on a range of issues from the cost to consumers to the impact on water views and local fishing grounds.

National Grid, an electric delivery utility in Massachusetts, expects the purchase of Cape Wind’s output to raise consumers’ bills by 1% to 2%.

The agreement with National Grid will facilitate the developments of renewable energy generation to meet state regulations and “does so with strong protections for ratepayers,” Ann Berwick, chair of the state’s utility agency, said in a statement. Cape Wind also offers benefits not available from any other renewable source and these benefits “outweigh the costs of the project,” she said.

Cape Wind president Jim Gordon said the “long-term contract not only secures an abundant, inexhaustible clean energy resource but protects consumers from rising fossil fuel and environmental compliance costs.” The developer is pursuing multiple options to sell the remaining power not contracted to the electricity transmission company.

Purchasing half of the offshore wind project’s generation will help National Grid fulfill “a good piece” of the renewable portfolio requirement, said Tom King, president of National Grid’s U.S. division, in an interview. Massachusetts requires that about 3.5% of the state’s power be generated from alternative sources.

King isn’t surprised another party has not stepped up as a counterparty for the second contract that was rejected because “it probably makes sense for them to watch us go through the proceedings.” The second contract was seen as a way to make it easier to find a buyer for the remaining power and secure economics for the project.

The contract between National Grid and Cape Wind, detailed in a 374-page order, sets the initial price for power at 18.7 cents per kilowatt hour in 2013. That will rise by 3.5% a year over for the life of the agreement.

Under the current contract, power costs are more than double the rate state residents currently pay. Electricity prices in the Northeast market are among the highest in the country, even though prices have fallen with the sharp drop in natural gas prices in the last two years.

King said the price is justified because it reflects not only the price of power, but the cost of transmission and renewable attributes for the new capacity. National Grid will have the right to extend the contract for another 10 years. The new contract could see power prices set below market rates, the state agency said.

In voicing opposition to the National Grid contract, the Alliance to Protect Nantucket Sound estimated that ratepayers could be forced to cover $4 billion in costs from Cape Wind if the remaining half of the power is sold at a similar price. The organization cited other New England projects that bring renewable hydro and wind power at lower costs to consumers.

The Massachusetts utility regulator expects the new wind generation to moderate peak electricity prices in the region and add 162 jobs over the life of the contract. The agency said the price for Cape Wind power can go up if the developer is unable to tap into federal subsidies, but prices would fall if financing costs were reduced.

National Grid shares closed up 0.5%, at $46.84, Monday. The stock is down 14% this year.

-Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

U.S. wind developers see prices easing

By Scott Malone

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: Quote, Profile, Research, Stock Buzz) 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.

PRICE SUPPRESSION

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: Quote, Profile, Research, Stock Buzz) 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)