Calculating the Savings
The cost of electricity is established through a complex market process with a number of variables including the amount of electricity demanded, the cost and availability of power plants, fuel costs to generate the electricity, the amount of electric transmission capacity, etc. Computer models can simulate this environment and be used to estimate the impact of new power plants, changes in fuel cost, and other scenarios.
La Capra Associates (La Capra), a leading energy consulting firm with over 20 years of experience, estimated the financial impact that the Cape Wind project would have on the New England energy market. La Capra used PROSYM software, a well-established dispatch simulation software program, to develop a model of the wholesale electricity market in northeast North America (includes Pennsylvania and Maryland up through New England, and the three neighboring Canadian provinces). The results from La Capra’s model have been used in utility rate filings, litigation hearings, and bond financings in New England and other states in the US.
The La Capra model uses projections of future demand, fuel prices, existing unit retirements, new unit additions and power plant-specific information to generate hourly estimated clearing prices. Depending on the resources available each hour, the PROSYM dispatch algorithm selects the lowest cost combination of bids from generating sources and available imports to meet the electricity demand in the region modeled. In essence, it simulates how the electricity spot market in the Northeast works. To ensure greater accuracy of the results, La Capra compares its forecast to historical trends and includes methodologies that capture "price spikes" and the impact weather has on load.
To establish how the Cape Wind project could affect prices, La Capra developed two simulations of the regional energy market for 2005-2009 (the first five years Cape Wind is expected to operate). The first was a base case based on recent long-term planning assumptions. The second simulation added the projected monthly energy output from the Cape Wind project, which was calculated based on typical meteorological data. Based on a comparison of the two simulations, along with judgement regarding the range of other potential outcomes, La Capra found that the addition of Cape Wind electricity would exert a downward pressure on wholesale electricity market prices, leading to a savings of approximately $25 million per year for the New England electricity market.
The methodology used to develop the projections is sound and consistent with other wholesale market price forecasts. The potential savings could be greater, if the market experiences extremely high fuel prices or tight supply conditions. In developing the simulation, La Capra used conservative figures; for example:
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When developing the range of reasonable electricity prices, La Capra considered both declining fossil-fuel prices as well as recently traded electricity forwards, which projected an increase in electricity prices. However, to the extent that higher fuel prices (reflective of late 2000 and early 2001) occur again, the suppressive effect of the Cape Wind project on regional energy clearing prices would be greater than shown here. |
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La Capra accounted for only occasional hours of tight market conditions and "price spikes" in New England because generating plants currently under construction will come on-line and provide new capacity. The La Capra analysis indicates that such price spikes will be relatively infrequent in the next several years. If tight market conditions occur more frequently, it will cause higher electricity prices, which could significantly increase the savings associated with Cape Wind. |
The savings estimated by La Capra only deal with electricity market prices. In its study, La Capra also noted that the Cape Wind project will result in lower overall pollutant emissions in New England, and that it might suppress natural gas prices for customers because it could reduce the region’s demand for natural gas. Also, by increasing the supply of renewable generation in New England, the project will reduce the costs of compliance with Massachusetts’ Renewable Portfolio Standard.
La Capra Associates is a Boston-based consulting firm specializing in energy planning, market analysis, and regulatory policy in the electricity and natural gas industries. Since its founding in 1980, La Capra has earned a reputation for practical and objective advice and for timely, accurate, and innovative analyses. La Capra has provided services at the forefront of change in the industry, including areas such as marginal cost pricing, integrated resource planning, competitive procurement of independent power supplies, and demand-side management. It has presented expert testimony or opinion before state or federal regulatory agencies, financial institutions, and corporate management and boards and has consistently withstood detailed scrutiny.
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