Here is the problem with Bluewater Winds term sheet. They want to pass on increases caused by rising costs of materials used for turbines, and changes in the foreign exchange rate.

They also asked for a 2.5% cost of living increase per year………

Without those two roadblocks we could be moving forward as we speak……

That may not sound like much. But due to the very inflationary cost of those materials needed to make turbines over the last five years, by 2013 when the deal is expected to go forward, the cost of turbines could be off the charts. According to the deal with Delmarva, those costs would have been spread over twenty five years. And if the worse case scenario were to occur, those costs, times the accumulating 2.5% per year, would have had us paying 2.5 times more than the most expensive state pays now…….

Rarely does the worst case scenario happen. But if it were to materialize, the valid question remains. Should we be the ones to pay, or should Babcock and Brown, which now has ownership of Bluewater Wind be the ones who pay up… ? The staff at the PSC, after reading the Independent Consultant’s report, has decided that the potential risk to Delaware citizens is too high……

But one should note that this report exists in a vacuum. It is accurate in assessing some of the potential risks that may occur. However, all of us should realize that great risks abound in our oil and gas markets as we speak.. Are the potential risks of building a wind farm dwarfed by the possible risks caused by new tensions in the Middle East? Perhaps. Obviously speculators have read the tea leaves over the debacle with Iran, and have considered today’s price of $94 a barrel to be a good investment……based on what is coming………

So whereas we may pay more for wind, the report fails to consider that we may pay even more for natural gas, which will have to be shipped from the Mideast in liquid form. To restate the obvious, war with Iran could recast Bluewater Wind in an even better light……

The PSC and the Independent Consultants both note that requesting such a cushion as was done by Bluewater Wind, is rather rare in energy regeneration bids….It would make sense if one were attempting new technology, but one of the defenses of Bluewater, was that this technology had been tested in Europe and was performing well.

If it is doing well, why should Delmarva customers pay the cost overruns of the investment? Anyway, isn’t that the idea of investment that one puts down one’s own money, then collects enough premium back to remain profitable?

Bluewater was also stung by a credibility issue. The problem was this. It’s initial proposal of a six dollar bid per Kw/hour at the outset of the independent consultant’s number crunching, rose to a potential of $55 a Kw/ hour. Probably prices would have settled in the $20’s, but competitively, that cost is still too high……

The reason for the initial change, from $6 to $10.59, was the trimming done by the PSC which removed 50 turbines. The loss of 50 turbines increased the cost per turbine, and by reducing the power created by the wind-farm, meant fewer homes could be serviced and fewer dollars could be brought in. Obviously if Bluewater’s costs increase, and their revenues drop, they will have to charge more per person for pay for electricity…Duh!

(This factor was not under Bluewater’s control. The PSC mandated this….Bluewater cannot be blamed.)

Another huge factor causing cost overruns is the time stretching from the initial go ahead to the point of actually providing electricity. Just a year or two difference in pulling the switch, can create huge cost increases that are passed on to us…..The real tragedy is that “Waiting for Godot” has cost us tons of money. Had we started with the studies on June or July, our costs and future prices could have been reduced even further.

The contract specified that Bluewater would provide up to the cap of 300 MW. Anything over that amount could be sold on the PJM (grid) for others to by. This amount is sold much cheaper than the contracted amount, because investment costs are not included, and would because of its cheap cost, drive down the overall price of electricity for everyone across the grid. Meaning less carbon sources would need to be burned to replace that energy.

There are times when the wind can provide only 60MW of power. That means 240MW will have to be made up by other means. Two gas turbines at NRG., if built, would require a natural gas line to be built across Delmarva. That would have added benefit for everyone down state except higher priced propane suppliers.

But this additional power could also be bought off the grid, particularly if land base wind farms start producing a greater chunk of the grid’s power. Just buying from the grid in that case, may use less carbon overall than firing up a gas turbine located somewhere in southern Delaware.

So here is the genius behind the compromise. If we return to the 600MW wind farm, with a 25% increase of wind generated power, on those slower wind days of summer, instead of 60MW our minimum would be 75 MW, meaning we need to outsource only 225MW instead of 240MW. Again less money spent, less carbon burned. On days when the wind does blow, Bluewater sells the extra to the PJM grid at that moment’s price. With more turbines, they stand to have more overage to sell, increasing their profit margins enough to cover any cost rise that the commodities’ market may experience.

In return for allowing them more of the turbines, and the potential for a greater revenue stream, they need to agree that all increased costs will be eaten by them……as is done when one opens a restaurant, or car dealership, or radio station……

Bluewater benefits from increased revenues. Delawareans benefit from receiving for twenty five years, less expensive electricity, than twenty states pay now………Delmarva benefits from not having to worry about consumers switching power supplies due to wind power’s high cost overruns, and everyone benefits from a little less CO2.

A win, win. Since time is critical, all parties should begin negotiating in earnest……

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