UK-based National Grid on Friday agreed to buy power from the $1 billion Nantucket Sound Cape Wind project, a 468-MW offshore wind farm expected to be operational in 2012 that had garnered approval from the U.S. Interior Department just nine days earlier.

Under the contract, National Grid, which is an electricity provider to more than six million customers in the Northeast, will begin buying 50% of the 130-turbine wind farm’s output in 2013 for 20.7 cents/kWh if the Massachusetts Department of Pubic Utilities approves of the deal. The price was based on assumptions that federal tax incentives will continue, increasing at 3.5% annually during the 15-year term of the contract.

National Grid projected that this would translate into a total monthly bill increase of $1.59, roughly 2% per month, for a typical residential customer who uses 500 kWh per month. “It is important to note that National Grid will only be purchasing slightly more than three percent of its total electricity supply from Cape Wind,” the utility said in a statement.

“We recognize that all renewable energy, be it on- or off-shore wind, solar or other sources, has a cost associated with it,” National Grid President Tom King said. “Carbon-based generation comes with its own set of long-term costs – to our health and our environment. Cape Wind is an investment in our future, and one that we must support if we are to achieve a lower-carbon energy portfolio.”

King added that if future federal energy or climate change legislation includes a price for carbon emissions, Cape Wind could have a significant price advantage because it is a low-carbon generator.

The first wind farm on the U.S. Outer Continental Shelf, Cape Wind has been thought capable of generating enough power to meet 75% of the electricity demand for Cape Cod, Martha’s Vineyard, and Nantucket Island combined. The facility would occupy a 25-square-mile section of Nantucket Sound. Though it is rated at 468 MW, its average anticipated output is 182 MW. The project includes a 66.5-mile buried submarine transmission cable system, an electric service platform, and two 115-kV lines connecting to the mainland power grid.

The project received approval last month, almost a decade after it was first proposed.  Federal approval for the long-disputed project has prompted a wave of legal threats from opponents who argue the decision violates the Endangered Species Act and other laws.

National Grid had previously negotiated a power purchase agreement with Deepwater Wind Rhode Island, an offshore project now in limbo after regulators in that state rejected it as too expensive. That project, a eight-turbine demonstration project, had Gov. Donald Carcieri’s (R) support, but the state’s Public Utilities Commission ruled that National Grid was to pay 24.4 cents/kWh for the pilot-scale 21-MW project. Only photovoltaic power would be more costly, the commission said.

Under the Green Communities Act, all of Massachusetts’s investor-owned utilities are required to enter into long-term contracts to purchase at least 3% of their electricity supply from renewable generators.

Sources: Cape Wind, National Grid, POWERnews