Maryland Offshore Wind: O’Malley’s Folly

By Lisa Linowes -- February 26, 2013

“The Governor … earned the nod of those representing poorer districts by packing the bill with millions of dollars in grants to boost small and minority-owned businesses that might involve themselves in the offshore sector…. [P]rice caps on electricity bills [hides] the billions of dollars of extra cost that $190/MWh energy adds up to.”

Maryland governor Martin O’Malley is convinced he’s found the right formula for ensuring that his state becomes the first to site a wind facility off its coastline. Last week Maryland’s House quietly approved HB 226. The Senate version (SB 275), although still in Committee, is also expected to pass despite much controversy over cost and risks to captive ratepayers–and back-door cronyism for developers and other special interests.

But don’t be fooled by the political victory. Despite the Governor’s grand claim that his bill will deliver offshore wind at an affordable price, the numbers tell a different story. O’Malley’s folly will deliver a paltry 80 megawatts of offshore wind at most, while draining billions of dollars from the State’s economy.

Offshore Wind: Too Expensive to Meter

Technological, environmental and visual impacts have slowed offshore wind development in the United States, but the primary, universal  issue is cost. Offshore wind is not economically viable without significant public support, as O’Malley knows.

The controversial Cape Wind project (468 MW), proposed ten years ago, is the most expensive energy project on the planet. Assuming a 2016 in-service date, the starting wholesale bundled price [1] will be $207.33 per megawatt hour (MWh), escalating by 3.5% yearly thereafter. By the end of the contract’s 15-year term, Cape Wind will demand over $330/MWh compared to conventional energy at $60/MWh or under. Massachusetts ratepayers will pay billions in above-market energy costs. [2]

The power purchase agreement awarded Deepwater Wind’s pilot project (30 MW) off the coast of Block Island (Rhode Island) mirrors Cape Wind’s with a starting contract price of $244/MWh and the same yearly escalator. [3]

Last year, New Jersey was urged to reject the Fishermen’s Energy offshore project (30 MW) over cost and in Delaware, NRG’s Bluewater Wind terminated its power purchase agreement with Delmarva Power citing lack of financing and growing public opposition to expensive renewable energy.

Cost, aesthetics and environmental concerns also shelved proposals in Michigan and New York that would erect turbines in the Great Lakes.

Maryland‘s Plan

O’Malley’s bill extends Maryland’s 2007 Renewable Portfolio Standard (RPS) by requiring up to 2.5% of the State’s electricity load come from offshore wind.

Unlike other proposals, private wind developers needn’t negotiate power purchase agreements with electricity suppliers to sell their energy. Instead, the bill establishes a ratepayer funded subsidy known as an OREC (‘Offshore Wind Renewable Energy Credit’) which pays a bundled price up to $190 per megawatt hour (MWh). Project owners, in turn, sell their energy and capacity to the power pool and refund the revenue back to ratepayers while retaining the environmental benefit.

This looks like a bureaucratic nightmare for the State but a sweet deal for developers who can waltz into Maryland waters knowing they have a guaranteed market for their power and certainty of price. The $190/MWh ORECs are more than three times the price of conventional generation — including onshore wind! (Nonsolar Tier 1 RECs in Maryland are trading for only $4/MWh).

Getting to Yes … Log Rolling and More

Two prior attempts at an offshore wind bill failed in large part due to added costs imposed on ratepayers, particularly those least able to subsidize a rich man’s vision. And no pixie dust magically appeared since the last legislative session that made the price of offshore wind easier to swallow.

The Governor fostered support for his bill the old fashion way — through handouts and hand-waving.

Earning the nod of those representing poorer districts meant packing the bill with millions in grants to boost small and minority-owned businesses that might involve themselves in the offshore sector.

The hand-waving came in the form of price caps on electricity bills – $1.50 per month for average residential customers and 1.5% total annual electric bills for nonresidential customers. Pitching the cost on a ‘per-ratepayer’ basis hides the billions of dollars of extra cost that $190/MWh energy adds up to. [4]

But the caps meant limiting the project size. The largest project that could be built offshore without exceeding the caps is 211 MW (about 1% of load). At a 39.3% capacity factor, this equates to roughly 80 MW of output. Even at this reduced size, ratepayers will still incur nearly $2 billion in above-market energy prices over 20 years.

Questioning the Benefits

O’Malley boasts that wind energy carries a “fixed, stable, affordable rate that can be locked-in” over the next 20–-30 years, but locking in prices at rates significantly above EIA’s forecasts for average wholesale electricity prices makes no sense. Not to mention that the turbines will reach the end of their useful life before 20 years.

The Governor’s larger vision banks on a hope that by being first with an operating project, Maryland would reap the benefits of becoming a regional manufacturing hub for offshore wind. He sees Maryland as jump-starting a new industry and insists the higher costs will return dividends in the form of private investment and more jobs.

His claims appear more hubris than real. Other states are vying for the same prize, with Massachusetts already in the lead. And it’s not clear whether the high price for offshore wind can be mitigated to the point where we will need more than one hub on the east coast.

There is also the question of future tax credits in an era of fiscal reform. The price caps built into O’Malley’s bill highlight the State’s concerns over cost. Without federal incentives, including the PTC and ITC, no wind will be built off of Maryland’s shoreline. Both credits were extended for one-year as part of the fiscal cliff debate, but as federal legislators work to rein in costs, renewable subsidies are likely to be cut.

 

 

On the promise of job creation, it’s likely O’Malley relied on NREL’s JEDI modeling which reports only gross impacts and does not considered job losses or transfers associated with higher energy prices. Two billion dollars drained from an economy will have a negative impact.

Conclusion

In reading the bill’s fiscal policy note, it appears the administration had two numbers it needed to make work — the $190/MWh OREC price and the cap on individual ratepayers.

But even at $190/MWh it’s not clear there’s adequate revenue to build in deep waters at a scale that justifies private investment. It’s time Maryland legislators recognize that other, more realistic alternatives exist that will deliver clean generation and not suck billions from ratepayers and taxpayers.

O’Malley’s vision is bold but uncertain–and he knows it. When asked whether it was possible for Maryland to see an offshore wind project by 2017, his responded this way: “There’s a saying in the Koran that everything is possible in God’s time, but nothing is for sure.”

Not much there to hang your hat on.

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[1] Bundled pricing includes energy, capacity and RECs or environmental attribute.

[2] Cape Wind is racing to start construction this year.

[3] When Rhode Island’s Public Utilities Commission (PUC) initially denied approval of the contract over cost, the legislature amended the law to constrain the PUC ‘s ability to say no. Deepwater reapplied and the contract was approved, but the project is still not built. The high cost does not include transmission to deliver the energy.

[4] This cost only applies to the energy price increases per household or business. It State government budgets are projected to increase by $2.1 million annually to cover added energy costs for state agencies and the University System of Maryland. In addition, Maryland consumers can expect commercial and industrial businesses to pass the higher costs on to their customers.