Monday, April 2, 2012

Cape Wind will save electricity ratepayers $7.2 billion over 25 years. Not!!

Charles River Associates has updated a 2010 analysis, now claiming that the Cape Wind project will save ratepayers $7.2 billion over 25 years. That’s several billion more than promised by the 2010 study. You know what they say… A billion here, a billion there, pretty soon we’re talking real money.

I will explain the concept behind this calculation in very broad strokes because this is an issue that quickly gets into the “weeds.”

Distributors of electricity purchase the energy from generators using two methods:

1) Contracting for X amount of electricity at certain prices. These are called power purchase agreements (PPAs).

2) Purchasing electricity on the spot market. Prices are bid by generators every day for the next day’s supply. Our market is managed by ISO New England, a nonprofit regional transmission organization. ISO stands for independent system operator.

The Charles River study focuses on the effect of Cape Wind's energy on the daily spot market. Each day, ISO NE takes bids for the next day's estimated requirement of electricity. These bids are entered into a "bid stack" which is ordered by cost of fuel. The daily bids are laid in on top of the electricity contracted by PPAs because the contracts create an obligation to purchase a certain amount of electricity each day.

A typical bid stack will have energy from PPAs, then renewables (since their fuel cost is zero), then coal, natural gas and oil. ISO NE then draws a line across the bid stack equal to the amount of electricity estimated to be consumed the following day. Those generators above the line--the highest priced bids--are told not to run. A good example of this is the GenOn Canal Plant in Sandwich, an oil-fired generation facility that rarely runs because of its high cost of fuel.

Those generators whose bids are accepted are told to run and receive payment equal to the highest accepted bid. That's a separate issue, but an interesting one. For example, a coal powered generator with fuel cost well below the maximum bid doesn't sell electricity at the price it bids, rather at the price of the generator that barely made the cut.

The study by Charles River calculated the cost of bids that would be pushed above the cutoff due to Cape Wind occupying space in the bid stack along with other PPAs and as a spot market generator with zero fuel cost. Their number is $7.2 billion over a 25-year period.

Let's assume that oil powered generators are the ones being pushed out of competition with fuel prices in the range of 15 cents per kilowatt hour. The cost of Cape Wind's contract at 17.5 cents per kilowatt hour ranging up to 31.5 cents by the end of the PPA term more than offsets the savings of pushing oil-produced electricity above the cutoff in the bid stack.

Charles River added up the cost of electricity displaced from the bid stack and did not net the additional cost of wind-generated power. The study also speculates on cost of fossil fuels into the future, assuming the passage of a carbon tax and a significant rise in the price of natural gas. With those assumptions, they predict that renewables will be competitive with fossil fuel prices down the road. My only comment is that there is no carbon tax under discussion in Washington since the attempt to push one through while ObamaCare was capturing most of the headlines and new technologies in drilling for natural gas promise to hold prices down for decades.

It is important to note that there are environmental benefits from energy generation that does not directly produce greenhouse gases. The discussion does go beyond the economics and I agree that it should, but claiming $7.2 billion in savings will accrue because of the Cape Wind project is simply not credible.

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