Professors Kempton and Firestone Evaluate the Term Sheets

Willett Kempton and Jeremy Firestone of the University of Delaware have circulated their first take on the terms sheets now under review. In their comments filed with the Public Service Commission, which were published in the News Journal on Sunday, Kempton and Firestone question the usefulness of the proposed backup generators and urge that the proposed wind farm be expanded to its original scale of 600 megawatts. Their comments bring some useful clarity to a complicated subject.

Willett Kempton and Jeremy Firestone's
Preliminary Comments on All Three Term Sheets

Last spring, after an open bidding competition, four Delaware state agencies jointly chose an offshore wind farm as the next major source for new power for Delaware, with the possibility of a smaller natural gas generator as well. The winning bidder, Bluewater Wind, was sent to closed door negotiations with Delmarva Power, which would buy the resulting power.
Conectiv and NRG did not win the bid, but were allowed to negotiate terms for "backup" power.
The negotiated terms are now public. The offshore wind farm is smaller than originally proposed, 450 megawatts rather than 600 (that is, 13 percent rather than 17 percent of the entire state's electric supply). The cost will be about 11 cents per kilowatt-hour, compared with the earlier bid of about 10 cents at the original size and terms.
A formula also allows Bluewater to pass on higher materials costs should they arise, but onlyuntil financing is fully in place. Other than a 2.5 percent inflation factor, there will be no increase in electric prices from this wind farm for 25 years.
Overall, the offshore wind bid is straightforward, is based on proven technology, and is consistent with what the law called for. It will have substantial benefit for consumer pricestability, decrease Delaware's contribution to global warming, reduce air pollution and contribute to Delaware's economic development. Because all of the fundamentals supporting the offshore wind farm bid remain firmly in place -- and the bid is if anything stronger now with the additionof a large investor, Babcock and Brown -- we expect the state agencies to reaffirm their decision for the wind farm.
However, the state agencies will have to resolve some questions remaining from the contract negotiations. We hope they also consider the original, larger project that was less expensive perkilowatt-hour. To do this would require finding a means to assure Delmarva that it would not get stuck with more electricity than it needs during the few hours of the year when load is lowest and the wind is strong.
We also think the state agencies should consider placing a cap on the amount by which an increase in commodity costs would increase the wind cost to consumers; and add that if commodity costs decrease, the benefits should be passed to consumers as well.
In case anyone is still wondering if Delaware's offshore wind farm is a good idea, look at our neighbor.
Last week New Jersey issued a request for proposals for a 350-megawatt power plant, allowing bids only for offshore wind: No coal, gas or land-based wind may apply. New Jersey understands what Delaware's bids revealed: that offshore wind has an electric price close to other generators, while providing stable prices, zero pollution and health benefits. It is carbon-free homegrown energy, creating a new local industry with construction and high-technology jobs.
Whereas Delaware is requiring Bluewater to pay the full project cost with no subsidy or state tax break, New Jersey is offering options for tax-free bonds to finance its project, plus offering $19 million cash to encourage bidders. New Jersey's 350-megawatt wind plant is considered a pilotproject to see if that state wants to develop an additional 2,150 megawatts of wind off its coast.
In contrast to its wind contract, Delaware's proposed backup contract is more controversial. Delaware can pick either natural gas bid -- or neither.
The Conectiv bid is for two 100-megawatt units in Bridgeville, fed by existing gas lines. The NRG bid is for 300 megawatts at Indian River, and will require a new natural gas pipeline to be run under the Chesapeake Bay. Both gas bids are for 25 years.
When measured against Conectiv's 2006 gas bid, both new gas bids are less favorable to Delmarva customers. They offer no price stability benefits, and despite their backup function, both are even larger than the proposed stand-alone Conectiv plant. In both new gas proposals, all increases in natural gas prices, and all carbon dioxide fees, would be passed through as higher, uncontrolled electricity prices.
In their order this past May, the four state agencies required that any change from the original bids result in greater price stability, lower price or other benefits for consumers. The changes proposed by NRG and Conectiv do just the opposite.
We see little justification for building a new backup power plant in the first place. Delmarva has stated on the record compiled in the bidding proceeding that no backup power is needed. We agree.
We also note that the comparable-sized New Jersey offshore wind plant request does not call for any new backup power plant.
In southern Delaware, the existing gas plants are often idle as it is. This past July and August, more than 350 megawatts of natural gas generators in Kent and Sussex counties sat idle. They ran an average of only 7 percent of the time [1]. They weren't fired up because for most hours, natural gas is already too expensive. It makes no sense to build 200 or 300 new megawatts for backup on top of so much idle capacity. If new gas generation was to displace existing coal, that would have a beneficial effect in cleaning up the air a bit. A new gas plant also would be more efficient than old ones. But consumers should rightfully ask if building a redundant gas plant and getting locked into a 25-year contract makes sense at this point.
Natural gas plants can be built quickly. There's no need to lock into a gas contract now, justified as backup for a wind farm that won't be operating until 2014.
Moreover, building transmission seems to make more sense for Delaware than building additional natural gas capacity. After the state agencies acted in May, the Mid-Atlantic Power Pathway received interim approvals from the federal government, the regional transmission operator and Gov. Minner. If and when it is finally approved, MAPP would run a high-voltage line connecting from multiple power plants and power users in Virginia, into Delaware all the way to Indian River. This would provide any backup power needed. And if Delaware builds more offshore wind farms, that also would make it easier for us to sell excess wind power toother states.
If one had to choose between the backup proposals, how do they compare? Regarding the danger of locking users into high gas payments, Conectiv's bid imposes a smaller penalty if the plant sits idle. The NRG plant is more efficient (less gas needed and thus less carbon dioxide emitted per kilowatt-hour generated), but would cost more to build and require constructing a big new natural gas pipeline.
If state decision-makers nonetheless desire backup, they should consider having Conectiv build only one of the two 100-megawatt units proposed and returning to Conectiv's original proposal for a 10-year commitment and price increases tied to a less volatile coal index, rather than passing through all natural gas price increases.
If backup is deemed necessary now, these modifications would add to existing backup with much less risk.
[1] This is a rough estimate that can be refined if needed.