A Final Submission to the PSC on Wind Power

After a long and largely unprecedented process, a new Power Purchase Agreement (PPA) is now before the Public Service Commission and other agencies charged with the selection and approval of a new electric generating facility in Delaware. This two year effort should be crowned by emphatically and enthusiastically approving the PPA on the table. When I first spoke at a hearing on the subject of Delaware’s energy future in March of last year, I urged that we should not fall into the comfortable old habits of conventional thinking: The debate over offshore wind power to Delaware has revolved around the matter of price. At the outset, many simply assumed that wind power must be more expensive than electricity from conventional sources. I and others argued otherwise.
It is gratifying to see the independent consultant revisit the assumptions it used last year, particularly the cost of carbon controls and the effect of natural gas prices. Last year the independent consultant published analyses in which the price of natural gas was projected to drop over the next several years:

Source: PSC Staff Report, October 29, 2007, Appendix C

I criticized this assumption, and the resulting conclusion, in my letter to the Commission dated December 12, 2007: The unrealistic estimates of future natural gas prices—based on federal Energy Information Agency (EIA) projections)—have been replaced with a set of somewhat more plausible estimates:

Source: Independent Consultant’s Report, July 3, 2008, Page 34

While these changes in assumptions have led to a more modest estimate of the net cost of the project of 70 cent per month for the average customer, I still find the forecasts to be optimistic. The “High Gas” scenario shows the price in 2007 dollars rising to $12 per MMBtu roughly thirty years from now. But the NYMEX futures market for delivery in December and January has traded above $12 in recent weeks, though prices have moderated a bit (http://www.nymex.com/ng_fut_cso.aspx).
I do not bring this up to fault the Commission or other agencies for using the EIA projections. I understand the importance of establishing a single set of assumptions to better compare competing and complicated analyses. As a federal agency, the EIA provided a convenient benchmark—though it unfortunately bore little resemblance to real world prices.
The consultant’s assumptions on the cost of carbon controls have also been revised sharply upwards. Again, I and others have pointed out that plausible estimates of the cost of future carbon controls would make wind power look affordable by comparison. The International Energy Agency projects that demand for coal power will increase 73 percent by 2030 (http://www.worldenergyoutlook.org/). At the same time, the need for carbon emission controls will increase the cost of coal power by at least 20 percent, according to an MIT study published last year (http://web.mit.edu/coal/).
The unrealistic assumptions used as the basis of the independent consultant’s results were buried deep within the written record, but their importance reverberated throughout the debate over wind power in Delaware. In my view, these crucial variables need to be placed front and center in future analyses of our energy options.
It would be flattering to think that eventually the independent consultant, the majority of citizens, 62 legislators and even the opponents of wind power came around to our point of view due to our superior analytical skills. The truth is that the view that we couldn’t afford wind power was overwhelmed, not by careful analysis, but by the relentless rise of fossil fuel prices. Even the most committed advocates did not anticipate just how quickly the rise of fossil fuel prices would bring us to the break-even point for wind power.
We can expect prices to remain volatile and continue to climb in the future. For this reason, I recommend that the PSC and the parties to the agreement not consider the PPA as an end point, but as a beginning, and be prepared to revisit the final size and scale of the wind farm in order to respond to future increases in energy prices.
In closing, I want to offer my gratitude and congratulations to the Commission, its staff and the other agencies, for an outstanding job of handling the almost impossibly complex procurement and negotiating processes with integrity and grace under pressure.

The simple fact of the matter is that wind power would cost us a little bit more if—and only if—fossil fuel prices remain flat for the next thirty years. If recent history is any guide, and if the laws of economics are not overturned, we can expect fossil fuel prices to continue to climb over the next thirty years.

The conventional wisdom is that the public’s environmental interest is in conflict with the public’s economic interest. But my review of the record leads me to conclude that the conventional wisdom has been turned on its head in this case; burning more fossil fuels doesn’t make economic or environmental sense for Delaware.