The Great Wind Power Bait & Switch (Massachusetts)
Aug 13, 2010
—David G. Tuerck & Jonathan Haughton, Boston.com, 7/28/10
How much are you willing to pay for green energy? Almost any ratepayer would say that if the electric utilities could obtain a significant amount of their power from a renewable source, and do so without raising rates, then that would be a good deal. It would certainly appear to be a good deal if they could obtain the power and at the same time reduce their rates.
For years Cape Wind Associates, which plans to build 130 wind turbines in Nantucket Sound, told us that it could supply renewable energy to the New England market and save ratepayers $25 million a year. Considering the cost of installing and operating the system (about $2 billion in present-value terms), it was always unlikely that Cape Wind could deliver on this promise. Yet, it seemed possible that by adding significantly to power supplies, Cape Wind could bring about at least a temporary decrease in the price of power.
Now we learn, however, that ratepayers will pay more for their electricity if Cape Wind builds and goes online. Recently, National Grid entered into an agreement to buy power from Cape Wind for almost 21 cents per kilowatt hour. It costs National Grid about 9 cents per kWh to get the same power from conventional sources. Under the state’s Renewable Portfolio Standard program, the electric companies charge ratepayers an additional 6 cents per kWh for that portion of their service (currently 5 percent) that the power companies are supposed to obtain from renewable sources. Hence, power that previously cost 15 cents will now cost 21 cents. National Grid’s biggest customers are protesting this price increase.
Under the agreement, National Grid, which supplies 40 percent of Massachusetts’ residential electric power, will buy half of Cape Wind’s output. The proposal to buy the power at the contracted rate (which allows for an annual increase of 3.5 percent) is now before the state’s Department of Public Utilities for its approval. If the National Grid deal goes through, it won’t be long before another electric utility finds itself under pressure to buy the other half of Cape Wind’s power.
If that happens, ratepayers are going to end up paying $82 million annually more than what they currently pay for the power to be supplied by Cape Wind. That is far cry from paying the $25 million less that Cape Wind originally promised. It’s a case of bait-and-switch: Promise something at a cost saving. Then reveal at the last minute that the cost will be greater, not less. It’s a practice that would have the authorities swooping down on any retailer that tried it.
The Cape Wind project was always a bad deal, in the larger sense that the subsidies needed to bring the project online were far greater than justified by such green-energy benefits as it would confer. And now we find out that the subsidy needed by Cape Wind in order to attract investors is more than twice what we could originally have expected.
It is no answer to say that the National Grid deal is good for ratepayers because fossil fuel prices might rise in the years to come. The Federal Energy Information Administration does not expect the real cost of electricity generation to rise for more than a decade. Yet fossil fuel prices would have to more than double to make the National Grid deal a bargain for ratepayers.
Nor is there a lack of cheaper sources of renewable energy. Currently, the state does not permit the electric utilities to apply hydro or wind power bought from Canadian suppliers to their Renewable Portfolio Standard requirement. By eliminating this rule, the state could get all the renewable energy it wants without compelling ratepayers to pay more than the 15 cents per kWh they currently pay. The only reason not to use Canadian power or some other source of cheap, renewable energy is to keep the Cape Wind project going. But Massachusetts ratepayers should not be expected to bear the burden of supporting this project when there are cheaper sources of renewable energy available. The regulators should tell National Grid to find another supplier.
David G. Tuerck is chairman and professor of economics and executive director of the Beacon Hill Institute at Suffolk University. Jonathan Haughton is professor of economics at Suffolk and a senior economist with the Institute.