Tuesday, January 22, 2008

The Economics of Wind Power, Part 1

Let's get right down to it. The decision about wind power in Delaware is about cost.
The Public Service Commission (PSC) staff report projects that the wind farm would cost the average customer an extra $6.46 a month. That's $6.46 compared to what? How is that figure calculated?
I have been reviewing these assumptions and found the methodology behind them to be astonishingly optimistic when it comes to future energy prices. The argument that Bluewater Wind’s offshore wind farm would cost ratepayers is based on the startling and unrealistic assumption that natural gas prices will go down over the next four years and will remain below current prices for years to come.
The scenarios used by the PSC staff and the independent consultant are based on energy price projections published by the Energy Information Agency (EIA), which, as a federal agency, provides a convenient benchmark — convenient, perhaps, but unlikely to be accurate.
The PSC staff report dated October 29, 2007 gives us the $6.46 figure, which is based on assumptions described in this chart in Appendix C, found on the next to last page of the report:

The chart offers three scenarios: ICF Ref, ICF+30% and AEO 2007. Think of them as low, middle and high. Each scenario, even the most pessimistic one, shows natural gas prices dropping starting next year.
If you ask an average ratepayer whether energy prices are likely to go down over the next year, the next four years or any length of time, the answer would almost assuredly be no. But gut instinct is not the only basis we have for questioning the assumptions that energy prices will go down and stay down for the long term.
First, the EIA has missed the mark in previous projections. In 1997, the agency predicted that natural gas prices would remain flat or rise slightly over the next ten years. Instead, natural gas prices tripled.
Second, those who trade energy for a living don't believe the EIA projections that show prices going down. The New York Mercantile Exchange (NYMEX) trades futures contracts in natural gas. The price of delivery for 10,000 million British thermal units in January, 2009 is running more than a dollar higher than current prices — a 13 percent increase.

Third, long term demand is going up. The International Energy Agency (IEA), in its most recent World Energy Outlook, projects that overall energy demand, including natural gas, will increase by 55 percent by the year 2030. Increasing demand and limited supply can only lead to higher prices.
The unlikely belief that energy markets will drive prices down isn't just a matter of picking an overly optimistic number. It betrays a misplaced faith in the benevolence of energy markets. I will trace the history of this misplaced trust in the market in my next post.


Anonymous Anonymous said...

Casual suggestion: You may want to edit your opening paragraph. Over first several reads based solely on the diction alone, even I thought you were dissing the $6.46 cost of wind power. I was asking myself how does the cost of gas affect the actual operating costs of Bluewater's wind farm? The way that would be true was if you were using the Bluewater/Connectiv combination scenario, pulling the data from one of the consultant's reports, and only then would the cost of gas prices affect the cost of what we pay for wind itself.

To be honest, it was not until your second installment that I fully understood you were talking about Delmarva's bid being based on declining natural gas prices, not Bluewater's. After that was clear, I reread your first post, and knowing what you meant to say, you did NOT make any mistakes; your diction was clear.

It was all me, but I just thought I would offer my take, in case it helps the cause.

Again I am probably the only person that got that surprising misperception, but nevertheless, I thought I would pass my thoughts on to you anyway.

So in other words, what I did not get until today:

The point of your argument is that wind power will NOT cost more, it will cost WAY LESS than going with Delmarva alone.......

The $6.46 is a pumped up fudged estimate offered by a consultant lowballing for Delmarva

(Since this comment does not need to be part of the record, feel free to delete it.)


The Public Service Commission (PSC) staff report projects that the wind farm would cost the average customer $6.46 a month. That's $6.46 compared to what? How is that figure calculated?

My Edit:

The Public Service Commission (PSC) staff report projects that the wind farm would cost the average customer $6.46 a month more (than Delmarva's estimate.) That's $6.46 compared to what? How was (Delmarva's) figure calculated?

Again forgive my intrusion, but after sitting on it for a full day,the thought finally occurred to me that if I failed to say anything, you would never know.

Were our roles reversed, I would certainly be grateful of similar editorial feedback.

12:02 AM, January 24, 2008  

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