Wednesday, January 23, 2008

The Economics of Wind Power, Part 2

Yesterday, I revealed that the estimate that offshore wind power would cost customers an extra $6.46 a month is based on the assumption that natural gas prices will go down over the next four years.
In other words, those who are opposing the wind power agreement are betting that energy prices will go down, making wind power too expensive.
The question is not simply one of setting a price; it is whether we can trust the free market to move in our favor over the long term. As with most significant buying decisions, risk must be weighed along with price.
Senate minority leader Charles Copeland summed up the argument for letting the market work without government intervention:
“We ought to let private investors compete against one another to get us the best price point and price stability. I think the marketplace would do that better than some regulatory regime,” Copeland said.
Putting aside the point that the wind power agreement is the product of a competitive process, and that all proposals were financed by private investors, Copeland is conflating two very different questions: The best price is time specific. Price stability is a measure of prices over time.
It may be the case that energy prices will fall below the price negotiated with Bluewater Wind, and electricity from a natural gas plant may be cheaper at a certain point. But will energy from fossil fuels be cheaper than wind power over 25 years?
The economic evidence points to energy prices continuing to rise in the near future and in the long term. The projections that natural gas prices will drop come from an agency (the Energy Information Agency) that in 1997 predicted that natural gas prices would remain flat or rise slightly over the next ten years. Instead, natural gas prices tripled. Futures contracts for delivery of natural gas next January are running 13 percent higher than current prices. 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.
As I said yesterday, the optimistic belief that energy markets will drive prices down betrays a misplaced faith in the benevolence of energy markets. H.B. 6, which created this process, was passed in the wake of the 59 percent rate shock brought on by deregulation. Those who characterize offshore wind as risky forget that ratepayers already shoulder the considerable risk associated with rising fossil fuel prices.
The News Journal reports that Delmarva Power is seeking proposals for alternative energy based on the increased renewable energy standard passed by the General Assembly. Senator Harris McDowell is expected to schedule hearings on finding other sources of alternative energy.
But the economic question is not whether Delmarva Power buys more renewable energy; the company is already required to do so. The fundamental economic question in this decision is whether any short term purchase of energy can provide the price stability as specified under H.B. 6.
The answer is no. No short term purchase or other market mechanism can provide the price stability offered by the long term agreement with Bluewater Wind now on the table.

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