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Cape Cod’s (Offshore) Wind Economics: Schleede Responds to Clean Power Now

[MasterResource editor] Clean Power Now VP Charles Kleekamp argued in favor of the proposed Cape Wind offshore wind project on economic grounds in guest editorials in the March 6 Cape Cod Times and March 15 Cape Cod Today. In letters-to-the-editor to the same papers (not published), Glenn Schleede challenges Kleekamp’s analysis and describes what information the developer of Cape Wind would need to provide to help determine what the ensuing cost of per kilowatt-hour is likely to be. Still, Massachusetts electric users can be expected to be paying more because such power is bring driven by state’s Renewable Portfolio Standard and the fact that electricity from wind is intermittent.

Mr. Schleede’s analysis follows.

Dear Editors:
Unfortunately, Mr. Kleekamp’s Opinion column in the March 6 issue of Cape Cod Times and March 15 issue of Cape Cod Today presents highly misleading information about the true cost of electricity that would be produced by the proposed Cape Wind project.

Your readers deserve better information about the full potential cost of electricity from Cape Wind, including what is now known and unknown, and who has the most complete information about the potential cost.

Mr. Kleekamp’s errors

Mr. Kleekamp is correct that the proposed Cape Wind project will not result in doubling the cost of electricity for New England customers. However, he is wrong in attempting to draw any conclusion from a comparison of the 12.7 cents per kilowatt-hour NStar “generation charge” with a highly theoretical estimate of 12.2 cents “cost” per kWh for the Cape Wind project that he found in the Mineral Management Service (MMS) Environmental Impact Statement (EIS). This doesn’t even qualify as an “apples to oranges” comparison. It is more like an “apples to elephants” comparison in its invalidity.

The MMS EIS “Economic Analysis” (Appendix F) makes it clear that the 12.2 cents per kWh calculation should not be construed as a valid and reliable estimate of the cost that might be incurred in producing electricity by the proposed Cape Wind project. Instead, that number is merely the product of an “economic model” developed by MMS to compare rough estimates of potential costs associated with alternative “wind farm” sites, including Horseshoe Shoal, using a consistent set of assumptions, which assumptions are based on data that are now quite out of date.

MMS did not and could not contend that the assumptions (essentially guesses) accurately reflect all the factors that will determine the actual costs that would be incurred by the Cape Wind project during the next 20 years. Mr. Kleekamp has contributed confusion, not useful information.

Cost information that is known and unknown

Your readers deserve facts about the true cost of electricity, not misleading comparisons. There are not many facts about the true cost of electricity from the proposed Cape Wind project available to the public. Key facts that are known and unknown at this time and the complexity of the calculations of the true cost of the electricity – as well as who will bear those costs — are summarized below:

1. No one, including the developer of the Cape Wind project, knows the true cost per kWh of producing electricity from the proposed “wind farm.” Such a calculation depends heavily on assumptions (guesses) about (a) the useful life of the wind turbines, (b) the amount of electricity that will be produced during the useful life, (c) the costs of operations, maintenance, repair and replacement that will be incurred during the useful life, and (d) decommissioning costs.

None of these factors are KNOWN at this time and firm estimates are impossible because there is very little experience with the turbines planned for the project. To illustrate the uncertainty:

a. Assume that MMS will prove to be correct in guessing that the turbines would have a useful life of 20 years and that all other guesses are correct leading to a theoretical 12.2 cents per kWh.

b. Now assume that all MMS guesses are correct EXCEPT for the useful life of the turbines which turns out to be 10 years, not 20. That means that only about half as much electricity will be produced during the useful life of the project, but the capital costs of the project will remain essentially the same as originally assumed. This means that the true costs per kWh of the electricity will be nearly double the original 12.2 cent estimate. The true cost per kWh will be nearly double the original estimate because the overwhelming share of the total cost of the project is accounted for by the initial capital costs. The capital costs do not decrease if the turbines last only 10 years instead of 20.

c. Other key factors in the calculation are also unknown and can only be assumed or guessed. These include the amount of electricity that will be produced; deterioration in performance over time; operation, maintenance, repair and replacement cost; and decommissioning cost.

2. While no one knows the true cost per kWh of electricity that would be produced, the developer probably has wind data needed to make estimates. He also has estimates from the turbine manufacturer of the amount of electricity that can be expected at various wind speeds. Valid and reliable data on wind speeds at the location and height of the proposed turbines is necessary to make estimates of the amount of electricity that might be produced and when it would be produced (e.g., hour of day, month of year). Apparently the developer has not revealed this critically important data to the public. Presumably, he has revealed it to any bank or financial partner that would be involved.

3. The true value of the electricity that is produced by any electric generating unit, including wind turbines, depends on (a) its reliability and (b) when it is produced. Experience with onshore wind turbines demonstrates that their output is intermittent, volatile, unreliable, and most likely to be produced when least needed; e.g., at night and in colder months – not on hot weekday late afternoons in July and August when electricity demand tends to be at peak levels and each kWh of electricity has its highest value. The intermittent, volatile, and unreliable output from onshore wind turbines also means that added costs are incurred because it is necessary to provide reliable backup generating capacity so that the electric grid can be kept in balance (supply and demand, frequency, voltage).

IF wind speeds at the location and height of Cape Wind’s proposed turbines are, in fact, substantially more reliable than wind speeds at onshore “wind farms,” the electricity may be somewhat higher in value. Again, only those having the wind speed data can make the rough estimates of how much and when electricity would be produced – and its intermittence, volatility and reliability.

4. Offshore “wind farms” are much more costly to build and maintain than onshore “wind farms,” and much more costly than electric generating units powered by natural gas, oil or coal. This has been demonstrated by offshore projects in Europe. For example, Centrica, a British company that was expected to build three offshore “wind farms” in the UK recently announced that the cost of the first project, now nearing completion, had increased by 70% during the past 2 years, and that work would not begin on the second and third projects because of high costs. Also, high cost is one reason why Shell withdrew from the consortium that planned to build the huge “London Array” offshore “wind farm” planned for the UK.

5. Particularly because of high capital costs, the true cost of electricity produced by offshore “wind farms” will be higher than most alternative sources of electricity. The true cost of the electricity will also be much higher than the cost of electricity from any existing generating units, including those powered by natural gas, oil, coal, nuclear energy, or hydropower. Inevitably, these higher costs of producing electricity will be borne in one way or another by electric customers and/or taxpayers.

6. “Wind farms” – particularly off shore “wind farms” – would not be constructed in the US or Europe if it were not for massive subsidies or tax breaks for the owners. The huge subsidy for electricity from offshore “wind farms” in Germany, for example, beginning in January 2009, is a 9.2 Eurocents per kWh (roughly equal to 11.8 cents US) “feed in tariff.” In Germany, this tariff is borne by all electric customers. (Coincidentally, Germany’s electricity prices are among the highest in the world.)

7. The Cape Wind project will not be built unless the developer concludes that it will be profitable. Whether the developer will reach this conclusion will depend on his estimates of

(a) cost of constructing, financing, operating, and maintaining the project and of any transmission and interconnection costs he is required to pay,

(b) the amount of electricity expected and when it would be produced,

(c) the expected sale price for the electricity,

(d) the expected value of “renewable energy certificates,”

(e) potential capacity and ancillary service payments or charges,

(f) perhaps most important, the federal, state, and local tax breaks that he can count on during the period of planned ownership, and

(g) decommissioning costs if he expects to retain ownership for the life of the project (many “wind farms” are sold once tax breaks have been captured).

As indicated earlier, the amount and value of the electricity that is produced will depend on the wind speeds at the location and height of the wind turbines and, of course, whether the turbines perform as expected.

8. The Cape Wind project almost certainly will not be built unless the developer is confident that he will be able to have assured sales for most of the electricity that is expected to be produced. Generally, a “wind farm” owner will want to have a signed contract (i.e., a “Power Purchase Agreement” or PPA) in hand for the long-term sale of most of the electricity to an electric utility which will resell the electricity to its customers.

9. The Cape Wind project will not be built unless the developer can arrange necessary financing. Generally, this will involve some of the developer’s money (i.e., the equity investment), probably not more than 30% of estimated capital cost, and the remainder (i.e., the debt portion) from a bank or other financial partner. Whether the debt financing will be available will depend on the lender’s assessment of the financial viability of the project. The lender(s) undoubtedly will want to know all or most of the information described in paragraph 7, above, and see the power purchase agreement.

10. Tax breaks and subsidies (not environmental, energy, or local economic benefits) are the primary reason why “wind farms” are being built in the US. Wind industry officials have claimed that about 2/3 or the economic value of “wind farms” comes from just two of the generous federal tax breaks; i.e., (a) the Production Tax Credit (PTC) which permits owners to deduct 2 cents per kWh from their tax liability for each kWh of electricity produced during the first 10 years of turbine life, and (b) five-year double declining balance accelerated depreciation, which permits “wind farm” owners to recover the full capital cost of the “wind farm” – including both equity and debt – over five years.

Through accelerated depreciation, a “wind farm” owner could recover his entire equity investment in as little as 18 months or 2 years, and, in effect, enjoy an interest free loan from the Treasury for the balance of the capital investment. Some corporations have been able to avoid paying any federal income tax on billions of profit because they have access to the PTC and 5-year accelerated depreciation for tax purposes.

11. The full, true cost of electricity from the proposed Cape Wind project plus the owner’s profit will be shared among electric customers and taxpayers. These include:

a. Customers of the electric utility(ies) that purchases the electricity from the Cape Wind project,

b. Electric customers in Massachusetts who pay more for electricity because their utility must either produce electricity from “renewable” energy sources, buy such electricity from others, or purchase “renewable energy certificates “ to comply with state “Renewable Portfolio Standards” (RPS). (RPS generally creates a high-priced market for the benefit of owners of facilities, such as “wind farms,” that produce electricity from “renewable” energy sources.)

c. Those who pay taxes to the U.S. government, who will bear the cost of the tax burden avoided by the owner of the Cape Wind project because he can take advantage of the federal wind PTC and accelerated depreciation (and perhaps new grant and guaranteed loan programs provided by recent “stimulus” legislation).

d. Massachusetts taxpayers to the extent that they must pick up the cost of state subsidies or state or local tax burden avoided by the owner of the Cape Wind project.

In any case, the full cost of producing electricity from the Cape Wind project plus the owner’s profit will have to be paid by someone. There will be no “free lunch.”

12. Electric bills in Massachusetts will increase as utilities increase their reliance on electricity from renewables to comply with Massachusetts Renewable Portfolio Standards (RPS). Bills will increase because the full cost of producing electricity from non-hydro renewable energy sources exceeds the cost of electricity produced from existing generating units. The high cost electricity from Cape Wind will help push up electric bills in Massachusetts (or wherever Cape Wind’s electricity is sold). However, electric bills will not reflect the full cost of the electricity produced by Cape Wind because existing federal and state tax breaks will shift part of the full cost to taxpayers, so the some of the higher cost will be shifted to taxpayers and show up in tax bills instead of electric bills.

The above facts are complex but I hope that they will give your readers a better understanding of both the key factors that will determine the true cost of electricity from an offshore “wind farm” and who will bear those costs.

4 comments

1 Barbara Durkin { 04.21.09 at 10:32 pm }

Thank you, Mr. Schleede, for decisively debunking fuzzy math intended to garner favor for the Cape Wind project. It’s quite troubling that proponents of this project dismiss the hidden taxpayer and ratepayer costs that you have revealed.

I agree, full disclosure is merited. Taxpayers and ratepayers should be able to provide informed consent to such a major project as Cape Wind.

We deserve the truth.

2 Steve Lempitski { 05.04.09 at 9:16 pm }

I find it funny how Cape Wind has an answer for everything thrown at them EXCEPT for price. Not once in the 7 years they have pursued the project have they told us what their rate will be. I know for a fact they have told their price only to a select few under non disclosure agreements as their generation costs is substantially more than the 9.7 cents generation costs we will now pay on Cape Cod starting in December 2009.

3 Bob Goodof { 06.14.09 at 8:20 am }

This is an excellent analysis of the issue at hand. There is also evidence, from recently announced DOE research funding programs, that the Federal Government is concerned that the materials available for offshore projects is not reliable enough to assure project financing.

In addition, because of wind variability, most utility experts (not me!) believe that backup gas-fired power generation will be necessary for solar/wind projects. While I wouldn’t allocate all gas fired expansions to the cost of renewables, there is certainly some overlap.

4 Interior Secretary Salazar on Wind: A Reality Check — MasterResource { 07.28.09 at 1:03 am }

[...] or not energy policy should include the private development of offshore locations like Cape Wind is one (controversial) thing. But representing offshore wind as capable of supplying the nation’s [...]

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