The PSC Staff Report projects that Bluewater Wind's offshore wind farm would cost the average customer 6.46 a month, or less if a proposed backup facility is built nearby. The question is, compared to what? What assumptions about future energy prices are used?
The argument that the offshore wind farm is too expensive is based on unrealistic assumptions that natural gas prices will go down over the next four years, or even longer, and will remain below current prices for years to come.
This chart is taken from the PSC Staff Report, October 29, 2007, Appendix C:
The PSC staff, whose work I do not wish to fault, based its analysis on energy price projections published by the Energy Information Agency (EIA) and by ICF International. The ICF projection (ICF-Ref in the chart) is slightly more conservative than the IEA projection (AEO 2007), but not by much.
The average consumer would tell you that the prospect of natural gas prices going down over the next four years, or any significant length of time, is unlikely at best. But let's try to be more systematic in examining these assumptions.
First, the EIA has missed the mark in previous projections. In 1997, the agency predicted that natural gas prices would remain essentially flat over the next ten years. Instead, natural gas prices tripled.
Second, natural gas futures prices traded on New York Mercantile Exchange (NYMEX) are going up, not down. The price of delivery for 10,000 million British thermal units in February, 2009 was running 14.9 percent higher than the current price as of the close of yesterday's session.
Third, 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.
Fourth, natural gas costs are expected to climb further as utilities find it increasingly difficult to build new coal power plants due to environmental concerns and the expected costs of carbon emission controls. The New York Times reports (February 5, 2008) that the slowdown in the construction of coal plants is increasing the demand for natural gas plants, which likely means further upward pressure on prices.
As for those who imagine that the recent news about untapped natural gas reserves in Pennsylvania will lead to lower prices, news reports refer to the high expense of extracting the gas (AP, February 4, 2008):
Geologists and energy companies have known for decades about the gas in the Marcellus Shale, but only recently have figured out a possible - though expensive - way to extract it from the thick black rock about 6,000 feet underground.
Like prospectors mining for gold, energy executives must decide whether the prize is worth the huge investment.In other words, the reserves will be extracted - once prices increase sufficiently to justify the high cost.
The public understands that energy prices are going up and unlikely to come down, which is one reason why public comments have run about ten to one in favor of the wind project.
So, who's being na"ive here; the advocates of wind energy or the opponents? It would be ironic if the General Assembly killed the offshore wind power proposal based on the mistaken assumption that energy markets will somehow work in our favor this time.
Before closing, I have several questions for this committee:
Does this committee accept the findings and recommendations presented in the PSC Staff Report?
Are there specific findings in the report with which this committee takes exception?
Does this committee expect natural gas prices to go down significantly over the next four years?
Does this committee intend to seek new sources of alternative energy outside of Delaware in addition to, or in lieu of, the proposed offshore wind farm?
Does this committee believe that the objectives of House Bill 6 (EURCSA) can be met by buying power from outside the state of Delaware?
Or do committee members intend to close down the process established under House Bill 6?
Does this committee expect to take up legislation to repeal HB 6?
The PSC Staff Report of December 14, 2007 recommends approving the Power Purchase Agreement (PPA) between Bluewater Wind and Delmarva Power because it meets the criteria set forth in House Bill 6 - including price stability.
The General Assembly passed House Bill 6 in response to the sudden 59 percent rate hike brought on by electric power deregulation. And yet, the argument that the wind farm would cost too much is based on the belief that this time the magic of the market will bring about decreases in future energy prices, despite what we have learned from experience, and in defiance of all we know about economics.
The General Assembly has before it legislation, House Concurrent Resolution 38, which would provide the decisive vote to approve the Power Purchase Agreement and make offshore wind power a reality in Delaware. I urge members of the General Assembly to promptly adopt this resolution and provide us with a measure of protection against future increases in fuel prices.
Sources:
Annual Energy Outlook 1997, U.S. Energy Information Agency
ICF International, "Evaluation of Generation Bids to Delmarva Power & Light," November 13, 2007
Natural Gas Wellhead Prices, U.S. Energy Information Agency
NYMEX Natural Gas Futures
Public Service Commission Staff Report, October 29, 2007
Public Service Commission Staff Report, December 14, 2007
"Utilities Turn From Coal to Gas, Raising Risk of Price Increase," Matthew L. Wald, New York Times, February 5, 2008
"Whopping gas field teases drillers," AP, February 4, 2008
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