Politics of O'Malley's Offshore Wind Plan Changed, Economics Have Not

Governor Martin O’Malley is hoping the third time is the charm for his offshore wind boondoggle.  Yesterday, O’Malley testified before the Senate Finance Committee on behalf of his plan to build wind farms off the coast of Maryland.  Previous efforts died in the Finance Committee the last two years.

O’Malley is hopeful that the General Assembly will approve the plan this year. 

What has changed? The politics.

Senate President Thomas V. Mike Miller, a proponent of O’Malley’s offshore wind plan, reassigned Senator Anthony Muse from the Finance Committee to Judicial Proceedings, and replaced him with Senator Victor Ramirez.  Muse had been an opponent of O’Malley’s offshore wind proposal.  O’Malley also sweetened the deal by including millions in state grants for minority businesses to compete for offshore wind energy contracts.  Muse was among the three African American senators who voted against the bill in the Finance Committee last year. 

While the politics of O’Malley’s offshore wind plan have changed, the bad economics have not.  

The bill creates a carve-out for offshore wind energy credits (ORECS) in Maryland’s Renewable Portfolio Standard (RPS).  Maryland’s RPS law mandates state electricity suppliers generate 20 percent of their retail sales from renewable energy by 2022.  Under O’Malley’s plan ratepayers would finance, in part, the purchase of ORECs sold by the offshore wind energy producer to suppliers like BG&E and PEPCO.  The bill caps the price of an OREC at $190 per megawatt hour. 

According to the Department of Legislative Services fiscal policy note, the legislation bundles in $66 extra (energy, capacity and ancillary services) into the price of the OREC whereas other credits traded in Maryland’s RPS system are unbundled.  DLS notes “ORECs are ‘bundled’ with the energy, capacity, ancillary services, and environmental attributes, whereas other Tier 1 nonsolar RECs are generally ‘unbundled,’ meaning the energy, capacity, and ancillary services are not included in the price of the REC.”

DLS also pointed out, “In general, most Tier 1 RECs used for State RPS compliance are traded in a market established by PJM, unbundled from the physical energy.”  Meaning the utilities and suppliers are merely chasing subsidies not actually creating any new renewable energy generation.  According to  US Energy Information Administration data (table 5) renewable energy as a percentage share of total generation in the state decreased to 1.3 percent down from 1.6 percent between 2000-2010.

O’Malley claims that ratepayers would only see a minimal $1.50 increase in their monthly bills, based on an average residential usage of 1,000 kilowatt hours per month.  The US Energy Information Administration estimates the average Maryland household uses 1,030 kilowatt-hours per month.  

However, the DLS analysis also underscores the uncertainty of the assumptions of O’Malley’s cost estimates noting in several instances scenarios where the monthly cost could exceed the $1.50 limit.  The analysis also stresses that additional cost impacts may vary due to approved bids and state and federal subsidies available to developers.

State and federal subsidies serve to mask the true cost of wind projects.  In particular the federal wind production tax credit.  In addition to any new monthly charges on their electric bills, Maryland ratepayers are already paying for massive federal subsidies for wind farms.  The federal wind production tax credit (PTC), extended by one year in the fiscal cliff deal, will cost U.S. taxpayers $12 billion.  The PTC gives wind power producers a $22 per megawatt hour/2.2 cents per kilowatt-hour credit for energy produced.  In some cases this subsidy counts for between 50-70 percent of wholesale price of electricity. 

If Congress extends the PTC beyond 2013, U.S. taxpayers would be subsidizing at a minimum, 12 percent (assuming the maximum price of $190 per megawatt hour) of the cost of one OREC generated by a Maryland offshore wind farm.  Assuming the same maximum price, taxpayers would be subsidizing 33 percent of the energy costs of one OREC.  Given that wind power is produced during periods of low demand OREC prices will tend to be lower than $190 per megawatt hour, meaning taxpayers will be subsidizing a larger percentage. 

If O’Malley’s bill passes, construction of any wind farm is still in serious doubt because the federal wind production tax credit faces an uncertain future, and his financing model is not viable (i.e. ratepayer subsidies not large enough) to attract investors to support such a costly project. Peter Mandalstam, an offshore wind developer, told the Washington Post that O’Malley’s plan “may make it difficult or, in a worse-case scenario, impossible to build a project off the coast of Maryland.”  Mandalstam’s contract to build a wind farm off the coast of Delaware collapsed because he could not secure financing.