On the Cusp of a Natural Gas Bonanza, Massachusetts Bets on Wind Power

You'd have to be a dim bulb -- perhaps one of those 13-watt compact fluorescents -- to believe that forcing utilities to purchase expensive offshore wind power will lead to economic prosperity.  Yet this is precisely the reaction of the Boston press to a recent deal brokered by Gov. Deval Patrick.

Gov. Patrick has been in a bind.  With the Green Communities Act of 2008, the state legislature enacted a clean energy mandate requiring that 20% of Massachusetts' power come from renewable sources by 2025, joining 36 other states with "Renewable Portfolio Standards."  Renewable energy, however, is expensive and especially hard to find in New England, and most voters don't like paying high prices for green electricity that behaves exactly like cheap electricity from natural gas or coal.  Patrick no doubt fears that the clean energy bandwagon could roll backwards and crush his re-election chances.

A proposed merger between two local utilities, NStar and Northeast Utilities of Connecticut, gave Patrick the opportunity to put together a clever plan.  His administration approved the $17.5-billion deal on two conditions: the new utility company must purchase 27.5% of the output of Cape Wind, the controversial offshore wind farm in Nantucket Sound.  Secondly, the utility must freeze its rates for the next four years, and distribute a one-time rebate of $21 million to customers.

George Bachrach, the president of the Environmental League of Massachusetts, wrote in the Globe: "The Patrick administration deserves great credit for negotiating the recent merger agreement with NStar that will both protect ratepayers and make Cape Wind a reality."  A Boston Globe editorial titled "NStar deal, rise of Cape Wind will boost state's economy" had similar praise.

It would appear that the state gets green energy to satisfy the Renewable Portfolio Standard, while utility customers (aka voters) get relief from higher utility bills.  Everyone wins!

Er, not exactly.

To begin with, that $21-million rebate works out to a one-time payment of around $13.  I'll try to not spend it all in one place.

Secondly, we are in the midst of a natural gas boom that promises to revolutionize America's energy picture.  Natural gas prices have plummeted from near $5 per MMbtu last summer to around $2.60 per MMbtu.  According to the EIA, the energy equivalent of $3 natural gas is $18 oil.

The Globe editorial admits:

Cape Wind power will likely be costlier than that from fossil fuels, and it looks even worse next to today's historically low natural gas prices. But fossil fuel prices are notoriously volatile; the deal will lock in predictable wind power rates for years.

It's true that locking in prices will protect consumers from volatility, but if the volatility stems from collapsing prices, this will benefit only utilities, not consumers.

Our current rates reflect past efforts to add green energy to the mix, and a government mandate requiring more wind-generated electricity won't "protect ratepayers."  Wind power is expensive.  Customers who choose the "NStar Green 100" option -- 100% of their electricity (in theory) coming from the Maple Ridge Wind Farm in upstate New York and Kibby Wind Power in Maine -- currently pay a premium of 4.791 cents per kWh.  On March 1, this premium will rise by 33% to 6.379 cents per kWh, an indication that the green power price trend is not following natural gas.  My residential rate is 7.928 cents per kilowatt hour, which means that NStar is charging an 87% premium -- nearly double -- for land-based wind power.  NStar claims:

For the average NSTAR Green 100 customer using 500 kilowatt-hours per month this will add approximately $8 to a total monthly bill when compared to recent electric bills.

Unfortunately, this claim is simply not correct.  Five hundred kwh times 0.06379 per kwh equals $31.89, four times the $8 claim.  An NStar customer service agent agreed that I was doing the math correctly, but was unable to explain where NStar got its figure of $8.  The Massachusetts average kwh usage actually  is 635.

Maple Ridge and Kibby are land-based wind farms, and when operations move offshore, prices get even steeper; offshore wind is one of the most expensive ways to generate electricity, second only to solar thermal.  Cape Wind has already signed an agreement with another utility, National Grid, to sell electricity for 18.7 cents per kwh, with a 3.5% increase every year over the next 15 years.  This wind power therefore starts out at more than double the average Massachusetts rate of around 8 cents per kwh.  The 3.5% increase compounded annually means that at the end of the 15 years, National Grid customers will be paying 31.3 cents per kwh, around 4 times the current rate.

Keep in mind too that construction on Cape Wind has not yet begun, so a four-year freeze on electricity prices will lapse by the time NStar starts purchasing that 27.5% of Cape Wind power.

Since the deal is so profitable for Cape Wind, other companies are looking at getting into the game.  According to the Globe:

Offshore power could be an immense economic resource for Massachusetts, and Cape Wind is already shaping up to be the nucleus of what could be a home-grown industry; earlier this month, federal officials began studying the possibility of another large new wind development south of Martha's Vineyard.

George Bachrach's op-ed is titled "Governor Patrick's environmental legacy is at risk" -- because the governor is not doing enough to promote wind power:

The Wind Siting Bill is critical for the development of onshore wind farms. It would create new standards and expedited permitting for much-needed, low-cost, onshore wind-energy.

Imagine the outcry if a Siting Bill expedited permitting of natural gas fracking or offshore oil drilling.

Bachrach concludes:

Cape Wind is critical, but it should be only the beginning as we look to much larger, deepwater wind projects, in areas recently designated by the federal government, further offshore.

Crony capitalism...what a business model!  The government mandates that the public purchase your product at prices double, triple, or quadruple those of your competitors.  And ten years from now, when Massachusetts businesses are forced to relocate to states that have allowed market forces to supply them with cheap natural gas, Deval Patrick will be long gone.