Optimistic energy projections are off
By TOM NOYES
Posted Thursday, February 28, 2008
DELAWARE VOICE
The fight over Bluewater Wind's offshore wind farm comes down to cost.
Delmarva Power claims the wind farm would cost consumers an extra 22 a month. State Sen. Harris McDowell is floating numbers ranging from 14 to 75 a month. These numbers are not based on the findings of the Public Service Commission staff, and should be dismissed as scare tactics intended to kill the proposal.
The PSC staff report projects a more plausible figure that the project would cost the average customer 6.46 a month. How is that figure calculated?
The projection that we would have to pay extra for the offshore wind farm is based on the astonishing assumption that natural gas prices will go down over the next four years, and remain below current levels for more than a decade.
This is an unlikely scenario. But gut instinct is not the only basis for questioning the assumption that energy prices will go down.
The scenarios used by the PSC staff and the independent consultant are based on energy price projections published by the Energy Information Agency, a federal agency that provides a convenient benchmark. It's convenient, perhaps, but unlikely to be accurate.
The EIA missed the mark in previous projections. In 1997, it predicted natural gas prices would remain flat or rise slightly over 10 years. Instead, natural gas prices tripled.
The market itself doesn't believe these optimistic scenarios. The New York Mercantile Exchange trades futures contracts in natural gas. The price of delivery for natural gas in February 2009 is running 15 percent higher than the current price.
In its most recent World Energy Outlook, the International Energy Agency projects overall demand, including natural gas, will increase by 55 percent by 2030. Increasing demand and limited supply can only lead to higher prices.
The Delaware General Assembly passed House Bill 6 (the Electric Utility Retail Customer Supply Act of 2006) in response to the 59 percent rate hike brought on by electric power deregulation. The PSC staff report recommended approving the power purchase agreement between Bluewater Wind and Delmarva Power because it meets the criteria in H.B. 6, including price stability, reduced environmental impact, and the benefits of new technology.
H.B. 6 was passed to protect us from rising energy prices. It would be ironic if the General Assembly were to kill the offshore wind power proposal based on the mistaken assumption that energy prices will somehow go down and settle into long-term equilibrium.
Approval of the Power Purchase Agreement would create jobs and make Delaware a leader in a new industry at a time when manufacturing jobs are disappearing. It would reduce greenhouse gases and toxic pollution. Most significantly, it would protect against future increases in the cost of electricity produced from fossil fuels.
If recent history and the laws of economics hold true, a wind farm will save customers money over the 25 years of the agreement.
The public understands energy prices are going up and never coming down, which is one reason why the thousands of public comments have run in favor of the wind project.
House Concurrent Resolution 38, which has 28 sponsors, would break the logjam on wind power by recommending that the controller general vote in favor of the agreement with Bluewater Wind. The General Assembly should understand wind power will help protect us from the forces driving fuel prices higher.
Tom Noyes, who writes the blog TommyWonk, has an MBA in finance from the University of Delaware.
