Maryland's Offshore Wind Power Initiative, Part 3

Maryland Governor
Martin O'Malley (D)

The Maryland Offshore Wind Energy Act of 2012: that's the name of the legislation Governor Martin O'Malley will introduce into Maryland's General Assembly this year, that, if it passes, will encourage building a "wind farm" in the Atlantic Ocean, 10 miles off the coast from Ocean City.

A wind farm (also called a "wind park") is a series of wind turbines — up-to-date windmills — that are set a-spin by the passing breezes, thereby producing electric power.

Wind farms are increasingly popular on dry land in the U.S., but apparently there are none yet built off America's shores. Here's a picture of one that sits off Copenhagen, Denmark:

I've already blogged twice about Gov. O'Malley's initiative, which I as a Maryland resident strongly support. Recent news coverage has added to my understanding of the proposal. Herein, I'll refer to the following sources:

1. "O’Malley to try again for offshore wind development," Washington Post, Jan. 22
2. "O'Malley to unveil new approach to wind power," Baltimore Sun, Jan. 23
3. "New O'Malley wind farm proposal still a long shot," Baltimore Sun, Jan. 23
4. "O'Malley Introduces Updated Offshore Wind Bill," Southern Maryland Online, Jan. 24

The governor, a Democrat, wants an as-yet-undetermined private outfit to build and subsequently own and operate the wind farm, the creation of which would be stimulated ultimately by an at-most-$2.00 increase on residential ratepayers' monthly electric bills. The increase for large commercial concerns would be limited to 2.5 percent.

The wind farm would create 1,800 jobs in the construction phase and 360 once a wind farm is operating, says the O'Malley administration (Source 2). It would be a way to produce "clean" electric power from a renewable source that does not pollute the atmosphere with carbon and thereby foster climate change.

Financial Details

I find the financial details of the plan a bit obscure, admittedly. Apparently, the wind farm as a "producer" would sell its electric power to "wholesale suppliers," who would in turn supply power to "utilities," who would then transmit it to homes and businesses. The bill would require suppliers, as middlemen, to "get a set amount of their power from wind, as they do now from solar sources" (Source 2).

Proof that the suppliers' requirement is being met would come in the form of "an offshore wind renewable energy credit allowing companies to earn certificates for demonstrating that they are using offshore wind as a certain percentage of their total energy generation" (Source 4).

The electric power from the wind farm would be sold to wholesale suppliers at rates determined on an open market. There would apparently be a secondary market for the renewable energy credits, i.e., the "certificates." "The price of the credits would fluctuate in tandem with market rates to ensure that offshore wind producers can continuously count on a stable profit" (Source 1).

I gather that that means a supplier that more than meets its renewable-energy requirements might wind up with excess credits, which could then be sold on the secondary market to suppliers who are under their quotas. That's how the price of credits would "fluctuate in tandem with market rates" that apply to the wind power itself. The more power the wind farm produces relative to demand, the lower the prices of the power and of the credits would normally be.

The prices for wind power/credits would be passed along, in whole or in part, to the ultimate consumers of the power as higher charges on their monthly bills.

Ostensibly, the prices must never go so low as to deny the wind farm operator — the "producer" — a reasonable profit. And they must not go so high as to exceed $2.00 a month for residential customers or the extra 2.5 percent for larger entities. How will we know in advance that the costs and prices will be so well-behaved?

Source 2 says:

Administration sources said the extra cost would be subject to a strict limit. If the Public Service Commission projects a cost of more than $2 a month — in 2012 dollars over 20 years — the project would be abandoned. ... the PSC would consider the [producer's] wind-power plan to ensure it was feasible and the price reasonable. Once it got the green light from the PSC, the [producer] could sell into a Maryland market with a guaranteed minimum demand built into the law. The PSC also would have to commission an independent study to verify that the program would produce a net benefit for the state.

Both the PSC and the independent commission would presumably have a go/no decision to make at some point down the road, based on (says Source 1) "on a 20-year prediction of future energy prices." That's "a term twice as long as the state’s Public Service Commission typically forecasts," Source 1 says, and it clearly imposes palpable risks.

The wind power would start flowing, Source 1 says, in 2017. The go/no-go decision would have to be made prior to that, and the underlying prediction would cover the 20-year period starting in that year. A big risk is that the 20-year prediction would be off target.

Costs of Building the Wind Farm

That's how the costs of operating the wind farm would be borne. These sources have far less to say about how the costs of building it in the first place would be met.

None of the sources says how much the wind farm would cost to build. Would the state itself subsidize any of the development costs? Seemingly not. Source 1 speaks of a "subsidy" from ratepayers ... but that's the $2-per-month I already mentioned.

Without mentioning any actual dollar amounts for development of the wind farm, Source 3, by Jay Hancock of the Baltimore Sun, gets down to brass tacks on how the building of the project might be financed: with federal "loan guarantees and tax subsidies for wind energy." Sadly, though, says Hancock, "Tax credits deemed crucial for wind development expire this year. Partisan rancor in Congress prompts many to fear they won't be renewed."

Accordingly, I assume the developer of the wind farm would get no up-front state or federal subsidies. It would raise capital the old-fashioned way, based on the supposition that operating the wind farm would produce a steady profit.

If there were any federal subsidies, fine. If not, fine too?

Chances of the Wind Farm Actually Being Built

Source 3 basically deals with Jay Hancock's estimate of the bill's chances of passage and the chances that the wind farm would really get built, assuming the bill does pass. He says the O'Malley bill may get through the legislature, but that doesn't mean the wind farm will actually get built. Why not? Because an offshore wind farm is hugely costly.

One official who is in the know is quoted by Hancock as saying, "We are not obligating our ratepayers to a single dime unless and until someone can figure out how to finance and build one of these things" under Maryland's ground rules. "If they don't figure it out, no harm, no foul."

Hancock continues:

But the ground rules are likely to prove too daunting for developers. Building pylons and turbines in corrosive water miles offshore is a risky and developing art. Delays and cost overruns are common. The more electricity customers are protected from that risk, the more wind farm developers have to assume it. And wind farm developers aren't looking especially daring these days.

And:

Even with federal support, there's no guarantee O'Malley's project works. Unlike last year's proposal, this one wouldn't have Baltimore Gas and Electric and other utilities buy offshore wind power directly. Instead, the [Maryland] Public Service Commission could require wholesale electricity suppliers to buy up to 2.5 percent of their megawatts from offshore wind generators. That's supposed to assure developers of long-term demand.

To clarify that once again: Baltimore Gas and Electric is a "utility" that transmits electric power to many Maryland customers. Since it does not itself produce electric power, it has to purchase the electric power it transmits to its residential and business customers. From whom does it purchase the power? From "wholesale electricity suppliers."

One of the "suppliers" I have dealt with in the past is Dominion Retail. I am now dealing with Stream Energy. There are several other electricity "suppliers" available in the deregulated Maryland market.

The "supplier," in turn, buys electricity from the likes of "offshore wind generators," among numerous other energy "producers" that may derive electric power from wind, solar, natural gas, coal, etc. It is the "suppliers" that would be mandated to buy "up to 2.5 percent of their megawatts from offshore wind generators," according to the O'Malley proposal.

If the offshore wind farm is hugely costly to build, and it would be, then once it is actually built and in operation, as an electric power "producer" it would begin passing along as much as it can of its large financing and construction costs to the wholesale "suppliers" — who would pass them along to the power transmission "utilities," who would pass them along to you as a customer. That is supposed to cause no more than a $2.00 increase in the monthly bills that "utilities" charge their residential customers, and at most a 2.5 percent increase for commercial ones.

But would those dollar or percentage limits actually work to let the the wind farm turn a profit, given the huge fixed costs of its initial investment in facilities and equipment which would have had to be initially financed by means of borrowing money at some perhaps high rate of interest? Hancock thinks not. Just as home buyers have to be pre-approved for their mortgages based on their incomes, the wind farm developer would have to be pre-approved by the PSC based on the likelihood that it could turn a profit under the ground rules of the legislation.

So the bill might pass and be signed by the governor ... and yet the PSC might be forced to nix the project sometime down the road, before the wind farm is actually committed to and built.