Washington Post Editorial: "Maryland’s power play"

I've been covering the Maryland Offshore Wind Energy Act of 2012, a legislative initiative of Maryland's Democratic governor, Martin O'Malley, in my Maryland Offshore Wind Power series. If passed in this year's General Assembly session, it's intended to subsidize an electric-power-producing wind farm 10 nautical miles out into the Atlantic Ocean, off Ocean City. It might look something like this:

A recent editorial in The Washington Post objected to the wind farm, which I whole­heartedly support. The editorial gives me information I hadn't known, though, and for which I'm grateful. Among the items I learned:

• The proposed wind farm would eventually generate perhaps a third of the state’s electricity. I hadn't realized it would account for that much of our electric power.
• Maryland lawmakers have already mandated that the state's utilities derive 20 percent of the state’s electricity from renewable sources by 2022. Renewable sources include wind, solar, and other technologies which don't consume fossil fuels, which we will eventually run out of, and do not contribute greenhouse gases, such as carbon dioxide, to the atmosphere, thereby abetting global warming.
• The state’s renewables mandate already requires that utilities derive 2 percent of the state’s electricity from solar by 2022.

The proposed wind farm legislation apparently (see my earlier posts in this series) requires wholesale electricity suppliers to buy up to 2.5 percent of their megawatts from offshore wind generators. I interpret that to mean that 17.5 percent or more of the required 20 percent for renewables would come from other than offshore wind.

The Post editorial doesn't mind the renewables mandate per se, just the specific requirement of the proposed legislation that a certain-sized chunk of it come from offshore wind. That requirement would keep electricity suppliers from opting for cheaper alternatives.

The Post also wants natural gas to count, at least partially, as "clean energy," even if it is not strictly "renewable." Natural gas has become quite cheap in the last few years. Burning natural gas puts half the carbon in the atmosphere that burning coal does. So why shouldn't electricity suppliers be encouraged to buy from electricity producers who use gas, if that's a lot cheaper than the proposed offshore wind operation?

My answer is that an expensive-to-build offshore wind farm needs an initial ratepayer boost before it can hope to become price competitive with natural gas, with nuclear, or even with solar, sometime down the road.

As I understand it, building the proposed wind farm would start in 2017 and be finished in 2022 — barring delays. Once it was completed, its developer would have to pay off the steep financing for it, over some ensuing period of years. Meanwhile, if Maryland's residential electricity customers' bills are $2.00 higher than they would otherwise be, most of the extra money would get funneled into paying off the loans.

Someday, though, the wind farm's startup costs would have been paid off. At that point, the wind farm would become price competitive with other power plants, and might even be cheaper than a great many of them.

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.

More on Maryland's Offshore Wind Power Initiative

As I reported in Is an Offshore Wind Farm in Maryland's Future?, Martin O'Malley, Maryland's Democratic governor, is moving ahead with a legislative proposal to subsidize a "wind farm" off the coast of our state. A cluster of wind turbines like these ...

... would be built off Ocean City, eleven miles out into the Atlantic, if the governor gets his way.

When the wind blows, the blades of wind turbines spin, generating electric power. But the offshore version of this relatively new technology is expensive and remains unproven to an extent that even many of O'Malley's fellow Democrats in Maryland's General Assembly remain unconvinced.

In The Washington Post of January 23, 2012, the article O’Malley to try again for offshore wind development, by Aaron C. Davis, talks about the governor's latest proposal.

I personally think the costs and risks are worth taking, because wind technology is clean and green. Wind power is solar power at one remove, in that the warmth from the sun is what makes the winds blow. No fossil fuels are used, no carbon is expelled into the atmosphere, and global warming is thus not facilitated.

* * *

According to Wikipedia's article on wind power, the United States already has (as of 2010) 40,180 megawatts of generating capacity from the wind, putting us in second place behind China, with 44,733 MW. "Offshore wind power can harness the better wind speeds," the article says, that exist out away from the land.

Governor O'Malley's immediate problem is that Maryland would have to subsidize the offshore wind farm, as it would be too expensive for private developers to build without financial incentives. Money, tax breaks, and/or loan guarantees would likewise need to come from the federal government. Maryland's monetary contribution would ultimately wind up being paid for by higher electric bills charged to residential households and large commercial accounts.

Legislation the governor introduced in the last General Assembly session, in 2011, would have charged residential households a flat $2.00 per month on their electric bills in the form of an explicit line item. That bill failed to pass. This year's version does not include a flat line item for customers. It assumes the costs of wind generation will be folded into the base electric rates customers pay.

It's still supposed to top out at $2.00 extra per month, but the Post article says there's a catch:

If solar [power] is any example, that means it could be nearly impossible for residents to calculate the cost of the subsidy. 

Although O’Malley’s bill would mandate that the cost be no more than $2 per month, that per-household price would have to be estimated up front on a 20-year prediction of future energy prices — a term twice as long as the state’s Public Service Commission typically forecasts. 

If the commission’s estimate is wrong, the subsidy for wind could be much higher or lower. 

“We could look like geniuses, or people could experience the price more” than $2, said one administration official, who spoke on the condition of anonymity to freely discuss the governor’s proposal.

How would the financial details work?

To make the bill more palatable to [Sen. Thomas M. Middleton, (D-Charles County), who chairs the Finance Committee, and his counterpart in the House, Del. Dereck E. Davis (D-Prince George's County)] O’Malley’s office also did away with a mandate in last year’s version that required utilities to buy wind power at a set price high above current market rates.

Rather, to ensure that developers can turn a profit, the state’s Public Service Commission, which regulates utilities, would set up a kind of commodities market. The electricity created from offshore wind would be sold at competitive prices. But the energy would also come with renewable-energy credits. The credits are needed by the state’s power generators to meet Maryland guidelines requiring them to obtain a growing share of their power from wind, solar and other renewable sources. 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.

By "sold at competitive prices" I assume the Post means that an open market would determine the price of the wind power generated off Maryland's shore; there would not be a preset price. I further assume the the "renewable-energy credits" that "the state’s power generators" need to amass — according to what mandate I don't claim to know — would be bought and sold on a secondary market whose prices would "fluctuate in tandem" with those for the power itself.

I admit to having doubts, by the way, as to whether market-determined prices would indeed "ensure that offshore wind producers can continuously count on a stable profit." Just as agricultural farmers aren't always guaranteed profits each year, why is it thought that tomorrow's "wind farmers" would be able to count on profits?




Clearly, the mandate that "the state’s power generators" — i.e., existing power plants that use coal, natural gas, or nuclear power — amass credits that derive from wind power generation is key. The operator(s) of the wind farm would receive the proceeds of selling the credits, which would amplify the proceeds of selling the wind power itself.

But existing electric-power generators would surely pass the cost of the credits on to their customers, in whole or in part. Ideally, as I say, the governor anticipates that the passed-on cost would top out at $2.00 per residential customer per month, and at "2.5 percent for the state’s largest commercial and industrial businesses."

* * *

Two key questions, then, are (1) Will the legislature pass O'Malley's complex proposal? and (2) Would it work out the way the governor hopes, if it becomes law? My guesses are "yes" and "yes" — but don't bet the farm on it.

Is an Offshore Wind Farm in Maryland's Future?

Here's a picture of what may one day soon arrive off our Maryland coast, 11 miles out from the beaches of Ocean City:

It's an offshore wind farm. The propeller-like things are wind turbines. When the wind blows, the blades turn, generating electricity.

Electric power from the wind sends no carbon into the atmosphere and so does not contribute to global warming. It's a renewable, indeed eternal, source of electricity. But it's not presently as cheap as, say, burning coal to power our light bulbs, heating, air conditioning, and the like.

One reason wind power is relatively expensive is that technologies to harness it are new. They have not yet moved "down the cost curve" to the degree experts expect over time.

So building an offshore wind farm today is costly ... and also risky, in that the market for wind power may fail to develop the way experts hope. Yet the only way to move wind power down the cost curve is to invest in it. Building wind farms will, over time, lower the costs of building more wind farms.

Maryland governor
Martin O'Malley

Maryland's Democratic governor, Martin O'Malley, thinks the costs and risks of building wind farms are tolerable even now, with governmental help. He'll be introducing legislation in this state's upcoming General Assembly session that, according to this recent article in The Washington Post, would increase the monthly electric bills of "ratepayers to help cover the cost of making offshore wind energy competitive."

A similar "measure to subsidize development of a multibillion-dollar offshore wind farm" which Gov. O'Malley introduced last year, says the article, "would have added a couple of extra dollars to every Marylander’s monthly electric bill for 20 years and thousands onto those of the state’s largest businesses."

The details of this year's modified proposal have not yet been released, but it appears to embrace a different mechanism for generating the intended financial subsidies. Accordingly:

The new plan would increase ratepayers’ bills, perhaps by an amount nearly equal to what last year’s plan would have, but in a way that would obfuscate such costs, experts said. The credits would not appear as a line-item charge but would be factored into the overall price of electricity sold in the state, raising base electric rates charged to Maryland customers.

I am a strong supporter of Gov. O'Malley in this. I feel that there is no better time for "green-energy" initiatives than now. My reasons:

1. They'll help wean us off fossil fuels in general.
2. They'll help end reliance on foreign oil in particular.
3. They'll help forestall global warming.
4. They'll pollute less in general, creating less acid rain and other harmful effects.
5. They'll use 100% renewable resources, and thus be sustainable into the far future.
6. They'll create a new industry, with permanent new jobs.

It is the creating of new jobs that is the biggest political selling point today, given the sluggish economy and the number of years it would take to get the wind farm up and running. From the point of view of Maryland, these jobs could be a hugely attractive plus for the state. And I imagine another plus factor for Maryland would be that the electric power from the wind farm could, some of it, be sold outside the Free State, thus enriching Maryland's coffers.

Yet the forthcoming O'Malley proposal will be a hard sell to even the governor's fellow Democrats in the state's Senate and House of Delegates. One reason is that the subsidies offered by the state to the wind farm's prospective developers would have to be amplified by sizable federal subsidies to those same developers, mainly in the form of tax credits and loan guarantees.

And those would be harder to come by than they might have been even last year. The general belt-tightening that we saw at the federal level in 2011 in response to the national debt crisis has made Washington largesse much harder to come by now. Add to that today's inflated skepticism about green-energy subsidies in the wake of the Obama administration's much-scorned Solyndra mistake, and you have reason to doubt the necessary federal subsidies would materialize.

I'll be keeping my eye on Gov. O'Malley's wind farm initiative as details become available and as the Maryland General Assembly comes to terms with it.