Energy Musings - September 24, 2023
East Coast governors plead for more federal aid for offshore wind projects. It is an acknowledgement of their cost and pain residents face in their power bills. The author finds himself conflicted.
Offshore Wind Has Me Conflicted
We recently wrote about the offshore wind industry and its current challenges from inflation, supply chain problems, and rising interest rates. Those three factors are cited by offshore wind developers as the root of the turmoil hitting the industry and calling its future into question. While wind leases are being snapped up off every coastline, the center of the industry is off the East Coast states stretching from Virginia to Massachusetts.
The financial problems that are disrupting the smooth progression from lease to delivered electricity envisioned by President Joe Biden in his pledge to install 30 gigawatts of offshore wind power by 2030 have put many of the planned and approved projects in jeopardy. The governors of six East Coast states recently wrote to Biden asking for more federal help to keep these projects alive.
It is not as if these projects haven’t received lots of government help, but the cost problems are outrunning the aid. Offshore wind projects are blessed because the primary driver behind their approval is to satisfy the various coastal state clean energy mandates. Because residents have adopted a not-in-my-backyard policy for onshore wind turbines and solar panels, the idea is to put them where they can’t be seen or heard. The decision to stick them offshore was easy. If you eliminate the visual opposition to windmills – their presence on the horizon, the flicker effect from rotating blades, and the blinking warning lights atop them – the public will become supportive. Who can disagree with the goal of ending carbon emissions from fossil fuel power plants? Who cares about the damage to marine mammals and the East Coast fishing industry, let alone the impact on local economies dependent on tourism?
With the support of climate activists, compliant politicians, and a history of declining costs, offshore wind was heartily embraced as the preferred solution for clean energy supplies. The economics of offshore wind were never examined, nor the physics of the progressively larger wind turbines needed to generate more power. Problems with the latter led to turbine suppliers having warranty issues that needed to be dealt with and disrupted delivery schedules for newer wind farms, adding costs to the projects.
The economic problem is tied to plans based on continued low inflation and zero interest rates that existed for the prior decade. That economic world was an aberration and not the normal offshore wind developers assumed in their calculations. Having contracted their electricity output at prices that met their rate of return needs, when inflation and interest rates failed to cooperate, these projects became “unfinanceable.”
Offshore wind is expensive. The Energy Information Administration’s latest calculation of the levelized cost of energy shows offshore wind with a $136 per megawatt-hour of power price in 2022. Even after a healthy $31/MWh tax credit, offshore wind still costs 165% above the cost of power from a combined-cycle natural gas power plant and 30% above the cost of supercritical coal and nuclear power.
What the governors want
The six governors want the Biden administration to rewrite the rules to enable offshore wind developers to qualify for bonus tax credits that lift the possible amount to 50% of project costs. The problem is that 20 of the 50 percentage points of credits are tied to the terms of the Inflation Reduction Act that developers cannot satisfy because they cannot meet the domestic content requirements.
The governors also want the federal government to create a revenue-sharing program for the wind lease bonuses. They argue that since lease bonus payments if a cost of the electricity the developers must recover, state electricity ratepayers bear the brunt of that cost. Returning some of that money to the states would help. However, oil and gas companies, who share the same offshore operating obligations must fund their lease bonuses. Thus, every American who buys oil or gas bears the brunt of those bonuses. The governors’ plea is a ruse to get more federal cash, which will allow them to shovel some or all of it to offshore wind developers, as Maryland and New Jersey are already doing.
In effect, the governors of six states want the taxpayers of the other 44 states to bear some of the cost of their green energy mandates that support the offshore wind industry. This is where I find myself conflicted. How so?
I live in Houston, Texas but have a summer home in Rhode Island, one of the states appealing for more federal help. According to the EIA’s latest data for June 2023, the average residential electricity price for Rhode Island was 26.04 cents per kilowatt-hour. That compares with Texas’ price of 14.20 cents/kWh. Any action to keep the price of Rhode Island residential electricity prices in check would benefit my pocketbook.
It is more meaningful to me to have Rhode Island electricity prices held down. I have a 24-panel, 7.92-kilowatt solar installation on my house’s roof. My 15-year contract with the local utility, which buys my power for 34.75 cents/kWh, uses my revenue from the solar panels to eliminate most of my monthly bill and refunds the surplus funds. The total cost of my system was repaid by electric bill cancellations and surplus payments in 60 months. The amount of surplus payments depends on the price of my electricity, so if it is held down, I earn more profit. Yea! But if my income tax bill and the cost of credit I use, which is impacted by the growing government debt, increases because of reduced offshore wind lease bonus money flowing to the federal government, I will suffer. Boo!
Should I be cheering or booing? Since I cannot calculate the respective impacts of this plan, I can only do a back-of-the-envelope analysis. There are one million residents in Rhode Island. I am not one, because I am only here for a few months a year, but the increased federal money flowing to Rhode Island to ease electricity bills will be more impactful than the cost imposed on the other 291 million people in the U.S., of which Texas represents a little over 10%.
Selfishly, I hope Biden caves to the governors’ requests. I think it is likely since offshore wind is the centerpiece of his climate change agenda, and it appeals to his environmental supporters whom he will need in his upcoming election campaign. On the other hand, I am personally opposed to federal subsidies that distort the economics of energy. Therein lies my conflict – object on principle or accept the personal benefit. The reality is I have no say in what happens.