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New O'Malley wind farm proposal still a long shot

Published at: Jan 23, 2012
source: The Baltimore Sun
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Maryland Governor Martin O'Malley announced this week a new proposal to develop offshore wind energy for the state. This is the second year in a row that the governor has proposed such a project. The proposal includes up to a $2 per month rate increase for electricity users but places clear demands on developers to plan financing and construction.

In its most important respects, Gov. Martin O'Malley's new proposal to build a wind farm in the Atlantic Ocean isn't different from the old one.

Developers must still pay hundreds of millions of dollars to build wind turbines off Maryland's coast. And Maryland electricity customers still have to pay for them.

Everything else is detail. That's why the project, proposed Monday by the governor for the second year in a row, still faces very long odds. Fiddling with the financing mechanics, as O'Malley has suggested, may win the legislature's approval this time. But that's not the same as signing a deal with a private company to start construction.

For any economically viable offshore wind proposal, "there's a massive subsidy from the ratepayers involved," said David Wisowaty, CEO of Fenimore Partners, a New York-based consulting firm that specializes in wind energy. "It's always the same issue - the very high cost of offshore power. It just requires some way of getting a high price per kilowatt hour" from consumers.

O'Malley administration officials acknowledge the high cost of offshore wind compared with most other kinds of energy.

But they'll protect household customers, they say, by capping the subsidies at $2 a month beyond what electricity users would have paid otherwise. And they'll require an independent analysis to ensure the extra cost pays off in construction jobs, reduced pollution and other benefits.

"It's a pretty low-risk proposition," said an administration official who requested anonymity so as not to upstage O'Malley's announcement. "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."

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.

Even a generous agreement from Delmarva Power to buy offshore wind megawatts wasn't enough for NRG Energy to attract investors to finance its Bluewater Wind project off the coast of Delaware. NRG pulled the plug on the project last month. The Cape Wind proposal in Massachusetts still hasn't found a buyer for half its electricity.

Uncertainty in Washington about future loan guarantees and tax subsidies for wind energy aren't helping. Tax credits deemed crucial for wind development expire this year. Partisan rancor in Congress prompts many to fear they won't be renewed.

"The general tone that the threat of expiration sets makes a difficult environment to attract investment in renewable energy," said Matthew DaPrato, a senior analyst at IHS Emerging Energy Research. "That's just something that really scares investors. There needs to be some long-range clarity on the policy purpose behind these projects."

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 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.

But the higher cost for offshore wind would be passed to electricity customers anyway. It's hard to believe that burden could stay below the $2-a-month cap and still cover developers' construction, financing and profits, as well as the labor contracts that Maryland unions are demanding.

Especially since the cost of conventional electricity has been stabilizing. To a large degree, natural gas prices determine electricity costs. Natural gas prices have been falling and may stay contained for years, thanks to huge, newly accessible gas stores in shale formations.

Remember, the added cost for offshore wind must be no more than $2 per month on top of what customers would have paid without it. The more prices for conventional electricity rise in coming years, the easier it will be for offshore wind to compete with it. But thanks to shale gas, conventional electricity may not be all that expensive.

Competition from natural-gas-fired electricity plants has already squelched plans for new U.S. nuclear power reactors. It's likely to have the same effect on offshore wind farms unless, somehow, Congress drastically increases support for renewable energy.

O'Malley administration officials say they'll minimize risks to ratepayers for his new offshore wind proposal. If they follow through on that promise, that's why this risky project won't get built.

 

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