Deepwater-National Grid deal bad for ratepayers

No matter what the alleged benefits of offshore wind power, as it has been proposed in Rhode Island, it is a bad deal for all consumers of electricity.
The key issue is the fact that the state, by its approval of the power purchase agreement between National Grid – the state’s monopoly electricity distributor – and Deepwater Wind – the developer of the proposed offshore wind-energy facility – has authorized approximately $390 million of above-market distribution charges for all Rhode Island ratepayers over the 20-year length of the agreement.
In addition, the state is giving National Grid a 2.75 percent bonus (worth about $19 million) from the power generated by the Deepwater project, which of course, the ratepayers will be required to pay. It is little wonder that National Grid has been so eager to make this deal happen in the name of “green power.”
Power deregulation came to Rhode Island in 1998, aiming to introduce free-market competition to the electricity marketplace. And indeed, consumers and businesses can switch to lower-cost power suppliers if they wish. However, because of the special deal between National Grid and Deepwater, all ratepayers, no matter how inexpensive their own source of electricity, are being required to pay for the higher price for power generated by the Deepwater project through their distribution charge. And that price is quite a bit higher than that generated by standard sources.
The reason that National Grid can do this is that the power purchase agreement is outside the ISO-New England power market, which is competitive. Thus, National Grid can start selling electricity at 24.4 cents per kilowatt-hour at the beginning of the operation of the facility, which is estimated to be in 2013. By contrast, the “standard offer” from National Grid at the moment for “small customers” is 9.366 cents per kwh and 7.148 cents per kwh for “large customers,” not including a renewable standard energy charge of 0.123 cents per kwh. But this rate is guaranteed in the power purchase agreement to escalate by 3.5 percent every year for 20 years. Therefore, by the end of the term of the agreement, the price will have become 47 cents per kwh, thus yielding above-market costs of approximately $390 million, as calculated by National Grid.
And that $390 million will be spread out among all electricity consumers in Rhode Island. Toray Plastics (America) Inc., for instance, will need to pay additional electricity distribution charges of about $304,000 in the first year alone and about an extra $7.5 million over the span of the 20-year agreement.
What are the benefits to the state of this overcharge? The Block Island project will cost about $205 million, but only $42 million of this would be spent in Rhode Island. The other costs will be paid to European manufacturers and go to other states. Paying a higher cost of about $390 million to get an economic impact of only $42 million (and the six permanent jobs that come with it) makes no sense.
Deepwater’s plan is to install eight turbines with a capacity of 28MW (the actual output would be about 11MW because wind is intermittent). This will create only about 1 percent of the power used in Rhode Island. Thus, for an environmental benefit of only 1 percent, all ratepayers will be forced to pay the extra $390 million over 20 years. This is an extremely small project that has extremely high costs for all ratepayers.
Deepwater Wind claims that higher cost is inevitable in order to generate green energy. However, this benefit is creating a competitive disadvantage relative to other regions of the country, especially the South. This disparity in the cost of electricity is one of the reasons many manufacturing companies are leaving Rhode Island. The balance between keeping jobs of existing businesses in Rhode Island (not to mention adding new ones) and going green needs to be considered. Deepwater says that the price of electricity will be reduced in the long term. However, if this extremely high-cost wind project is built now, there will be no way to reduce the price paid by ratepayers because the price must recover all of the high installation costs (i.e., it will be a fixed cost).
While renewable power was supposed to give price sustainability compared to the volatile prices of fossil fuel power generation, the price in this power purchase agreement will increase every year by 3.5 percent no matter what the economic situation is in the future.
Deepwater is saying that “Rhode Island can become a hub for wind manufacturers.” However, the company is not required to make this happen.
The R.I. Public Utilities Commission rejected the original power purchase agreement in March, saying “this is not commercially reasonable.” And it was right.
About four months after the PUC’s decision, the PUC reversed itself in a 2-1 vote, following the passing of a midnight-session law by the General Assembly. The PUC now says that the project is “commercially reasonable,” when it is the exact same power purchase agreement, except for the “open book” concept (meaning that any cost savings in the building of the facility will be realized by the state’s ratepayers, not Deepwater). But an open book does not guarantee any price reduction.
It is not too late to seriously consider whether this Deepwater project is really a good deal for Rhode Island or not. &#8226

Shigeru Osada is the senior vice president for Toray Plastics (America) Inc., a manufacturer of plastics located in the Quonset Business Park.

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