When Delmarva Power customers saw their bills increase by 59 percent last May, many blamed the increasing cost of natural gas.
So state officials went looking for a solution that would protect Delaware residents against volatility in the energy market.
The leading plan? Build another natural gas plant.
Conectiv’s proposal to build a 180-megawatt natural gas turbine plant at its Hay Road complex beat out plans for an offshore wind farm and a coal gasification plant. A state evaluation of the proposals favored the plan because it offered the best price for consumers in the next 10 years.
But a state consultant and a Delmarva consultant concluded that all three proposals would cost ratepayers more than they pay now.
Delmarva spokesman Tim Brown quoted his company’s consultant as saying it would cost residential customers about $1 more per month to contract with Conectiv for 10 years.
If the state went with Bluewater Wind’s proposed 200-turbine offshore wind farm, which the consultants ranked second, it would cost residential customers about $11 per month over 25 years, Brown said.
And if NRG built a coal gasification plant, it would cost about $26 more per month over 25 years, Brown said. The consultants ranked NRG last.
Price is the major consideration in the state’s decision-making process, followed by price stability and environmental impact. The process for picking a winner will include three public hearings this week.
But critics point to the historically volatile prices of natural gas, arguing no one can tell exactly how much it will cost, leaving ratepayers with an uncertain future.
In its bid, Conectiv estimated the future price of electricity it can offer to Delmarva will be close to what Delmarva is paying now for electricity.
Ratepayers may be better off with Delmarva buying off the open market rather than locking into a long-term contract with Conectiv, said Jeremy Firestone, University of Delaware assistant professor of marine policy.
“If the state is correct in their analysis, it would seem that bid doesn’t make sense,” said Firestone, who also suggested taxes on carbon emissions could further increase the price of natural gas.
And even Delmarva, the company that could be forced to enter into a long-term contract with one of the companies, says none of the proposals makes sense. Brown said the three proposals do not provide enough savings and price stability to justify a contract.
Delmarva argues it can meet its customers’ long-term needs through a combination of energy-efficiency programs, buying on the wholesale market, modernizing its transmission system and “targeted purchases” of renewable power.
The key issue for most Delaware residents is cost, said Edward O. Taylor, field organizer at the state chapter of the Association of Community Organizations for Reform Now, an advocacy group for low-income residents. It doesn’t make any sense to stabilize a high price, he said.
“It’s like the joke, we’re going to let this 59 percent increase stabilize our utility costs. That 59 percent didn’t take into consideration anyone in the low- or middle-income range,” Taylor said. “We need to be stabilizing profits.”
Firestone said Delmarva’s consultants’ analysis also failed to adequately consider the cost of future taxes on carbon dioxide emissions, which he said could make the proposed wind farm more attractive.
The vast majority of scientists agree global warming is caused by the accumulation of carbon dioxide in the atmosphere, largely from man’s burning of coal, oil and other fossil fuels. The Delmarva consultant acknowledged the federal government is likely to enact some kind of restrictions or financial penalty for carbon emissions, but the specifics are unknown.
This much is known: Conectiv and NRG have stated they would pass the cost of such taxes to ratepayers. Bluewater Wind’s proposed wind farm would emit no pollution.
Natural gas burns cleaner than coal, including fewer carbon dioxide emissions, noted Richard Shaten, assistant faculty associate at the Gaylord Nelson Institute for Environmental Studies at the University of Wisconsin-Madison.
That has encouraged the upsurge in the construction of natural gas plants in recent years, Shaten said.
It’s cheaper to build a natural gas plant than it is to build a coal plant or put up a wind farm, he said.
‘A self-fulfilling prophecy’
But natural gas has been the most volatile of fuels in recent years, Shaten said. Over the past decade, demand for natural gas has grown, causing prices to rise. Last year, the average wellhead price was $6.47 per MMBTU, about three times higher than the 1990s price. (MMBTU is a thousand, thousand BTUs, which is the amount of heat required to increase the temperature of a pint of water by one degree.)
Delmarva customers saw their bills increase by 59 percent last year after price caps came off. During the seven years that the state capped prices, the cost of natural gas was driving up the price of wholesale electricity.
The U.S. Energy Information Administration forecasts the price of natural gas generally going down in the next two decades.
Shaten disagreed. He argued the government’s projections of natural gas prices have been low, and he expects the price of natural gas to instead double in the next 10 years.
“The easy thing to do is build the cheapest, quickest power plant that will serve your needs, which is natural gas,” Shaten said. But “if everyone keeps building natural gas plants, it becomes a self-fulfilling prophecy that natural gas prices will skyrocket.”
Domestic sources of natural gas are being depleted, which will force U.S. companies to turn to the Middle East or Siberia for liquefied natural gas, said Dave Bayless, a professor of mechanical engineering at Ohio University. That’s likely to mean higher prices, he said.
Delaware is now fighting a proposal, on territorial grounds, to build a liquefied natural gas terminal across the Delaware River from Claymont that could bring stabilizing quantities of natural gas to the region, but is mostly produced outside the United States.
“Whenever you talk about energy from foreign sources, it’s problematic,” Bayless said.
Conectiv spokesman Bill Yingling said his company can afford to offer low, stable pricing because it would take out a long-term contract with its suppliers to lock in prices for a “substantial portion” of its natural gas supply. The company refused to specify exactly how much of its supply would be covered under that contract.
Conectiv would then sell to Delmarva at price changes pegged not to the natural gas market, but to the less-volatile coal market. If natural gas prices exceed coal, Conectiv would absorb the difference, Yingling said.
“That’s part of what we do in our business,” Yingling said of the risk to Conectiv. No matter how bad it gets, Conectiv would honor the contract, he said. “What we sign up for is what we live to.”
Pricing rationale questioned
But Conectiv’s bid does not specify what the price would be to Delmarva on day one, instead specifying a formula to set the price.
“We don’t understand the rationale for basing the natural gas price on the coal price,” said Bluewater Wind spokesman Jim Lanard. “How do you compare these bids if you don’t have everybody’s firm price?”
Prices for coal, a more-abundant resource, have traditionally been relatively stable, although prices have increased over the last few years.
Wind-power prices tend to be more stable than fossil fuels, which are subject to market forces.
On the issue of a carbon tax, Firestone noted that the state consultant criticized Delmarva’s estimates as too low. Firestone said even the state is underestimating how high the carbon taxes will be. If the state used estimates from the Boston-based consultant Synapse Energy, the wind farm would look like a better option, Firestone said.
“We have to think of it like an insurance premium,” Firestone said. “You’re insuring against the possibility of higher rates in the future by locking into long-term rates.”
Contact Aaron Nathans at 324-2786 or email@example.com.
IF YOU GO
The Public Service Commission will hold three public hearings this week to receive input on three proposals to build a new energy source in Delaware. Four state agencies could recommend in May whether to build one of the plants. The public hearings are scheduled for 7 p.m. on each of three days: Tuesday, House Chambers, Legislative Hall, Dover; Wednesday, Delaware Technical & Community College, Owens Campus theater, Georgetown; and Thursday, Carvel State Office Building auditorium, 820 French St., Wilmington.
COMPARING ENERGY SOURCES
Three companies are vying to build a power source in Delaware that would supply energy to Delmarva Power under a long-term contract. The state is evaluating the proposals based on cost, price stability and impact to the environment.
Bluewater: Wind turbine
Description: 200-turbine Atlantic Ocean wind farm 7 to 13 miles off Rehoboth Beach or Bethany Beach. Total maximum yield 600 megawatts; likely annual yield 111 to 127 megawatts.
Dollar cost: More than $1.5 billion. State consultant predicted long-term costs at 10.4 percent greater than buying electricity off regional market, or $2.2 billion by 2038.
Environmental impact: Zero emissions. Undetermined effect on migratory and aquatic birds and aquatic life. Unproven durability in mid-Atlantic offshore environment.
NRG: Natural gas
Description: 600-megawatt plant near Millsboro fueled mostly by natural gas-like fuel extracted from coal. Project also would retire two dirtier coal units at Indian River power plant.
Dollar cost: More than $1.5 billion. Long-term ratepayer cost up to 24.7 percent more than buying electricity off regional market, or $5.2 billion by 2038.
Environmental impact: Emissions far lower than conventional coal plant. Potential multimillion-ton-per-year increase in carbon dioxide /greenhouse-gas emissions without costs for capture and control. Unproven proposal to inject CO2 deep underground.
Conectiv: Coal gasification
Description: 177-megawatt turbine system in east Wilmington, fueled primarily by natural gas.
Dollar cost: Up to 1.1 percent more than buying electricity from regional grid. Reliance on potentially unstable natural gas supplies and prices.
Environmental impact: Increased CO2 emissions without controls.
By Aaron Nathans
The News Journal
4 March 2007
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