The proposal to build a 40-turbine wind farm off the South Shore would enrich its contractor with “extraordinary” returns while “saddling” Long Island ratepayers with a 20-year-plus contract for energy at “excessive” prices, a new study of the project’s economics has found.
Scheduled to be released this week, the study, by the Long Island Economic & Social Policy Institute at Dowling College, questions the initial $356-million construction cost of the project and suggests LIPA explore the alternative of funding and building the wind farm itself, which it says would be cheaper.
“Wind energy makes sense for Long Island, but this contract does not,” said the study’s author, Mark Greer, a professor of economics at Dowling.
Using documents first obtained by Newsday through a Freedom of Information Law request last year, the study’s research determined that contractor FPL Energy’s proposed construction costs exceed current market estimates for an offshore wind farm by more than $100 million. Greer estimated a realistic construction cost estimate to be around $250 million.
In addition, the study determined that the return on investment for the wind farm would be 19 percent to 20 percent – a figure Greer called extraordinary for lower-risk ventures such as wind energy – while providing a shareholder return on investment of 42-45 percent.
FPL’s initial winning bid for the wind farm stipulated a $94.97-per-megawatt-hour charge for energy the project would generate, a figure that would climb to $187.68 by the 20th year of the contract, assuming that federal tax credits end after 10 years, according to Greer’s analysis of LIPA’s figures. He estimated that if LIPA were to fund the project itself, it could produce energy at a steady cost of $68.48 over the 20 years, for a total saving of $589.4 million compared with the FPL contract. Greer contends inflated construction costs allow FPL to arrive at the higher energy-cost figures. Were LIPA or another government entity to secure the funding and build the project itself, the costs could be much lower, he said.
“I think LIPA has lost its way,” said Martin Cantor, director of the institute. “It has to get back to the reason it was created: to provide the lowest cost of energy for Long Island. This contract certainly isn’t that.”
LIPA, which hasn’t voluntarily released figures on the construction costs or the price of electricity from the proposed wind farm, called the study “way off base.”
“Without a formal contract, no study can ascertain the final costs or profit involved,” LIPA chief executive Richard Kessel said yesterday. “LIPA and/or FPL will respond in more complete detail once it has seen the study and had a chance to analyze it.” Kessel said the authority has already committed to giving the economics of the FPL proposal another look, reiterating the point new LIPA chairman Kevin Law made at a recent trustees meeting. Kessel said LIPA was nevertheless “committed to it, we think it’s a good project,” and cautioned that present-day estimates do not take into account that costs for fossil-fuels could skyrocket and make wind energy look cheap.
As for funding and building the wind farm itself, LIPA has already considered it, Kessel said, and determined ratepayers couldn’t afford the risk, “especially after Shoreham.” He was referring to the nuclear power plant that was built but never operated and saddled ratepayers with billions in debt.
Steven Stengel, a spokesman for FPL Energy, said the company “stands by” its cost estimates and energy prices. “We feel that we are clearly very experienced at this,” he said, noting FPL is the largest contractor of wind-power projects on land. “The costs we presented to LIPA were based on our analysis of what it would cost to build the … farm,” he added.
In a 2005 letter to LIPA, FPL modified its $356-million proposal to “reflect the substantial increase in capital required to construct” the wind farm. FPL and LIPA have since declined to say how much more it will cost, or what will be its impact on ratepayers. The letter, which Newsday obtained through a Freedom of Information Law request, redacts all mentions of construction-cost and energy-price increases.
By Mark Harrington
2 April 2007
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