July 27, 2010
Massachusetts

The big bet

BY: Bruce Mohl, CommonWealth Magazine, www.commonwealthmagazine.org 27 July 2010

Massachusetts is pushing ahead with an ambitious green agenda, but there has been remarkably little debate about the its scope or what might undermine it

The south shore community of Milton is planning to borrow $6 million to build a large wind turbine on town land. Normally, a project of that magnitude in such a small town would be studied endlessly, but it whisked through town meeting in less than an hour because it’s such a no-brainer.

Town officials expect the wind turbine to reduce the region’s reliance on fossil fuels, curb greenhouse gas emissions, bolster the state’s clean tech sector, and, most important of all, start turning a profit in its first year of operation. Over the course of 20 years, the town expects the turbine to return nearly $8 million to municipal coffers.

This amazing confluence of financial and environmental gains is made possible by the Green Communities Act of 2008, which allows Milton to sell the electricity from its wind turbine back to its local utility, NStar, and collect roughly twice what other generators of electricity are paid for their power. The extra subsidy for Milton’s wind project will be paid by all of NStar’s ratepayers.

Fueled by similar subsidies, green projects are springing up all across Massachusetts. Falmouth has two wind turbines up and running and is preparing to add another. Cape Wind wants to put 130 turbines in Nantucket Sound. National Grid is installing a solar facility at its gas storage tanks in Dorchester. MIT is investing heavily in energy technology research and companies across the region are pursuing alternatives to coal, oil, and natural gas.

Bit by bit, project by project, Massachusetts is pushing ahead with an ambitious and well-coordinated green agenda that is essentially a bet on a future in which carbon emissions are costly, fossil fuels are increasingly scarce, and clean tech jobs are up for grabs. It’s a bet that could very well pay off. But there has been remarkably little debate about the overall size of the bet or about alternative scenarios, particularly breakthroughs in the search for natural gas that could lead to plentiful domestic supplies at reasonable prices.

Most consumers are unaware of the green subsidies they are paying because they don’t see them. They are hidden in plain sight on electric bills, tucked inside charges for power distribution and generation, the two main components of the bill. No one has calculated the full cost, but it is likely to exceed several billion dollars over the next three years and rise substantially in future years as green energy targets are ratcheted up and state officials follow through on plans to address greenhouse gas emissions from cars and trucks.

State officials say the cost of the energy investments will be offset by savings from lower electricity consumption and lower electricity prices, as well as reductions in world-threatening greenhouse gas emissions. But those savings are premised partly on assumptions about the pace of technology development and the future price of oil and natural gas.

Gordon van Welie, president of ISO-New England, the region’s power grid operator, likens Massachusetts to a car buyer trying to choose between the all-electric Chevy Volt and the gasoline-powered Toyota Corolla. The Volt, which is expected to debut this year, will cost more than twice as much as a Corolla, but its cost-per-mile driven and its carbon dioxide emissions will be far less.

Van Welie says Massachusetts, through its energy programs, is essentially choosing the Volt, betting that more costly green investments now will pay off in the future as the price of fossil fuels keeps rising. Will the bet pay off? “It’s easier said than done,” van Welie says. “It’s clear it’s going to cost a great deal of money in the short and medium term to address these issues.”

The Massachusetts plan

If the state of Massachusetts is betting on a green future, Ian Bowles is the one rolling the dice. The state’s secretary of energy and the environment is convinced Massachu­setts can reduce its energy use, curb greenhouse gas emissions, and ramp up the use of renewable power in a way that saves consumers money and creates jobs.

“We think the clean energy revolution will be the next American Revolution, run out of Boston and New England,” he said at a Boston conference on climate change earlier this year.

The revolution, financed by utility ratepayers through assessments on their bills, has two major goals: Reduce energy usage, thereby avoiding the cost of constructing new power plants, and tilt the electricity fuel mix toward renewable forms of energy like wind and solar, which hopefully will displace higher-polluting fossil fuels.

The foot soldiers in this revolution are the Massachu­setts investor-owned gas and electric utilities, which are heavily regulated by the state. “The state is using the utilities as a vehicle to move policies forward,” says Janet Gail Besser, vice president of regulatory strategy and policy at National Grid. “We’re happy to step up to the plate to do that.”

The biggest initiative is a $2.2 billion, three-year energy efficiency effort. Utilities hope to reach 2.4 million customers with energy audits, lighting and appliance rebates, retrofits, and even social-networking programs that let neighbors see how their energy use compares to each other. State officials say the three-year effort will reduce electricity usage across the state by 1.4 percent in 2012 and create or maintain 4,000 jobs.

Penni McLean-Conner, vice president for customer care at NStar, says the energy efficiency programs for the most part build on what the utilities have been doing for years. “There are no new innovations here per se,” she says. “It’s about doing more and packaging it better.”

Other initiatives are more experimental. Utilities, for example, are launching smart grid pilot projects in a handful of communities to improve their delivery networks and to open two-way communication with customers. The goal is to reduce power demand during peak times by conveying real-time pricing information to customers so they run dishwashers and other appliances when electricity is plentiful and costs are low. During peak-demand times, the utility could even turn down customer thermostats to cut energy usage.

The regional power grid is also encouraging energy efficiency by essentially treating power generation and conservation the same. Instead of just paying power generators to produce more electricity, the market is also paying large consumers of electricity to cut their energy usage permanently or sharply reduce their usage during peak demand periods. These sorts of initiatives to reduce demand account for 9 percent of the region’s electricity capacity.

To reduce greenhouse gas emissions, Massachusetts and nine other northeastern states are participating in a cap and trade system that sets a limit on overall electric utility carbon dioxide emissions. Under the system, utilities are required to buy allowances at regular auctions for each ton of their emissions. The emission targets have been set fairly high, so the price of allowances has stayed low (less than $3 per ton) and the emission reductions haven’t been very large. That could change if the targets are tightened or the federal government establishes a national cap and trade system.

The state has a lot of initiatives to promote renewable energy. All of them funnel subsidies to companies, municipalities or individuals to produce renewable power that would otherwise not be competitive under current market conditions. Federal tax breaks and subsidies supplement the state initiatives.

The broadest state subsidy program is the renewable portfolio standard, which requires a percentage of the state’s electricity to come from new renewable sources. The requirement is 5 percent this year, rising 1 percentage point a year until it hits 15 percent in 2020.

Under the program, renewable power developers are paid like any other generator but they also receive special certificates for each kilowatt hour of electricity they produce. The certificates are as good as cash because companies selling electricity to customers in Massachusetts have to buy certificates equal to 5 percent of their sales. The price of the certificates fluctuates with supply and demand, but state officials expect it to hover for many years around the state-set cap of 6 cents per kilowatt hour.

Starting this year, Massachusetts electricity sellers are also required to buy a small portion of their renewable energy certificates from in-state solar power generators. The solar carve-out mandates a much higher subsidy of at least 30 cents a kilowatt hour and a maximum of 60 cents a kilowatt hour. (For comparison purposes, the wholesale price of power is about 5 cents per kilowatt hour and the retail price that consumers pay is about 9 cents.)

A number of other initiatives subsidize renewables in different ways. One is the net metering program that Milton plans to tap. Another directs utilities to enter into long-term contracts with renewable power developers to help them obtain financing for their projects. The most prominent example is National Grid’s $1.8 billion, 15-year contract to buy half of Cape Wind’s electricity.

Utilities are also building their own solar facilities, a back-to-the-future initiative since utilities were forced by the state to divest all their energy businesses in the late 1990s. National Grid is currently building five, one-mega­watt facilities on company-owned land, including an open area near the gas tanks along the Southeast Expressway in Dorchester. The company says its five installations will cost somewhere between $26 million and $36 million and generate electricity with an average price of 30 cents per kilowatt hour.

National Grid is fully committed to the state’s green agenda. Edward H. White Jr., the company’s vice president of customer strategy and sustainability, said in an affidavit filed with the company’s solar proposal that the project is not cost effective under current market conditions, but should be built anyway.

“It is not possible to say today when solar generation will be less costly than the market price of electricity from the prevailing fossil-fuel driven market,” White said. “But what is most important is taking initial steps to utilize new technologies that prepare us for a cleaner energy future, and solar can be an important part of that societal preparation.”

The costs

At a February climate change summit in Boston, hundreds of government officials, environmental advocates, and clean tech executives gathered to discuss how businesses can succeed in a low-carbon economy. Speaker after speaker extolled the virtues of going green. Then Robert Rio, a senior vice president at Associated Industries of Massa­chusetts, the state’s largest business group, stepped to the microphone.

Rio said he was as green as the next guy, but had a question that no one seemed to be able to answer. “I just want to know what it costs,” he said, referring to the state’s green agenda. He said he was troubled that so many of the items on the agenda seemed to be focused more on making money or creating jobs instead of addressing environmental problems. “There’s only a one-letter difference between green and greed,” he said.

The reason Rio hasn’t been able to get an answer is because no one knows for sure. Many of the state’s programs are just getting underway and their cost, relative to existing fuels, hinges on a number of variables, including the pace of technology breakthroughs, demand for electricity, and the future price of natural gas. There is little consensus on any of these variables.

ISO-New England, for example, is forecasting that electricity demand in Massachusetts will rise an average of 1.1 percent a year between 2010 and 2019, but Bowles says it will go down because of the state’s energy efficiency measures.

The Patrick administration in April estimated the cost of solar carve-out subsidies at $75 million a year for the next 10 years, or a total of $750 million. An earlier report estimated an even higher annual cost. Bowles says neither forecast is accurate, predicting solar power will be price competitive in five years and need no additional subsidies.

National Grid’s proposed contract with Cape Wind may include the most detailed analysis of a green initiative’s cost. The utility estimates its 1.2 million electric customers in Massachusetts will pay somewhere between 42 percent and 50 percent more for Cape Wind power than they would if that power was purchased from conventional sources. That’s $734 million to $885 million extra (in 2013 dollars) over the life of the 15-year contract. And it doesn’t include an extra 4 percent fee ($70.6 million in 2013 dollars) that National Grid will collect for doing the deal.

Consumers are also in the dark about the cost of the state’s green initiatives. Virtually none of the subsidies they are paying are broken out on customer utility bills. There’s a small charge for renewable energy, which goes to fund the state’s Clean Energy Center, and a charge for energy conservation, but the cost of the other initiatives is being rolled into the distribution and power generation sections of the bill.

State and utility officials say it would be impractical to break out each environmental initiative on a customer’s bill, but Robert Bryce, the author of Power Hungry: The Myths of “Green” Energy and the Real Fuels of the Future, says the lack of disclosure is leading many consumers to conclude that renewable energy is essentially free. “It ain’t free and nobody is talking about the cost,” he says. “The tax from all this green business is being hidden from the public because it’s being put on their utility bill and not on their taxes.”

Some potentially big, green bills loom on the horizon. Massachusetts policymakers have focused their attention on electricity and largely ignored the transportation sector’s use of fossil fuels. That may change, particularly with the BP oil spill in the Gulf of Mexico dramatizing the nation’s reliance on hard-to-get oil. Following the lead of California, Massachusetts and a number of other northeastern states are exploring the possibility of reducing the carbon content in fuels that power our cars, trucks, and buses, which could increase the price of gasoline.

ISO-New England says tapping bountiful wind resources in Maine and purchasing hydro and nuclear power from Canada?could significantly boost the region’s renewable energy supplies. But the agency says bringing that wind power to market in southern New England where it is needed would require the construction of new transmission lines at a midrange cost of $10 billion. There is no consensus yet on who would pay for those lines, but in the past transmission costs have been divided among states in the region based on consumption, which would mean 46 percent of the tab would be paid by Massa­chu­setts residents.

State officials say green investments will pay big job dividends, but most of the money that Massachusetts electricity customers are paying to subsidize renewable energy is flowing out of state. In 2008, electricity sellers in Massachusetts obtained only 11 percent of their renewable energy certificates from companies inside the state. Most of the certificates came from biomass, landfill gas, and wind projects in Maine (31 percent), New York (28 percent), New Hampshire (13 percent), and Canada (12 percent).

Massachusetts regulators are trying to steer more of this ratepayer money to in-state projects, but those efforts were challenged in court in April and most of them were subsequently set aside. TransCanada, a Canadian energy company that operates a wind farm in Maine and sells electricity in Massachusetts, says the Massachusetts-only policies violated the interstate trade provisions of the US Constitution. Mike Hachey, a top official at Trans­Canada’s office in Westborough, says the goal of state renewable energy programs should be to find the best possible resources at the cheapest prices no matter where they are. “Otherwise, at the end of the day, the loser will be the customer,” he says.

Alternative scenarios

Dexter-Russell, a Southbridge company that makes fine cutlery for food service professionals, is aggressively trying to cut its energy costs and carbon emissions. The company is installing new energy efficient lights, switching from oil to natural gas, and even considering building a hydroelectric project on the Quinebaug River that runs by its plant.

Yet Alan Peppel, Dexter-Russell’s chief executive, says he sometimes feels like the company is running in place, cutting power usage but seeing little impact on its energy bills. He worries that state-backed investments in more expensive wind and solar power will only make it more difficult for Massachusetts to attract new businesses and for his company to compete against rivals in China and Brazil.

“The cost structure they have is very different from what we face,” he says.

Peppel’s concern raises an interesting policy question: Does it make sense for Massachusetts—a state with the sixth-highest electricity rates in the country and one of the best environmental records—to be leading the way on so many costly green initiatives?

Massachusetts already uses energy more efficiently and cleanly than almost every other state. It ranks 48th out of 50 states and the District of Columbia in energy consumption per capita. It ranks 29th in terms of overall greenhouse gas emissions, 47th when those emissions are adjusted for economic output.

The nation as a whole saw its carbon dioxide emissions rise 19 percent between 1990 and 2007, with emission levels in fast-growing states like Arizona and Colorado going up 62 percent and 52 percent, respectively. By contrast, carbon dioxide emissions in Massa­chu­setts actually fell over that time period by 4.6 percent. Even more remarkable, state officials last year projected that emission levels in 2020 would show no increase over 1990 even if no new efforts were made to reduce them.

Massachusetts emission levels are relatively low because our economy has shifted away from manufacturing to lower-polluting service industries and because the state has dramatically changed the way it generates electricity, which accounts for about a third of all emissions.

In 1990, the state relied on oil and coal for two-thirds of its electricity generation, but by 2008 natural gas had displaced oil to become the dominant fuel. Natural gas burns more cleanly that the other two fossil fuels, producing half the carbon dioxide of coal and far fewer other greenhouse gases. Combined, natural gas and nuclear power now account for two-thirds of the state’s electricity generation, with coal representing another quarter of the fuel mix.

Although Massachusetts has benefited environmentally from this shift in fuels, state officials argue that renewable sources of energy need to be developed to reduce reliance on electricity produced with natural gas. “We’re tied to the fossil fuel roller coaster,” says Bowles, the state’s secretary of energy and the environment. “We’re tied to the natural gas price, and getting off that roller coaster is important for pure economics.”

Yet right now Massachusetts consumers are riding that fossil fuel roller coaster down. Retail prices for electricity are down about 30 percent compared to where they were two years ago when natural gas prices were at an all-time peak. Bowles says the current low prices for natural gas won’t last, pointing to the steep up-and-down gyrations in the market over the last 10 years. He says projections about the future price of natural gas are notoriously wrong.

But there is growing evidence that natural gas may be an important fuel of the future. New drilling techniques developed in Texas have made it possible to economically tap gas trapped in shale rock formations that was once considered out of reach. Drillers fracture the rock with a mixture of chemicals and water, allowing the gas to seep out and be captured. While environmentalists have raised concerns about the process, it’s a technique that has suddenly transformed the gas industry into the energy industry’s hottest play. Industry officials say they are now sitting on reserves big enough to supply 100 years of consumption at current levels.

Big Oil is taking an interest. Royal Dutch Shell PLC agreed to pay $5 billion in May for a Pennsylvania company that controls drilling rights in a promising shale area that stretches from West Virginia to New York. And last December, Exxon Mobil paid $41 billion for XTO Energy Inc. of Houston, a major shale gas player. The industry activity is fueling speculation that natural gas could displace significant amounts of coal in electricity generation and even be viable as a transportation fuel.

For Massachusetts, a state that has already embraced natural gas as its primary fuel for electricity generation, the downward trend in prices and the brightening supply picture is both good and bad. The lower price of natural gas means electricity is cheaper, but it also means that wind, solar, and other forms of renewable energy will continue to need hefty subsidies to remain competitive.

The sudden resurgence of natural gas is a reminder that change happens quickly in the energy business and the state’s bet on a green future is no sure thing.

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