Harley Lee’s article in the Feb. 2 edition of the Press presents an incomplete analysis of the economics of the proposed wind tower. Though the standard worst-, baseand best-case scenarios were presented, the spreadsheets accompanying these scenarios were not.
A cursory analysis of the spreadsheets, which the Town Council has seen, suggests that the worst-case scenario does not come close to capturing the potential downside risks of this project. If the town is going to invest between $5 million and $6 million of borrowed money, and in doing so put the taxpayers on the hook for maybe $429,000 a year for the next two decades, it makes sense to understand what those risks are.
There are four key variables to be considered when modeling the different scenarios: the cost to build the tower, the rate at which the town can borrow money, yearly operating costs, and the price at which the turbine’s output can be sold. Small miscalculations in any one of these variables will have a large impact on the bottom line. Yet Lee’s three scenarios adjust for the building costs only.
By far the most important variable is the price at which the tower’s output can be sold. In all three scenarios it is assumed that the town will sell the power for 13.3 cents per kilowatt hour (kwh) in year one through 15, and then, in what surely must be a guesstimate, for an ever-increasing amount in year 16 through 20 until it reaches 15.4 cents kwh. How can we be so sure?
In a Town Council meeting a couple of months ago, Town Administrator Bruce Keiser indicated that he had purchased power for the town for 7 cents per kwh. In the same meeting it was also noted that the wind tower would sell its power for 13.3 cents per kwh. Light bulbs should have gone off when hearing those odd economics. Effectively the town is going to buy power at 7 cents and sell it at 13.3 cents. That sounds like a tremendously profitable arrangement, but it also sounds like what Enron tried to do. Of course we all know what happened there. The price the tower supporters are hoping to receive is a subsidized one, and it is one that is 80 percent above the free market price. At a time when subsidies are being pulled for solar and wind projects globally, can we assume the 13.3 cents will stand?
To provide some idea of just how sensitive the economics of the tower are to the received power price, we can play with the numbers in Lee’s spreadsheets. Let’s assume that in the final five years we do not receive the projected price increases, and we continue to sell the power for 13.3 cents. In that case, and changing none of the other variables, the tower loses money in each of the last eight years. In the final year of the loan, instead of making $58,000, the tower loses $33,000. Over 20 years the tower generates a total profit of $160,000, not the $429,244 modeled. Is it worth going into $6 million in debt to generate that level of return? Yet this scenario is still probably too optimistic and comes nowhere near the worst-case scenario.
The worst-case scenario should include the loss or reduction of the subsidy. The state passed a law a few years ago requiring utilities to buy wind power at an inflated rate, and it allowed them to pass the extra costs along to its customers. At the time this subsidized rate was not too far from the free market rate, so the cost to the consumer of supporting clean energy was not that great. However, the price of natural gas, which powers National Grid’s plants, has dropped by 70 percent since then.
Four years ago the U.S. was assumed to have just a 30-year supply of gas, now it has more than it can use and the price is forecast to drop further. This is why Hess Oil canceled plans to build an LNG import facility at the top of the bay, and why Keiser will pay even less for electricity next year.
At some point National Grid’s customers will “cry uncle.” Consumers will want to see the benefit of lower natural gas prices show up in their electricity bills. Residents and businesses in the rest of the state will rebel against footing the bill for what might be considered vanity windmill projects in a few coastal communities. This will require the state General Assembly to reverse the law they passed a few years ago. Would they do that?
Last year the assembly reversed years of legislation when it zeroed out COLAs for retirees. Simply the promises made to the retirees over the course of a couple of decades no longer made economic sense. Three years ago who would have imagined a democratic-led assembly doing this to their union constituents? And to top it off they even congratulated themselves afterwards. Based on that experience can we assume that the subsidized electricity rate will stand? It might. But can we assume it? Think about who owns wind towers – rich towns and the wealthy who invest in them for the tax benefits and the subsidy.
Assume that we split the difference between the market and the subsidized price by building into the spreadsheets 10 cents per kwh, which is still 42 percent above the market price. On that basis the tower loses $2.7 million over the 20-year period. Plugging 10 cents per kilowatt into the best-case spreadsheet still generates a loss of $1.2 million.
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