Governor Andrew Cuomo’s energy agency issued a stern correction to an October 24 blog post in this space that said subsidies for offshore wind developers could cost ratepayers more than $6 billion.
NYSERDA, the state Energy Research and Development Authority, said my calculations (which were based on NYSERDA’s own data) were “incorrect and misleading.”
So I went back and double-checked. In one respect, I did make a mistake, explained below—but not in reaching the $6 billion estimate.
In fact, the final price tag could climb even higher.
First, some basics:
Wind turbines set for construction off Long Island and New York City can’t operate profitably under present market conditions, so the state must subsidize their installation and operation. In the case of two wind projects announced by Governor Cuomo in July, the subsidies will be collected by public utilities from ratepayers across the state—a form of indirect taxation.
The turbine operators will sell electricity (at a loss) into New York’s wholesale market. Over a 25-year period beginning around 2024, the difference between their revenues and a higher rate guaranteed by NYSERDA will be made up with money collected through “credits” that utilities must buy. The utilities will then charge higher rates to recoup that cost.
So what will this cost ratepayers? The wind projects were first announced months ago, but it wasn’t until last month that we got a glimpse of more specifics in a report filed by NYSERDA with the state Public Service Commission.
Based on the numbers in that report, my blog post included the following:
State-of-the-art turbines … have capacity factors greater than 60 percent. The contracts with Empire and Sunrise appear to acknowledge as much, since NYSERDA has agreed to subsidize up to 9.9 million MWh per year—reflecting capacity factors averaging 66.4 percent. In that case, at $25.14 per MWh, the contracts now “valued” at $2.2 billion in 2018 dollars would cost ratepayers $6.2 billion over 25 years.
Within hours of the blog post, NYSERDA issued (to a single journalist, not the general public) the following unsigned statement:
The Empire Center’s calculations are incorrect and misleading. In back-calculating the annual megawatt hours generated by the projects, Girardin confused real and nominal values to create erroneous ratepayer impact metrics. NYSERDA’s calculations did in fact utilize the generation from the Empire Wind and Sunrise Wind projects as bid – with an approximate 50 percent capacity factor, as noted in the OREC agreements themselves appended to the Phase 1 Report. NYSERDA used an outlook of wholesale energy and capacity prices to calculate the expected OREC prices, resulting in an average OREC cost of $25.14 per megawatt hour (2018 real dollars). The estimated total OREC contract value, in 2018 real dollars, is $1.2 billion and $1.0 billion for Empire Wind and Sunrise Wind, respectively.
My mistake: NYSERDA said the “contract value” of the two deals totaled $2.2 billion, and I assumed that was the total cost of subsidies. I wrote that such a price-tag wasn’t consistent with other project figures, and said NYSERDA had likely low-balled the subsidies by underestimating how many megawatt-hours it would subsidize.
That assumption was wrong, however, because NYSERDA never intended the “contract value” to represent how much New Yorkers would pay in subsidies (in today’s money). The agency used an accounting technique to put a “value” on the contracts as though they were an investment. This valuation used a 6.55 percent “discount rate,” which makes numbers look considerably smaller in future years than just adjusting them for expected inflation.
For example, applying NYSERDA’s 6.55 percent discount rate, a 2048 dollar will have dwindled in value to the equivalent of about 15 cents in today’s terms. But assuming average consumer price inflation of 2 percent, which is the Federal Reserve’s target level, a dollar in 2048 will be worth about 55 cents in today’s terms. Applying a discount rate, instead of adjusting for inflation, made the subsidies look considerably smaller.
So for the purpose of figuring out what New Yorkers will actually have to pay, the “contract values” are useless because we don’t know how much subsidy they can expect to pay in each year. NYSERDA has assured developers they’ll get up to $29 billion, in nominal dollars, over the life of the contracts. There is, to say the least, a lot of uncertainty baked into these deals, which will still have New Yorkers paying subsidies beyond Andrew Cuomo’s 90th birthday.
In short, the mistake was in trying to deconstruct NYSERDA’s $2.2 billion figure: it was never meant to represent a serious cost estimate, but to deliberately mislead.
For anyone interested in calculating the actual cost impact of the wind turbine projects, the most substantive number in NYSERDA’s filing was a $25.14 “average” subsidy, in what the NYSERDA filing labeled “2018 dollars,” for every megawatt-hour generated over the life of the 25-year deals. Taken together with the 9.9 million megawatt-hours maximum generation NYSERDA has agreed to pay for each year, that puts the total ratepayer subsidies at up to $6.2 billion in “2018 dollars”—which presumably means an inflation-adjusted value.
Even this number relies on long-term energy market forecasts and on assumptions about how much energy NYSERDA expects to buy from each developer in each year. NYSERDA hasn’t released details of those forecasts and assumptions. Thus the per-megawatt-hour average subsidy could be even higher than $25.14.
So why does NYSERDA need to conceal the actual price-tag of these projects?
Because, for one thing, the agency has put New Yorkers on the hook for more money than it publicly acknowledges. And because NYSERDA has good reason to conceal what is shaping up to be a very bad deal.
State blew up wind costs
The Cuomo administration’s approach to offshore wind has been primarily driven by political considerations. Offshore wind has a cult-like following in certain environmentalist circles, and the state zeroed in on it as a solution instead of weighing it alongside other substantive mechanisms for reducing carbon emissions (such as a carbon tax or hydroelectric power).
The bidding process for subsidies was completed earlier this year, in a seemingly rushed manner, before the federal Bureau of Ocean Energy Management could let additional companies get leases directly off New York’s coast. In fact, the Cuomo administration has vocally opposed a federal plan to allow turbines off the Hamptons in Suffolk County, where they could potentially be built at a lower cost than those now set to get state subsidies.
Cuomo’s stance artificially shrank the pool of bidders, and left just four developers able to submit bids. Only one (Empire Wind) actually proposing anything in New York waters—even as several other companies were asking the feds for permission to build offshore the Empire State.
And for those that could compete, the state artificially hiked their costs: Governor Cuomo last summer pledged to force developers to pay union rates during the construction of these and other renewable energy projects. He also, unlawfully, coerced bidders into steering work to certain construction unions that had endorsed his re-election last fall. These steps have likely driven up the project costs, and the subsidies needed, considerably.
The subsidy contracts themselves, with 25-year terms, are curiously long, considering the rhetoric from offshore wind proponents about how the industry will eventually operate without subsidies. New Jersey and Maryland, for instance, gave developers 20-year deals, meaning they envision profitable operation without subsidies during several years when New York ratepayers will still be subsidizing ours.
And finally, NYSERDA (and by extension, ratepayers) are assuming tremendous risk under these contracts. If electricity prices end up lower than NYSERDA expects, the subsidies (for which more than half the cost will be borne by people living north of New York City) will have to be larger. At the same time, the Cuomo administration may even be counting on electricity prices to rise downstate and decrease the need to subsidize the wind projects—which is yet another reason why NYSERDA should, but won’t, be more transparent about these deals.