Archive | March 4, 2013

How we arrived at the numbers

We asked the Brattle Group to investigate the macroeconomic impacts of building a commercial-scale offshore wind industry in the United States. It based its work on three underlying, well-established principles:

As technologies mature, their costs decline.

“In the presence of unpriced externalities,”—for example, in the case of electricity generation, carbon and other health-related costs of pollution from burning fossil fuels—“new technologies cannot compete effectively with existing, more mature technologies.”

The future costs of both renewable and fossil-fired electricity generation are “highly uncertain,” so ensuring mature technologies exist across a spectrum of sources is “equivalent to buying insurance against the risk that the current, incumbent and cheaper technologies will be more expensive … in the future.”

Pursuing offshore wind as a viable source of renewable energy is therefore a means of not putting all our eggs in one basket when it comes to ensuring an affordable energy future, particularly when accounting for the likelihood that at some point the external costs of carbon pollution might be incorporated into the cost of energy generation.

The study assumes three different estimates of a so-called learning rate—the speed at which the industry would be able to cut costs based on lessons learned from past experience. The slow learning-rate scenario involves a high starting cost and a learning rate of 3 percent annually. The medium scenario starts with a cost that is equivalent to the first proposed projects in the United States—but still below the current cost in Europe—and a learning rate of 5 percent. And the high scenario starts at the European price point and a learning rate of 10 percent. The report defines a learning rate as “the rate at which costs decline for each doubling of the installed capacity.”

The three key measurements that the analysis focused on were the projected average increase in cost to ratepayers; and the date and investment required to bring offshore wind to a point where it costs the same as traditional energy sources, referred to as “grid parity”; and an estimate of the overall investment required to develop the proposed 54 megawatts of offshore wind capacity.

One last note about the figures in the study: Because of the uncertainty surrounding U.S. tax policy as it relates to renewable energy production, the Brattle Group did not include subsidies in its estimate of the cost of offshore wind. In January 2012 Congress extended both the production tax credit and the investment tax credit for offshore wind through the end of 2013. If the current tax structure remains in place, the numbers contained in this report will look significantly better for the offshore wind industry.

Of course, getting the offshore wind industry off the ground in the United States will require an upfront investment, and in its analysis, the Brattle Group found that a build-out to 54 gigawatts of offshore wind capacity would require an investment ranging from $18.5 billion to $52 billion—“assuming some greenhouse gas externalities are included in the market price.”

To place this figure in context, the Brattle Group also explored subsidies to other existing energy technologies and found them to be “comparable in size” to the investment required to develop America’s offshore wind industry. Domestic oil subsidies, for example, from 1950to 2010 totaled approximately $369 billion, while coal subsidies totaled $104 billion, and natural gas totaled $121 billion. Recall that these subsidies are for industries that are already decades old and, as in the case of oil and gas, are making annual profits in excess of $100 billion industrywide.