Tuesday, December 22, 2009

Think Tank Flunks Renewable Energy Analysis

An Examination of Wisconsin Policy Research Institute’s Bogus Methodology

Michael Vickerman
RENEW Wisconsin
December 22, 2009

A report put out in November by the Wisconsin Public Research Institute contains a number of specious assertions intended to advance the proposition that a number of proposals endorsed by the Governor’s Global Warming Task Force in 2008 would be exorbitantly expensive. One particularly dubious finding in the report1, titled “The Economics of Climate Change Proposals in Wisconsin,” is its estimate of the net cost of the 25% Renewable Energy Standard (RES) proposed in the climate change bill. The “trained economists”—WPRI’s term, not mine--who worked on the report contend that the capital and operating costs of the capacity needed to meet the proposed RES would exceed $16 billion by 2025. Mindful that this estimate could become a “headline” number in the coming months, I thought it might be useful to dive into WPRI’s economic analysis and verify the methodology and assumptions that were used to reach this conclusion.

Having done this, I would like to take this opportunity to catalog the faulty forecasts, transparent double-counting and other methodological errors that enabled WPRI to arrive at this absurdly inflated cost estimate. What I’ve documented below leads me to conclude that WPRI’s $16 billion number was pulled out of thin air, and that its analysis is nothing more than a tortured effort at reverse-engineering the numbers to fit the preordained conclusion.

1. The electric sales forecast is grossly inflated. The report authors assume that annual electricity sales in Wisconsin will climb from its current level (70 billion kilowatt-hours (kWh) in 2008) to 92 billion kilowatt-hours in 2025. Right now, electric load is shrinking, not growing, and 2009 sales will come in somewhere at about four billion kWh below the all-time high set in 2007. So, if we’re headed into 2010 with an electric load somewhere between 67 - 68 billion kWh/year, clearly a miracle must occur in order to lift that that number by 26% to reach the 92 billion level in 2025, especially if this climate change bill passes, which it must in order to set the new RES at 25% by 2025. My view is that the state’s electric sales will remain flat for the foreseeable future, due to a combination of continued improvements in energy efficiency coupled with subpar economic performance. So if electricity sales remain stable over the next 15 years, then the total supply of renewable energy needed to satisfy the 2025 target would be 17.5 billion kWh/year. This is considerably less than the 28.3 billion kWh of renewable generation which the report writers claim will be occasioned by the RES (See Table 4 in the report).2

The table below presents the cumulative impact of current and proposed renewable energy policy requirements using more realistic sales forecasts and
capacity requirement estimates. When the sales forecast is adjusted to mirror today’s load numbers, the capacity cost falls to $13.5 billion, using the rest of the WPRI methodology, which is clearly flawed, as we shall see.

Cumulative impact of Proposed RE standard in climate change bill

Category 2004 Baseline 2013/2015 2025
RE Percentage 3.3% 10% 25%
Total kWh Sales 68 billion/year 70 billion/year 70 billion/year
Total RE kWh supply (gross) 2.5 billion kWh/year 7 billion kWh/year 17.5 billion kWh/year
New RE kWh supply (net of 2004) -- 4.5 billion/year 15 billion/year
New RE capacity (net of 2004) -- 1,650 MW* 5,400 MW*

* Assumes 90% wind/10% biomass mix; combined capacity factor 32%

2. WPRI’s cost estimate inexplicably incorporates the cost of the current Renewable Energy Standard into the total price tag. The WPRI report purports to characterize the incremental cost of increasing the RES above current levels. However, the cost estimates used by WPRI lump in the renewable capacity that will be added to comply with the existing requirements under Act 141. It would appear that WPRI decided to include these costs because the bill would move the compliance date of Act 141’s requirement forward to 2013. This is sophistry of the highest order. The 10% renewable content target that Wisconsin utilities must attain is embedded in current law. To avoid the double-counting we see here, the authors of this report should have treated all Act 141-compliant projects as sunk costs, not as new costs. As evidenced by the table below, treating all Act 141 renewable energy acquisitions as sunk costs reduces the incremental addition of renewable generating capacity down to 3,750 MW, compared with the 6,480 MW figure that WPRI cites.

Incremental Impact of Proposed RE standard (net of Act 141)

Net RE increase 15%
New RE supply 10.5 billion kWh /year
New RE capacity 3,750 MW

When the double-counting of Act 141 generation is eliminated, the capacity costs associated with a successor RES decline to a range between $9 and $9.5 billion, compared with the $16 billion figure cited by WPRI. Implicit in that cost range is the assumption that the every kilowatt-hour that is applied toward a successor RES will be generated from a facility that hasn’t been built yet. As we shall see in the next section, that is a faulty assumption.

3. WPRI’s analysis ignores currently available renewable generating capacity that can be used to meet an RES. WPRI’s analysis assumes that all of the renewable capacity needed to meet the 2025 target will be built some time in the future. That assumption fails to account for all the existing wind capacity in the Upper Midwest that is not generating RES-compliant electricity, whether for Wisconsin or another state. Wisconsin one has one such facility--Butler Ridge in Dodge County--that has uncommitted capacity. Though it has a capacity rating of 54 MW, only 20 MW is dedicated under a long-term contract to a Wisconsin electric provider (WPPI Energy). The remaining portion of the project produces energy that is sold into the wholesale market and renewable energy credits (RECs) that the facility owner will sell to anyone wishing to acquire them. There is nothing to stop a Wisconsin utility from acquiring the REC’s from Butler Ridge’s 34 MW of uncommitted capacity and applying them to its Act 141 requirements and any successor RES.

An REC corresponds to a megawatt-hour (MWH) of electric generation, or 1,000 kWh. How is an REC worth? Over the last two years, REC’s have averaged between $5 and $10 per MWH, or from half a penny to a penny per kWh. Assuming a 30% capacity factor for Butler Ridge, the cost to a Wisconsin utility of acquiring that facility’s annual output of REC’s would range from $45,000 (at a half a penny per kWh) to $90,000 (at one penny per kWh).

As the table below indicates, Iowa is far and way the regional leader in wind generating capacity. Yet Iowa’s renewable energy standard is very modest compared with other state RES percentages, including that of Wisconsin. A significant portion of that capacity falls into one of two categories: (1) owned by an Iowa utility but not committed to that state’s RES or (2) owned by an independent power producer (e.g., NextEra Energy, Horizon Wind Energy, berdrola USA, etc.) that does not have a long-term contract with an electric provider). Furthermore, most of the wind turbines in those categories were placed in service after January 1, 2004, and as such are eligible for complying with Wisconsin’s RES. My conservative estimate of existing Iowa wind capacity that could be applied to Wisconsin’s RES, over and above those turbines that are either owned by Wisconsin utilities or producing power for Wisconsin utilities, is 750 MW. This quantity of “spare” wind capacity could significantly reduce the quantity of generation needed to be constructed to meet a 25% standard need to manufacture and install produce As with the example of Butler Ridge, any Wisconsin utility can elect to acquire the REC’s from these Iowa installations and apply them to current and future RES requirements.

It should be mentioned that more than 100 MW of existing Iowa wind capacity (e.g., Barton, Endeavor 2, Top of Iowa 2) supply Wisconsin utilities with REC’s that are dedicated to their voluntary renewable energy programs, an example being Madison Gas & Electric’s Green Power Tomorrow. Because these REC’s are being resold to a subset of utility customers at a premium, they cannot be applied to their RES requirements. However, there may come a day when these utilities decide that it would be more cost-effective to apply those REC’s to any additional RES requirement rather than build new capacity specifically for RES compliance purposes.

If we were to subtract 750 MW from our running total, the net increase would come to 3,000 MW, which would cost somewhere in the neighborhood of $7.5 billion, less than half of WPRI’s estimate.

Snapshot - Midwest Windpower Development Activity
December 2009

State Operating capacity
(in MW) Under construction (in MW)
Iowa 3253+ 199
Minnesota 1805 60
Illinois 1123 979
Indiana 730† 404
Wisconsin 449 --
Michigan 129 16

+ Total includes Alliant Energy’s 200 MW Whispering Willow project
† Total includes Horizon Wind’s 200 MW Meadow Lake project

Sources: American Wind Energy Association, Alliant Energy

4. WPRI uses the wrong metric to calculate savings from the proposed successor RES. In Table 3 of the WPRI report, the authors present the gross capacity costs of the new renewable generation and subtract the cost of avoided conventional generation to arrive at a net cost. In this case, the authors assumed that the new renewable generation would offset the construction of natural gas-fired peaking units. This formulation is reasonable in places where loads are growing and the need to build new generating capacity is well-established. However, those circumstances are no longer operative in Wisconsin, which, as noted above, has experienced a decline in retail sales, due principally to significant consumption cutbacks in the industrial sector. According to the Energy Information Agency’s latest Electric Power Monthly report, in-state generation output is running more than 2 billion kWh below last year’s totals (through August 2009). Moreover, in consideration of additional efforts by high demand customers to curb electricity usage3, a near-term rebound in overall electricity consumption is simply not in the cards. With a capacity reserve margin that is likely to approach 25% in 2010, the likelihood of a Wisconsin utility proposing to build a gas-fired peaker in the next 10 years is nil.

In light of the growing capacity overhang in Wisconsin, I believe that a more appropriate candidate for measuring savings from the proposed RES would be plant retirements. There are a number of older fossil steam generating units that require the installation of scrubbers and other pollution control technology to bring them into compliance with federal Clean Air Act regulations. There are likely to be instances where a retrofit would not be cost-effective. In those situations, the utility can either sell the generating unit to another entity, as We Energies is attempting to do with its share of Edgewater 5, or retire it.4 The savings that would accrue with retiring less efficient fossil steam units would come in two forms: an avoided capital expenditure and a reduction in operating expenses. A utility that times its renewable energy acquisitions to correspond with planned fossil plant shutdowns would accomplish two objectives. The first would be to maximize the reliability value of the renewable generation it acquires. The second would be to stabilize the asset value of its generation portfolio even as it removes an older unit off its system. Moreover, such a strategy would result in a more efficient accumulation of CO2 offsets, which, one need hardly add, is the ultimate goal of this legislation.

Other Problems

The report makes a number of other assertions that fly in the face of reality. One is that all of the new renewable generating capacity will be located in Wisconsin. No support is provided for that patently ludicrous claim. The authors are clearly oblivious of the many out-of-state wind projects that are either owned by Wisconsin utilities or are generating electricity under contract to Wisconsin utilities. As is indicated in the table below, Wisconsin utilities have not been reticent about building--or taking power from—wind energy installations located in other states.

The RES cost analysis also assumes that Wisconsin utilities will be the sole owners and operators of all post-2013 renewable generating facilities. How the report authors came to that conclusion is utterly mystifying, given the existence of such nonutility-owned installations as Butler Ridge, Forward Energy Center and Montfort in Wisconsin, not to mention the projects owned by NextEra Energy and Iberdrola Renewables listed above.

Out-of-State Windpower Projects Owned by or Under Contract to Wisconsin Utilities
(In-service dates 2004 and later)

County (State) Project Owner MW Utility Offtaker Name
(In-service date)
Worth (IA) Iberdrola Renewables 80 WPPI (50 MW)
MGE (30 MW) Top of Iowa 2 (2007)
Worth (IA) MGE 30 MGE Top of Iowa 3 (2008)
Osceola (IA) NextEra Energy 50 MGE Endeavor 2 (2008)
Hancock (IA) NextEra Energy 150 Alliant-WPL (100 MW) Crystal Lake (2008)
Worth (IA) Iberdrola Renewables 30 WPPI
Barton 1 (2009)
Howard (IA) WPS 99 WPS Crane Creek (2009 est.)
Freeborn (MN) Alliant-WP&L 200 Alliant-WP&L Bent Tree (2010 est.)


The report’s attempt to characterize the incremental cost impacts of a successor 25% renewable energy standard is fatally flawed in the following ways:

 It relies on a grossly inflated electricity sales forecast that is completely detached from current realities.
 The final cost estimate includes all the generation built to comply with the current renewable energy standard, a clear-cut case of double-counting.
 The authors fail to account for existing renewable generation capacity that is not currently being applied to a state renewable energy standard.
 There is a high likelihood that the savings from the renewable energy standard are undervalued, because the authors fail to model plant retirements in their analysis.

In the final analysis, the convergence of methodological sleight of hand, unsupportable assumptions, and computational errors in this section is telling. The attempt to double-count existing renewable generation toward the incremental costs of a successor RES is especially egregious, and plainly gives away the authors’ real intent here, which is to portray the policy in the most negative light they could conjure. It would be too generous to describe the analytical approach taken here as incompetent or slipshod. What we have here instead is disinformation, pure and simple, and it should be called out as such, especially as the Legislature begins consideration of arguably the most important economic development and environmental protection initiative in many years.


1 http://www.wpri.org/Reports/Volume22/Vol22No7/Vol22No7.html

2 There seems to be computational error in Table 4 of the WPRI report. If the estimate of total electricity sales in 2025 is 94.116 billion kWh, then 25% of that number is 23.529 billion kWh, not 28.235 billion kWh as indicated in the table.

3 http://www.jsonline.com/blogs/business/78527027.html, “Nine state factories pledge to cut energy use,” Dec. 4, 2009.

4 http://www.jsonline.com/blogs/business/78724417.html, “We Energies may sell stake in Sheboygan coal plant,” Dec. 8, 2009.