There are two fundamental drivers for New York’s Climate Leadership & Community Protection Act (Climate Act – the presumption that there is an existential threat from climate change and that the transition away from greenhouse gas (GHG) emitting energy sources requires no new technology and will be cheaper because the wind and sun energy is free. I disagree with both positions. This article addresses the cost fallacy based on a new analysis at the Cato Institute.
I have followed the Climate Act since it was first proposed, submitted comments on the Climate Act implementation plan, and have written over 380 articles about New York’s net-zero transition. The opinions expressed in this post do not reflect the position of any of my previous employers or any other organization I have been associated with, these comments are mine alone.
Overview
The Climate Act established a New York “Net Zero” target (85% reduction in GHG emissions and 15% offset of emissions) by 2050. It includes an interim 2030 reduction target of a 40% reduction by 2030 and a requirement that all electricity generated be “zero-emissions” by 2040. The Climate Action Council (CAC) is responsible for preparing the Scoping Plan that outlines how to “achieve the State’s bold clean energy and climate agenda.” In brief, that plan is to electrify everything possible using zero-emissions electricity. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies. That material was used to develop the Draft Scoping Plan outline of strategies. After a year-long review, the Scoping Plan was finalized at the end of 2022. In 2023 the Scoping Plan recommendations were supposed to be implemented through regulation, PSC orders, and legislation. Not surprisingly, the aspirational schedule of the Climate Act has proven to be more difficult to implement than planned and many aspects of the transition are falling behind. When political fantasies meet reality, reality always wins.
Cato Report
Travis Fisher described the high cost of offshore wind policy. He argues that eventually political support for offshore wind will have to confront the costs: “Recent polling suggests that just 38 percent of Americans are willing to increase their energy costs by $1 per month to address climate change.” He goes on to show that offshore wind will cost much more.
He makes a compelling case that “offshore wind mandates are bad public policy because they simply cost too much and would not be economically viable without taxpayer support”. He also points out that there are significant environmental impacts. He explained that the political targets are coming to grips with these issues:
In contrast to the ease and simplicity of issuing aspirational offshore wind plans, policymakers are now confronting the reality that offshore wind faces many obstacles. The second half of 2023 brought story after story of canceled or renegotiated contracts for offshore wind. BP and Equinor canceled their contract with the state of New York; Ørsted canceled two large projects in New Jersey; and developers in Massachusetts canceled four projects totaling 2,400 MW of offshore wind.
Unfortunately, the politicians have not adjusted their policies:
With such high electricity prices, one might expect political leaders to attempt to reduce the burden of the energy costs their constituents pay. Instead, policymakers in these states have insisted on mandating offshore wind, which will invariably increase electricity rates and impose a higher federal spending and tax burden on the country. There are several ways of looking at the cost of electricity from specific resources, such as wind off the East Coast of the United States. Unfortunately, offshore wind is expensive by every measure.
The reason for this post is Fisher’s explanation of different ways of looking at the cost of electricity.
One way to subsidize offshore wind is through Power Purchase Agreements (PPAs) and Levelized Revenue of Energy (LROE). Fisher explains:
PPA prices are a generous way to examine the cost of offshore wind. They are the price paid by the offtakers of the energy from offshore wind projects—PPAs do not explicitly show the full cost paid by retail electricity consumers and taxpayers. These contract prices are usually expressed in wholesale units of dollars per megawatt‐hour ($/MWh).
As one example, the Vineyard Wind project off the coast of Massachusetts has a levelized PPA price of about $98/MWh (escalating from a lower base price to a higher final price at the end of a twenty‐year contract). As the National Renewable Energy Laboratory explained in 2019:
“This LROE estimate for the first commercial‐scale offshore wind project in the United States appears to be within the range of LROE estimated for offshore wind projects recently tendered in Northern Europe with a start of commercial operation by the early 2020s. This suggests that the expected cost and risk premium for the initial set of US offshore wind projects might be less pronounced than anticipated by many industry observers and analysts.”
Other operational projects, like the South Fork project in New York, don’t advertise the PPA price but have stated that “the power from South Fork Wind … will cost the average ratepayer between $1.39 and $1.54 per month when it starts operating.” (Recall that fewer than 40 percent of Americans are willing to spend $1 monthly to address climate change.)
In short, PPA prices tend to put the cost of offshore wind projects in the best light.
The State of New York has not admitted that even these best-case costs “do not compare well to clearing prices in wholesale markets”. Comparison to current prices shows that the PPA costs are much higher.
The second way to look at the cost of electricity is through the Levelized Cost of Energy (LCOE). Fisher describes the parameter:
LCOE is a common measure of the cost of electricity from a given class of resources. LCOE boils down construction and operating costs into a single cost estimate (in dollars), divided by the energy output of the plant over its lifetime (in watt‐hours). Hence the familiar unit of dollars per megawatt‐hour. LCOE is a straightforward way to get a sense of the levelized (or averaged‐out) cost of a standalone power plant.
According to recent LCOE estimates from EIA, the unsubsidized cost of offshore wind exceeds $120/MWh and is among the most expensive generation resources. The consulting firm Lazard also publishes LCOE estimates that have become common reference points. In the latest Lazard research, the LCOE for offshore wind ranged between $72/MWh and $140/MWh.
Fisher notes that if the LCOE parameter is used then “offshore wind compares favorably to the highest‐cost natural gas generators ($115–221/MWh) but not to the lowest‐cost renewables ($24–75/MWh for onshore wind and $24–96/MWh for utility‐scale solar photovoltaics [PV]).” However, this parameter only considers the cost of the generating capacity.
Fisher explains that the there is a third way to look at the cost of electricity: the Full Cost of Electricity (FCOE) and Levelized Full System Cost of Electricity (LFSCOE). He notes that:
Recently, scholars have expanded the LCOE model to include spillover costs that are borne by other generators on the system. To remedy the analytical shortcomings of LCOE, the FCOE approach zooms out and considers the all‐in cost of the entire electricity system. This is the appropriate measure to use when judging society‐wide costs because the full system costs are ultimately borne by retail ratepayers (and by taxpayers when subsidies are involved, as they are today).
The most important element of FCOE that is missing from LCOE is the cost to the rest of the system of intermittent output. Intermittent or “non‐dispatchable” generation always requires backup and balancing help from controllable or “dispatchable” resources to satisfy total electricity demand; however, the cost of making other resources fluctuate their output to accommodate intermittent generation—by backing down in times of high intermittent production and ramping up in times of low intermittent production—is not captured in LCOE estimates.
A group of authors who favor using the FCOE of solar PV and onshore wind said, “LCOE is inadequate to compare intermittent forms of energy generation with dispatchable ones and when making decisions at a country or society level.”
Fisher quotes a description of the (LFSCOE):
The LFSCOE are defined as the costs of providing electricity by a given generation technology, assuming that a particular market has to be supplied solely by this source of electricity plus storage. Methodologically, the LFSCOE for intermittent or baseload technologies are the opposite extreme of the LCOE. While the latter implicitly assume that a respective source has no obligation to balance the market and meet the demand (and thus demand patterns and intermittency can be ignored), LFSCOE assume that this source has maximal balancing and supply obligations.
For our purposes what does that mean for costs? Fisher explains
Under the LFSCOE assumptions, the cost of onshore wind in Texas is approximately seven times higher than its LCOE (an LFSCOE of $291/MWh compared to an LCOE of $40/MWh). The details of applying an LFSCOE to offshore wind would only be slightly different from applying it to onshore wind. Specifically, offshore wind has a slightly higher capacity factor than onshore wind (about 43 percent versus 34 percent in 2018, according to the International Renewable Energy Agency’s 2019 “Future of Wind” report). However, offshore wind is still an intermittent resource, meaning its LFSCOE is higher than its LCOE.
Conclusion
While the focus of this analysis was on offshore wind the differences between the three ways of looking at electricity costs is applicable to onshore wind and solar too. The FCOE and LFSCOE methods of calculating electricity costs are much better approaches for estimating the total costs. When using those parameters the costs of renewables are much more expensive than current electricity prices. In addition, those parameters do not incorporate the cost of the dispatchable emission-free resource that credible New York analyses project are necessary for an electric system that eliminates fossil-fired generation.
Proponents of the net-zero transition disparage fossil fuel subsidies but the explicit and implicit subsidies for wind and solar far exceed them. The Levelized Full System Costs of Electricity calculates the implicit subsidies necessary to integrate wind and solar into the electric system. Fisher concludes:
Policymakers need to understand the full costs of their actions and come back to the shore. The American people simply don’t want to pay more for energy—not in their electricity bills and not in their tax bills.
Pragmatic Environmentalist of New York 