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Questions of costs, jobs and influence surround O'Malley's offshore wind proposal

By Aaron C. Davis and Steven Mufson
Washington Post Staff Writers
Wednesday, March 2, 2011; 11:25 PM

Maryland Gov. Martin O'Malley on Thursday will ask lawmakers to support a proposal to raise almost every state resident's electric bill for the next 20 years to underwrite a plan for Maryland to generate some of the nation's first offshore wind power.

O'Malley's legislation runs counter to a campaign promise to lower ratepayer costs that helped propel him to the governor's mansion five years ago, as well as repeated efforts since then to cast himself as a fighter for lower residential energy prices.

But if he succeeds, O'Malley (D) could produce a high-profile environmental achievement in his second term and secure his place as a national leader on green energy.

His plan would attempt to make the state's first proposed offshore wind project - a $1.5 billion field of giant turbines about 111/2 miles off Ocean City - attractive to investors and developers. It would require Maryland utilities to buy power from the wind farm at a price far above the current market rate and at which its developers agree they could turn a profit.

According to the governor's office, the cost of the subsidy would be spread among all Maryland electric customers in the form of monthly surcharges. The fee has been estimated at $1.44 a month for residential customers, but an analysis released by legislative budget analysts Wednesday night pegged the initial fee at $3.61 a month. For the state's largest industrial power users, the surcharges would add up to tens of thousands of dollars a month.

O'Malley's hope is that with similar projects being launched in Delaware, Massachusetts, New Jersey and Rhode Island, the surcharges will eventually disappear as the industry matures. His plan assumes, as do federal projections, that the industry will mature within a decade or two and that its prices will become competitive with those of coal and gas. Along the way, studies suggest, the effort would spawn thousands of construction, manufacturing and other blue-collar jobs not easily sent overseas.

But in Annapolis, several members of a committee that regulates utilities said they are reluctant to force any new fees on customers this year.

Most members of the House Economic Matters Committee, which is scheduled to hear testimony from O'Malley about the plan Thursday, said they are primarily interested in the plan's costs to ratepayers, its assumptions about job creation and concerns that political influence might have affected the way the bill was drafted.

Several committee members said close ties between O'Malley and one of the project's potential developers has raised eyebrows and needs to be understood fully.

The governor's former chief of staff, Michael R. Enright, a friend since high school, is managing director of an energy company that has paired with a Virginia firm to try to win federal leases needed to develop all of Maryland's offshore wind areas.

"I've been contacted by industries that want a similar setup because they would like to build generation in the state too," said Del. Jeannie Haddaway-Riccio (R-Talbot), a committee member. "But they're not getting subsidies and mandated power-purchasing agreements. They feel like biomass or solar might be just as important as wind."

Committee Chairman Del. Dereck E. Davis (D-Prince George's), who has sparred with the governor over energy policy, said he supports the governor's plan generally but is conflicted about imposing costs on consumers.

"The things the bill espouses we definitely need to do. Clean energy, green jobs, diversify our energy sources; I support all that," Davis said. "But the thing that gives me pause, what you just can't get around, is the money component, the surcharge. There's no way to gloss over that."

And assessing just how large that charge may be will be no easy task. Even offshore wind's biggest proponents say that the nature of the governor's proposal - as well as the fact that not a single offshore wind turbine has been constructed in U.S. waters - means that many of the costs are to be determined.

O'Malley's offshore wind proposal would essentially force the start of a new energy market in Maryland.

Under the governor's plan, utility companies would be required to buy wind power at one fixed price for at least 20 years. That price would be set by the state's Public Service Commission next year. The plan assumes that developers will be awarded federal leases late this year or early in 2012, that construction would begin in 2014 and that the first turbines would begin spinning in 2016.

According to cost modeling by the governor's office, which assumes the PSC signs a 25-year contract, Maryland pegs offshore wind costs when the power comes online at about 16.4 cents per kilowatt hour, or more than 60 percent higher than the rate at which most utilities in the state are buying power. Like Delaware, the model assumes the developer receives an annual price increase of 2.5 percent to cover inflation.

But Maryland's budget analyst says the governor's model doesn't factor in all of the costs. The analyst's report estimates an "effective rate" of 21 cents per kilowatt hour for Maryland offshore wind power in 2016, rising to 23 cents by 2040.

By comparison, long-term projections released in January by the U.S. Energy Information Administration forecast that traditional electric power costs - now at an average of 11.1 cents - will fall slightly over nearly the same period.

Abigail Ross-Hopper, O'Malley's energy adviser, said the state's calculations that wind power would be relatively less expensive are based in part on less optimistic and less current modeling of traditional energy costs.

Energy prices in Maryland doubled from 1999 to 2009, and "intuitively it doesn't make much sense that energy prices are going to stay flat for the next 25 years," she said, "it just doesn't."

Maryland expects traditional energy prices to rise 4 percent annually, on average, over the life of its wind contract, or faster than an annual inflation adjustment for wind, meaning that "the incremental price we pay for the wind would actually get smaller and smaller," Ross-Hopper said.

Ross-Hopper said the state' s model was constructed late last year, before the January release of the latest federal data. The federal report attributed its projections of lower long-term energy costs to the country's growing estimated natural gas reserves.

There is also disagreement on how much residential utility bills would likely increase as a result of the wind project. The state originally forecasted an increase of $1.61 a month, but adjusted that downward by 17 cents, saying transmission charges would decrease.

Utilities, however, say transmission charges are unlikely to decrease for very long and probably not by that much.

The budget analyst projected the cost at $3.61 a month, or $43.31 a year, in 2016. The amount would decrease significantly over the life of the contract, to $1.91 a month, or $22.95 a year, in 2040.

Both models assume hundreds of millions of dollars in transmission line upgrades, including a major new route that Pepco has been pushing for, which could also require a surcharge.

Costs aside, Hopper said O'Malley's proposal is critical for the state to meet its goal of having 20 percent of its energy come from renewable resources by 2022.

Although federal climate legislation looks unlikely, more than half of the states have adopted climate bills that require certain percentages of utility power to come from renewable sources. In New Jersey, it's 22.5 percent by 2021; in Delaware, it's 20 percent by 2019. Without wind projects, it will be difficult if not impossible for most East Coast states to meet those targets, the states say.

The prospect of building wind farms off Maryland's shores has lured companies such as Bluewater, a wind power firm now owned by NRG, one of the country's biggest utilities. Bluewater has proposed building an offshore wind farm that would provide energy for as many as 136,000 households from turbines 12 miles off the Maryland shore. The company also has proposals for New Jersey and Delaware.

Bluewater chief executive Peter Mandelstam said that offshore wind prices seem expensive compared with coal or natural gas, but he stressed that offshore wind deals lock in prices for decades, providing protection from fluctuating commodities prices.

Bluewater has bid on 175,000 acres off Maryland. There were seven competitors, including Maryland Offshore LLC, a joint venture of Apex Wind Energy, based in Charlottesville, and Beowulf Energy LLC of Easton, Md., which employs Enright.

If a project is approved in Maryland, financing could still be an issue for the developer.

Financing offshore wind projects can be difficult because in the United States they are new. Banks consider the projects high-risk, so developers are seeking Energy Department loan guarantees to bring down financing costs.

Staff writer Ann E. Marimow contributed to this report.

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