WSJ Why Is New York Paying So Much for Wind Power?
The state will pay $155 and $146 per megawatt-hour, respectively. These prices are steep, at least four times the average grid cost paid over the past year.
WSJ Why Is New York Paying So Much for Wind Power?
Posted by: chopper
Date: August 24, 2024 09:39AM
Why Is New York Paying So Much for Wind Power?
Two projects will pay producers prices far above the break-even cost of generating electricity.
New York state signed a contract in June to buy electricity generated by two large wind farms, Empire Wind 1 and Sunrise Wind, off the coast of Long Island. The projects are expected to begin in 2026 and 2027, with power delivered to Brooklyn (Empire) and Long Island (Sunrise).
The state will pay $155 and $146 per megawatt-hour, respectively. These prices are steep, at least four times the average grid cost paid over the past year. New Yorkers should be asking why.
States agree to pay wind-power operators—known as the “offtake price”—based on a project’s “break-even cost,” the estimated bill for building and operating the wind farm over its useful life. That is undoubtedly part of the problem. The offshore wind business off the East Coast is in turmoil. Operators have canceled projects from Massachusetts to Maryland that were due to be constructed in the next four years. Some have been delayed, while others have renegotiated their contracts at prices 30% to 50% higher than originally promised.
Two widely quoted sources of break-even costs are the U.S. Energy Information Administration and Lazard, an investment bank. In its most recent estimates, the EIA suggests the average break-even cost of offshore wind farms, adjusted to 2024 prices, is $131 per megawatt-hour, not counting government subsidies, and $101 per megawatt-hour after allowing for basic tax credits. The latter figure is what matters, because every offshore wind farm expects to take advantage of investment or production tax credits under the Inflation Reduction Act.
Lazard is far more optimistic about break-even costs. Its 2024 estimates imply a minimum of $53 per megawatt-hour and a maximum of $79 after tax credits.
Both estimates refer to offshore wind projects expected to reach full output in 2027, as are Empire Wind 1 and Sunrise. Why, then, has New York agreed to pay much higher prices?
The owner-operators of the two farms—Equinor for Empire and Orsted for Sunrise—are two of the top five global wind-farm investors and operators. Equinor is Norway’s state oil company, while Orsted previously was Denmark’s. Both companies have access to large financial resources, can demand the best deals from their suppliers, and have significant experience in offshore activities. They also expect to earn an after-tax return of about 8% from these projects.
New York in 2022 agreed to an offtake price of $107.50 per megawatt-hour for Empire Wind 1. There was a second phase of the project, Empire Wind 2, that Equinor canceled because of higher-than-anticipated costs. The company threatened to cancel Empire Wind 1 unless the state renegotiated its offtake price. Orsted followed the same playbook for Sunrise.
The difference between these new agreements and the hypothetical break-even costs produced by the EIA and Lazard means one of two things: either the true break-even costs are 50% to 100% higher than what the EIA and Lazard claim, or the projects will earn huge profits at the expense of U.S. taxpayers and New York ratepayers.
The EIA and Lazard both assume much lower capital and annual operating costs for U.S. projects than the actual costs for large offshore wind farms in the North Sea. European supply chains and firms are far more developed than in the U.S., which would mean higher prices for projects in the states.
Using actual European capital and operating costs, Empire Wind will be exceptionally profitable, with an after-tax return on equity of 24% thanks to a federal investment tax credit of 30% of the construction cost. If Empire Wind qualifies for a 40% investment tax credit, which it is likely to do after the Biden administration reinterpreted the requirements under the Inflation Reduction Act, the company’s pretax return would be even higher. If these return estimates are true, New York made a drastic mistake in agreeing to the offtake price of $155 per megawatt hour. Meanwhile, the average wholesale value of power in New York from July 2023 to June 2024 was $36 per megawatt hour.
In addition, Equinor and Orsted will each receive a total subsidy of more than $3 billion courtesy of U.S. taxpayers. Who is the patsy here? Are American taxpayers funding an extraordinarily expensive form of electricity generation? Did New York sign an agreement that allows large wind-farm operators to earn unreasonably high after-tax profits at the expense of its residents? Or both? Either way, New Yorkers are the big losers.
Mr. Hughes is a senior fellow at the National Center for Energy Analytics.