Customer Cost Cap Protection is being Threatened

Delaware SB 265 is disastrous for ratepayers & should not pass

 

By David T. Stevenson

Center for Energy & Environmental Policy

May 14, 2024

 

 

In 2008, the Delaware legislature passed a requirement that 25% of our electricity should come from renewable sources like wind and solar power by 2025. Legislators back then were wise enough to protect electric consumers with a 3% cost cap on their electric bills.

 

Delmarva Power displays the costs of wind & solar as a line item on its electric bills. This acts as a report card on the impacts of legislation passed in Delaware. A March 2024 Delmarva Power residential bill revealed that the average premium cost was $10 per month or 6%, double the cost cap.

 

Additionally, another calculation performed on the "proposed offshore wind procurement" bill (SB 265) reveals that these premium costs could increase to $27 per month or 14%.

 

 

What happened to the cost cap protection promised by Delaware legislators?

 

First, DNREC Secretary Collin O'Mara promoted a "deal" with Bloom Energy to have Delmarva Power customers pay a huge premium for a small fuel cell power plant in exchange for a fuel cell manufacturing plant in Newark, which, ironically, doesn't buy electricity from Delmarva Power. It was called renewable because, in theory, it could be fueled by landfill or biogas. In reality, it is fueled by conventional natural gas and actually uses more gas than a typical natural gas-fired power plant. Over the twenty-year contract for the fuel cell power plant, Delmarva Power customers will pay about a billion dollars in electric premiums. The "deal" was approved by the legislature.

 

Two years ago, the legislature raised the goal to 40% by 2035. The cost cap was in the way, so it was replaced with a price cap on RECs. If the market price for Renewable Energy Credits (REC) exceeds $25, Delmarva Power can simply pay $25 for each equivalent Alternative Compliance Payment (ACP) to the state. That means we wouldn't be buying renewable power. Over the last three years, the average price of RECs has been $21, which is close to the price cap. 

 

 

Senate Bill 265 requires Delmarva Power to obtain bids from only offshore wind developers for twenty-year contracts.

 

This bill ignores the 2018 recommendation from the Governor's Working Group on Offshore Wind that offshore wind was too expensive. Any future bidding system should include competitive bids from onshore wind and solar developers. 

 

Some legislators, fed by poor information from the University of Delaware and DNREC, want to require the purchase of long-term offshore wind power and want to get around the new cost cap on REC prices. Below are some issues surrounding this poor information:

 

• The University of Delaware study falsely claims offshore wind power has gotten cheaper. In reality, the offshore wind industry is in turmoil. Nine of eighteen projects expected to receive federal approval by the end of this year have walked away from high guaranteed price contracts because the prices were too low to obtain financing. New project prices are running 60% to 100% higher. In 2018, offshore wind was about three times as expensive as onshore wind and solar. Now, it is four to five times as expensive.

 

• SB 265 ignores recent offshore wind price increases and the plain good sense of using competitive bids from other low-emission technologies to get the best deal for electric customers. The bill establishes a "benchmark price" that adds the three-year averaged prices from RECs and Delmarva Power supply contracts plus a 10% premium. Based on published Delmarva Power data, the "benchmark price" would be about $96 per megawatt-hour (residential customers use about one megawatt-hour a month). To that, developers can add 2% a year to bid prices over twenty-year contracts, which yields an average price of $124 per megawatt-hour over the life of the contract.

 

• However, only the first-year price will be compared to the "benchmark price," with future higher prices ignored. In addition, Delmarva Power supply contracts during the averaging period were outliers with extremely high prices caused by natural gas supply interruptions related to the Ukraine war. PJM, our regional electric grid operator, reported average wholesale prices were about $40 per megawatt-hour in 2021, and $80 in 2022 compared to only $31 in 2023, and early 2024. NOTE: A DNREC-funded study from Synapse Energy projects fairly steady natural gas prices in the future, which means stable electric prices. Excluding the high electric prices in 2021 and 2022 suggests that the "benchmark prices" should only be about $83 per megawatt-hour, which yields an average of $108 per megawatt-hour over the project life span.

 

• The higher "benchmark price" plus the 2% inflator adds $2.5 billion to Delmarva Power electric costs over twenty years, or $200 per year on residential electric bills ($125 million/year divided by 7 million megawatt-hours Delmarva Power demand multiplied by 11.3 megawatt-hours annual residential demand). The impact of the proposed "benchmark price" formula busts the price cap protection, raising renewable energy costs by $27, or 14% of residential electric bills. 

 

• Legislators favoring this bill frequently cite polling showing that 70% of the population favors more wind and solar power. While correct, people answering these polls also want reliable and affordable power. Polling, summarized by the University of Michigan, showed that half the people in surveys say they are willing to pay $5 to $20 per month more on electric bills for 100% wind and solar power. Delmarva Power residential customers are already paying $10 per month more for just 24% renewable power, and with 90% of that produced in other states. The study goes on to compare "Willingness to Pay" survey results to what people are actually willing to sign up for when they get the chance from their utilities. The mean participation rate in utility offers of $5 to $20 per month is 1.1%, almost 50 times less than the "Willingness to Pay" survey estimates. The Delaware Electric Cooperative offers 100% solar for $10/month extra. The participation rate is 0.3%.

 

 

SB 265 is a bad deal for Delaware and should not pass the legislature.

 

The majority of Delawareans do not want to pay $200 more a year for offshore wind energy. Any procurement program should be a competitive process that includes solar, onshore wind, natural gas with carbon capture, and nuclear power. Better yet, let markets work and don't lock in potentially high electric rates in twenty-year contracts.