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Letter to Delaware Public Service Commission re: the "Bluewater Wind" project

Dec 07, 2007

Chairman Arnetta McRae
Delaware Public Service Commission
861 Silver Lake Boulevard
Cannon Building, Suite 100
Dover, DE 19904

RE: “WGES Response to Firestone/Kempton Analysis”

Dear Chairman McRae:

On November 12, 2007, Professors Jeremy Firestone and Willet Kempton filed a document entitled “Recommendations on Term Sheets” in the ongoing proceeding involving the Bluewater wind project. This document is posted on the Commission’s website.

Under the heading “Prices to Compare” the document includes comparisons between electricity supply offers available from WGES, and prices for “Bluewater Wind” that the Professors derive from the Bluewater Term Sheet. The comparison performed by the Professors is completely incorrect, and erroneously concludes “that Bluewater is cheaper than real onshore wind offering in DP service territory [sic]”.

Unfortunately, WGES believes that this incorrect comparison and this erroneous conclusion have gained public exposure in Delaware as part of the dialog on the Bluewater project, undermining the public debate on this issue and acting to the detriment of WGES’ efforts to bring renewable energy supplies to Delaware consumers today. WGES requests, therefore, that this letter be posted on the Commission’s website under the caption “WGES Response to Firestone/Kempton Analysis”.

As demonstrated below, the cost of a 1-year, 100% wind power offer for Delmarva residential customers based on the pricing components included in the Bluewater Term Sheet would be well in excess of 15.5¢/kWh, compared to WGES’ current offer of 13.9¢/kWh. The Bluewater Term Sheet parameters do not demonstrate that “Bluewater is cheaper than real onshore wind offering [sic]”, in fact, they imply the contrary.

In their November 12, 2007 document, the Professors state:

“Another comparison is the WGES offering in the DP service territory for 100% wind. That is offered at 13.90¢/kWh for 1 year or 14.50¢/kWh for
two years (from now until this time in 2009). We can make a direct comparison to wind only from Bluewater Wind (by itself effectively 100%). The prices for Bluewater Wind are 11.5 ¢/kWh in 2007 and 11.8¢/kWh in 2008. That is, in year 1, this currently-offered land-based wind is 21% more expensive than the Bluewater offer, and 24% over the Bluewater offer for the two-year combined price. This simple but real market comparison shows both that Bluewater is cheaper than real onshore wind offering in DP service territory, and that with a small 2.5% inflator trends better than market.”

The source of the 11.5 ¢/kWh figure for Bluewater Wind in 2007 is apparently the analysis prepared by the Independent Consultants to the Commission from Table 3 of their October 29, 2007 report. In footnote number 55 to that report, in which the Independent Consultants explain their method of calculating this figure, it states:

“The analysis of old and new Bluewater costs sums all projected payments for energy, capacity and RECs annually; the $/MWh cost is based on this annual sum divided by the projected MWh sale from Bluewater for the year.”

In the enclosed spreadsheet WGES reproduces this process of summing the energy, capacity and REC payments from the data in the Bluewater Term Sheet, arriving at the same 11.5 ¢/kWh figure.

The combination of these three electricity supply components, in the ratios contained in the Bluewater Term Sheet, in no way resemble and in no way constitute what is required to supply a 100% wind power offer to a Delmarva residential customer. In fact, as the attached spreadsheet also shows, if the proper combination of only these energy, capacity and REC components are used, the pricing in the Bluewater Term Sheet would result in a cost to a residential customer of 14.6 ¢/kWh for a 100% wind power supply.

Further, it is clear that these three pricing components combined in this way leave out important additional cost components. The most obvious and simple to evaluate missing components are the required “Ancillary Services”, and the allowance for distribution losses on the Delmarva system. Adding these two factors to the analysis increases the cost of a 100% residential wind power offer based on the Bluewater Term sheet data to 15.5 ¢/kWh.

These cost components, of course, still do not represent the full costs associated with a residential offering. The 15.5 ¢/kWh figure does not include any costs associated with matching the variable output of the wind power generators to the load requirements of residential customers, nor does it include other pricing components that must be built into a retail sales offer such as allowance for bad debt, financing the lag between customer payments and wholesale supplier payments, and business operations, not to mention any allowance for profit.

Clearly, the cost of a 1-year, 100% wind power offer for Delmarva residential customers based on the pricing components included in the Bluewater Term Sheet would be well in excess of 15.5¢/kWh, compared to WGES’ current offer of 13.9¢/kWh. The Bluewater Term Sheet parameters do not demonstrate that “Bluewater is cheaper than real on-shore wind offering [sic]”, in fact, they imply the contrary.

We reiterate our request that the Commission post this letter on its web-site along with the other comments and documents offered in this proceeding, and
that the Commission consider our analysis in its ongoing review of the Delmarva Power RFP.

Very truly yours,


Harry A. Warren, Jr.
President
Washington Gas Energy Services, Inc.
13865 Sunrise Valley Drive
Suite 200
Herndon, VA 20171

cc:Commissioner Jeffrey Clark, Delaware Public Service Commission

Commissioner Joann Conaway, Delaware Public Service Commission
Commissioner Jaymes B. Lester, Delaware Public Service Commission
Commissioner Dallas Winslow, Delaware Public Service Commission
Bruce Burcat, Executive Director, Delaware Public Service Commission
Michael Sheehy, Deputy Director, Delaware Public Service Commission
Senator Harris B. McDowell III, Delaware General Assembly
Representative Gerald W. Hocker, Delaware General Assembly


Attachment