JONATHAN HAUGHTON AND DAVID G. TUERCK
Offshore wind power still isn't worth costIN 2003, Commonwealth Electric Company wanted to build a substation in West Barnstable in order to provide a "secure and adequate supply" of electricity. Before it could build the substation, however, the company had to get an exemption from zoning laws that would have stopped the project from going forward.
In building the facility, the company accordingly took pains to mitigate its environmental and aesthetic effects. It promised, among other measures, to use "native vegetation," where possible, to hide the facility from public view. That was then. Now a developer wants to erect a "wind farm" in Nantucket Sound for the purpose of providing electric power. If the developer is successful in this effort, people standing on the beach in nearby Barnstable will have their now pristine view of the ocean interrupted by 130 windmills, each over 400 feet in height, covering a 24-square-mile section of the Sound. The need for electric power will in this instance have trumped any consideration of aesthetics. Dismaying as the prospect of this development must be for vigilant keepers of the Cape's "native" environment, the foregoing scenario looms as a very real possibility. The just-described wind farm could be placed in operation as early as 2007. Why this odd discrepancy? The answer is that, while Cape Cod zoning laws commonly protect the view of the land from the ocean, they do little to protect the view of the ocean from the land. Nor is there any regulatory authority that can be depended upon to protect the Sound from industrialization. An Ocean Management Task Force appointed by Governor Romney has ducked the issue. The only serious potential obstacle is the Army Corps of Engineers, whose approval is needed in order for the project to go forward, but which faces a bewildering array of claims and counterclaims from the various interested parties. The Corps of Engineers is writing a preliminary report, possibly to be released in August, which, it is said, will be up to 2,000 pages in length. Happily, there is a methodology, commonly employed in developing environmental regulations, that could simplify this task. This methodology, called "cost-benefit analysis," provides a yes-or-no answer to a single question: When we place a dollar figure on all the benefits and costs associated with a project, do the benefits exceed the costs? If yes, then the project should go forward. If no, then it shouldn't. To be sure, the outcome of any cost-benefit test depends on frequently arguable assumptions about the project to which it is being applied. For example, a Federal production tax credit of 1.8 cents per kilowatt hour has not been available since January of this year, raising the question whether the tax credit will be renewed. Also, there is the question whether Cape Wind should pay royalties to operate at this site, something that wind farms built on private land typically do. And then there's the question of energy prices. The higher the price of oil and gas, the greater the benefits to society of producing energy with renewable power like wind. Thanks to a grant from the Egan Family Foundation, we were able to submit our own cost-benefit report to the Corps of Engineers. In our report, we assumed that Cape Wind would get the production tax credit and that it would pay royalties. We based our assumptions about future energy prices on projections issued by the US Energy Information Administration in January 2004. The result: In present value terms, the costs exceed the benefits by $209 million. Which means that the project should not go forward. The reason lies largely in the high cost of building and maintaining a wind farm in coastal waters rather than on land. Since January, energy prices have moved sharply upward. Should they remain at their post-January highs, the results would be more favorable to Cape Wind. In order to address this possibility, we recently redid our analysis, on the assumption that energy prices will remain at these very high levels for the next ten years.
It turns out that, even in this conceivable -- if implausible -- scenario, the project would fail a cost-benefit test. Whether or not the project received the Federal production tax credit and whether or not it paid royalties, costs would still exceed benefits by $52 to $54 million. It will remain a highly subsidized but socially inefficient enterprise. Our earlier conclusion stands: Whatever one thinks about the fastidiousness with which Cape Coders guard their environment and whatever one thinks might happen to long-term energy prices, this is still the wrong project at the wrong time and in the wrong place. Jonathan Haughton is associate professor of economics and senior economist at The Beacon Hill Institute at Suffolk University. David G. Tuerck is chairman, professor of economics, and executive director at The Beacon Hill Institute. © Copyright 2004 Globe Newspaper Company.
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