(July 5, 2013) Later this year, Delmarva Power and Light – the electricity provider for Ocean City and most of the peninsula – will be going before the Maryland Public Service Commission to request a 5.5 percent rate increase, a move that is under heavy scrutiny.
The extra revenue, according to the company, is needed to cover the cost of infrastructure improvements necessary to meet the service standards required by the state. From 2011 to 2012, DP&L reduced its average number of outages per customer from 2.42 to 1.69, and the average duration of those outages from 356 minutes to 190 minutes.
But what drives the majority of the cost customers actually see on their bills is not DP&L’s internal spending, but the market price of energy itself. During a recent media tour, Ocean City Today was given the opportunity to pick the brains of DP&L President Gary Stockbridge and Public Relations manager Matt Likovich about energy prices and the future of “green” energy in Delmarva, especially given the Maryland General Assembly’s approval this year of a proposal to auction off tracts of ocean off the resort’s coast for wind farm development.
Gary Stockbridge: So if you look at our rates, they’re basically flat to decreasing from 2006 on. There are two different things happening here, supply and delivery. Supply is just your commodity cost. We don’t own any generation systems, so we go to market to buy our energy and pass the costs through. The supply costs are going down and that’s mainly driven by the shale gas discoveries in PA driving the commodity down.
Distribution is where we make our money, that’s pipes and wires for our business. Normally, about 25 percent of your bill is that cost, and that’s the piece that’s going up because of the investments we’re doing in infrastructure. But those net out even, and I think that’s the biggest thing keeping the customer satisfaction up.
Many of these infrastructure projects stem from back in 2003, when we had that big blackout in the northeast and 40 million customers went out up in New York. When that happened, PJM (the industry standards group that controls power grid build-out) started to look at how they do their planning, and they came up with some more stringent requirements to make sure it wouldn’t happen again. Those requirements then translate into work, and most that was given to us to do had to be done by this summer. So most of the projects you see are finishing up that time frame.
Ocean City Today: How much political oversight is there as far as where you get your energy?
Stockbridge: Maryland and Delaware have consistent standards. They both require 25 percent by 2025. Meaning that out of our whole energy supply, by the year 2025, they want a quarter of our portfolio to come from renewable sources.
In Maryland, it’s pretty straightforward. Every year, we bid out a third of our supply – one third every three years, so after three years we’ve bid out our whole load – and the requirement is passed onto our suppliers. So, every year, when the bids come in, 10 percent of their bid has to be from renewable sources.
The renewable that’s closest to market prices – fossil fuel prices – is onshore wind right now. There’s an awful lot of build-out of onshore wind right now, and lot of places actually exceed what the demand is, meaning you can get some pretty good deals. Offshore wind, as you know, is a different story. People have been trying it for quite some time, but it’s very expensive and there’s not a lot of it out there yet so we don’t quite know how it’s going to play out.
We also have a lot of solar, because each state usually has a little carve-out for solar. So, you have to be 25 percent renewable by 2025, and maybe three percent of that has to be solar – something like that, I can’t remember the exact number.
For instance, in Delaware, we have three wind farms, a fuel cell, and a solar farm. In Maryland, we don’t know exactly what the mix is because we pass that responsibility onto the providers, but I would tell you it’s probably land-based wind.
OCT: Is offshore wind a possibility?
Stockbridge: I was involved in all the Bluewater Wind discussions in Delaware when that was trying to be done. That kind of fell through, but I had about two years of understanding what it takes to get that stuff to work. The developers for offshore wind want a huge offshore wind farm, because of the economy of scale. They think they can get the price to where its reasonable, but only if you build a huge facility.
On the other hand, all the policy and decision makers are risk-averse and worried about building too big – ‘let’s build a small farm and see if it works, learn from it.’ Well, that doesn’t match well, which is what’s happening, other than a few demonstration projects here and there.
So it’ll be interesting to see what happens in Maryland. Jersey is moving ahead a little bit too, but they have some price clauses in there where if it become too expensive, they’re not going to do it. So, it’s been very slow getting off.
There are two things working against offshore wind. One, they’re one of the most expensive renewable energies, so everyone is apprehensive about it. Two, the bottom has gone out of the commodities market. With the shale gas discoveries, the market is a lot lower than anyone thought it would be. What made renewable attractive was when fossil fuels started climbing and climbing and everyone said, ‘Look, eventually these will keep going up, renewables will go down, and if we invest in it now they’ll eventually cross [in price].”
Well, fossil just plummeted, so now you’ve got this big gap. That hesitation slows everything down. So I’m skeptical it’ll really happen, because I’ve seen it fail too many times. And until the commodities markets become much more expensive and there’s more pressure on investing in renewables, I worry that no one will have the risk appetite to put a lot of money in offshore wind.
OCT: The policy that Maryland passed earlier, to basically auction off these two big tracts of sea for a wind farm, are they large enough in scale that you would anticipate them being attractive to a developer?
Stockbridge: I think offshore wind farms are talking about thousands of megawatts, and everything we’re talking about around here are hundreds of megawatts. What I think would be attractive is if they believe it’s the start of something much bigger – a ‘loss leader’ type thing. They would to it and try to break even, not lose any money just to prove that they could do it and it could be done with the hope that it would grow.
Matt Likovich: Wasn’t that the downfall of Bluewater? We agreed to buy ‘x’ amount of megawatts, and then wasn’t it their responsibility to go out and broker the remaining megawatts to get it built, and they couldn’t do that because people didn’t want to invest in it?
Stockbridge: That was part of it. They also had told us that the amount we contracted for was enough for them to at least build it. So, even if they couldn’t find anybody, they could at least build it. What happened was, when it came time to get to a milestone that said, ‘Hey, you have to commit a certain amount of money here’ – I think it was like $6 million for the offshore monitoring, they needed to study the wind and the tides and it was $6 million or so for the equipment to do it. NRG started to realize that, given the contract we had entered into, and the current costs of developing offshore wind, they really couldn’t do it and make any money. So, the contract was just no good to begin with. No matter how many other people they brought on, our contract wasn’t enough. And they knew that if they went back to the General Assembly in Delaware, there wasn’t an appetite there to increase the contract cost, because they had already gone through a big argument over getting it where it was. So they just said they’d let it lapse.
They still own some of the permits in Delaware for offshore rights, and they’re doing some of the work on their own, there just doesn’t seem to be a whole lot of effort to do it. And NRG knows a lot about it, so I consider them to be the barometer. They invested a lot of capital into understanding how it works and what would make it work.
Likovich: And as you said, offshore wind will always be more expensive than onshore wind.
Stockbridge: You could almost step back and say that, if you believe that the United States will literally run out of land-based locations to put wind farms, then offshore wind makes sense. If you believe that you’ll always have a place to put onshore wind, then offshore wind will never make sense. What I’ve found is that they’ve built massive amounts of onshore wind in a lot of locations, and they seem to say they have a lot more capacity to build it out.
I remember back when we were dealing with [global renewable energy consultants] Babcock & Brown. They seemed to have this belief that you would eventually run out of onshore wind locations, but that hasn’t seemed to prove out. There are a lot of locations that people never thought of to put onshore wind.
OCT: So is that still a growing industry, marketwise?
Stockbridge: It’s still going, and it’s the alternative energy of choice because it’s the one that’s closest to fossil-fuel market price. Here, it’s still difficult to make it work, but you go to Texas and the middle of the country where we have high winds and large areas of flat ground, they can build that stuff like crazy.
The other thing Babcock & Brown said was that if you look at the United States, the middle of the country can house an awful lot of wind, but it can’t get it out to the outside. They didn’t feel the stuff they could do in the Appalachians or those areas would be enough to supply the whole east coast, so they would have to do offshore.
The question in my mind is, even if you can’t build as much in the center, can you still build what you need, economically?
It’s really tough. My heart goes out to the developers who are trying to make this work, because it’s a chicken-and-egg thing. You have these huge economies of scale, but no one wants to take the risk.
OCT: If wind power did happen, it would have to hook into your grid.
Stockbridge: Yeah, it has to come in somewhere. Bluewater was going to come in through the Indian River. They need to find some key locations on land to bring the energy in – although you do have Atlantic Wind Energy, which is that group that has the concept of running a transmission line north-south in the ocean, off the coast, to connect all the wind farms. Of course, if you don’t have any wind farms to connect, it doesn’t make a whole lot of sense, so that’s kind of the same problem.
Their concern was that if you build the wind farms first, and each farm builds a line in for itself, then you’re defeating the purpose of building a line in the ocean. It’s a tough nut to crack, making that work, and it becomes even tougher when commodity costs are low and onshore wind is so big right now. That market is over-built, basically.
OCT: What’s the prospectus on that as far as energy prices in general? I know you said the shale gas discoveries were a big factor.
Stockbridge: We think that’s going to slow down pretty soon and stay steady for a bit, and then it’ll start to go back up again. It’s been going down since ’09, but as we look at the future costs of energy, we don’t think it’ll keep going down. There will be a plateau.
The wind or solar is not the cure-all to end the use of fossil fuel energy, because what do you do on the days the wind doesn’t blow? You don’t want people saying, “I can’t use my computer, I can’t watch the Super Bowl.” It’s something that’s going to continue to be explored, but as we sit here and talk now the conventional way of producing electricity and distributing it is pretty clear-cut.
OCT: Do any of your providers use nuclear plants?
Stockbridge: I think Constellation, which is one of our providers, may have some nuclear. I’ll be honest with you, I’m not sure who in our bid process did. We have five or six providers, some of them don’t own any generation and are just brokering off the market. Some of them do own assets. Generally, when you think about this whole region operating off the same grid, that grid has a mix of fuels, which include nuclear, coal, gas, oil, all in the mix. In Delaware, we do have a pretty good deal with Bloom Energy, which is a fuel cell manufacturer from the West Coast, so we do have 30 megawatts of fuel cell energy going in, which is kind of neat.
It was kind of a partnership between us and the state for an economic development package. Bloom Energy – which was first in the press years ago – K.R. Sridhar was their founder, has one of the guys who worked on the Mars mission, which got cancelled, and he decided to take the fuel cell he was working on and try to use it commercially.
They sold a lot of fuel cells in California and wanted to expand to the East Coast. So some of the folks in Delaware got wind of it and wanted to attract them, but realizing that Delaware is a small state and couldn’t offer them a whole lot of money, came to us about doing a package product, where we buy some of their product and they decide to move their factory to Delaware and put it all together here. We bought 30 megawatts, 10 can come from California and 20 has to come out of the Delaware factory. They’ve built the factory and it’ll be up and running this month.
Likovich: They were talking about 950 jobs at that factory, something like that, which was the reason for the economic development subsidy from the state.
Stockbridge: It runs off natural gas, but it’s not combustion, its chemical. The cells have plates with an anode and a cathode, and basically you run air over one side and natural gas over the other, plus heat, and there’s a reaction that produces energy. These plates wear down over time, but there’s literally thousands of them in each fuel cell. It’s very clean.