Of Molehills And Renewable Energy Purchases

Commentary

by Michael Vickerman, RENEW Wisconsin

February 22, 2010

As the Legislature mulls over the pending comprehensive energy bill known as the Clean Energy Jobs Act (SB 450/AB 649), both supporters and opponents have been keeping their artillery banks busy, peppering the airwaves and cyberspace with press releases, position papers, radio advertisements and economic impact studies. It's a veritable war of words out there.

In pursuit of the larger objective of undermining public support for that bill, several opponents of the energy bill are attempting to manufacture a controversy out of the State of Wisconsin's purchasing of renewable electricity, an outgrowth of the state's current energy policy law (2005 Act 141). That law directed the State of Wisconsin to source 10% of its electrical usage from renewable resources by 2007 and 20% by 2011. In the initiative's first year, the purchase of renewable energy added 1.4 million, or 1.7%, to the state's overall electric bill.

The critics, led by Rep. Brett Davis (R-Oregon), contend that the state's purchase is a budget-straining extravagance that taxpayers cannot afford at this time. In a letter sent to the Department of Administration, Davis insinuated that one of the energy purchase contracts amounts to a sweetheart deal for the utility provider, WPPI Energy, because it charged higher premiums than the other two utilities. Davis has asked the Legislative Audit Bureau to review the WPPI contract. WPPI, it should be noted, is a nonprofit wholesale energy provider serving more than 40 municipal electric utilities in Wisconsin.

Before we plunge into the politics behind this puffed-up molehill, a brief primer little on energy pricing is in order. First and foremost, the renewable energy in question is acquired by the state under long-term contracts that set forth a fixed price. Whether we're talking about windpower, solar or biogas, the price of that resource remains steady over time. It does not yo-yo up and down the way certain fossil fuel prices do.

By contrast, an unregulated energy commodity like natural gas is especially susceptible to price volatility. Even though natural gas is primarily used as a heating fuel in Wisconsin, its price behavior strongly influences wholesale electricity costs at the margin.

Back when the State of Wisconsin signed its contracts with its renewable energy providers, natural gas prices were significantly elevated. After July 2008, they plummeted, which took the air out of wholesale electric markets. As a result, the cost differential between conventional energy and renewable energy widened going into 2009. But the renewable resources didn't become more expensive; their costs stayed the same as it was two years ago.

The energy provided by WPPI Energy comes from the Forward Wind Energy Center located in Fond du Lac and Dodge counties. Keep in mind that the Forward project is a local energy source; no state dollars leave the state to procure the electricity. This 129-turbine installation pumps more than 1 million a year into the local economy in the form of land rental payments, local government revenues and maintenance crew salaries. Not a single dollar from the State of Wisconsin stays with WPPI Energy.

The State's arrangement with WPPI Energy is nothing more than a standard hedge contract. This type of arrangement is common between suppliers of propane or fuel oil and their customers. Those businesses routinely offer their customers an opportunity to lock in a certain fuel price in advance of the heating season. Sometimes it works out for the customer, sometimes it doesn't. But many customers and suppliers elect to enter into hedged contracts, because both parties can lock in their fuel expenses for the winter regardless of how the energy markets behave.

Yet, if wholesale electricity prices are slumping, then so is the cost of heating buildings with natural gas. According to a recent post by Milwaukee Journal Sentinel reporter Tom Content, residential and business customers are spending 15% to 30% less on heating bills this winter. The primary cause of the reduction in heating bills is the ongoing slump in the price of natural gas.

Content goes on to say that while electric rates rose at the beginning of this year, the savings on the heating side are neutralizing the impact on customer pocketbooks. If you and I and every other utility customer are seeing significant reductions in our heating bills, then it stands to reason that the State of Wisconsin is too. Put another way, the very dynamic that lifted renewable energy premiums last year also lowered energy bills statewide this winter.

Most people expect fossil fuel prices will rise again, and history will not disappoint them. Rep. Davis knows this too, which is why he and every other Republican legislator except one lone dissenter voted in favor of the state renewable energy purchasing initiative four years ago. But the Republicans were in the majority back in 2006, and thus took credit-deservedly so--for their leadership in passing Act 141.

In a further irony, the source of Davis's ire was a pet policy of a fellow Republican legislator, former representative Scott Jensen. As a member of Gov. Doyle's Task Force on Energy Efficiency and Renewables, Jensen championed the idea of the state acting as a "model customer," whose leadership by example serves to educate other customers on the virtues of renewable energy.

But the real reason why Rep. Davis and others have sought to make a federal case out of this molehill is to blow up the Clean Energy Jobs Act bill before it can pass a Legislature that is, this time around, controlled by Democrats. Unlike their rivals four years ago, Republicans don't see any electoral advantage to working with the majority party on this bill, even though it is clearly the most important economic development initiative that the Legislature will entertain this session.

During most of my 19 years as a renewable energy advocate, there has been an implicit recognition that both parties should share in the risks and rewards associated with something as fundamentally important as state energy policy. But times have certainly changed. Bipartisanship is completely MIA in this debate, as evidenced by the unnecessary and unconvincing posturing over the state's renewable energy purchase. To echo the great Irish poet W.B. Yeats, the center is not holding.

"Michael Vickerman is the executive director of RENEW Wisconsin, a sustainable energy advocacy organization headquartered in Madison. For more information on the Clean Energy Jobs Act bill (SB450/AB649), visit RENEW's web site at: www.renewwisconsin.org."