Op-Ed: We Need to Determine Net Economic Impacts for NJ of Offshore-Wind Energy

Pranay Kumar, Frank A. Felder | September 19, 2019 | Opinion
Required: a comprehensive economic analysis that includes any rate increases due to all future wind and other clean-energy projects

Pranay Kumar and Frank Felder
On June 21, 2019, the New Jersey Board of Public Utilities (BPU) awarded an 1,100-megawatt capacity offshore-wind project to Ørsted’s Ocean Wind after evaluating three applications on multiple socio-economic criteria.

One major stated reason for the state to pursue offshore wind — and part of the BPU’s selection criteria — is economic development. An offshore-wind industry will create construction, operations, and maintenance jobs along with supporting positions in the supply chain and related industries. The BPU’s order claims that Ørsted’s Ocean Wind is expected to bring an estimated 15,000 jobs to New Jersey over its 25-plus-year life and will have $1.17 billion in economic gains plus additional environmental benefits for the state. This translates into an average of 600 jobs per year, or a 0.014 percent increase above New Jersey’s employment level of 4.4 million as of June 2019. Of course, there are more jobs per year during the initial construction period than during the 20-year operational period.

The BPU order states that Ocean Wind’s cost for the first year of offshore-wind renewable energy certificates (ORECs) is $98.10/MWh, a levelized OREC price of $116.82/MWh over the project lifetime, and a levelized net OREC
cost (LNOC) of $46.46/MWh (not including possible additional transmission costs). The LNOC accounts for the forecasted revenue from the sale of wind energy that is netted against the total OREC cost.

According to the BPU, over the 20 years of operational life, the project’s monetary impact on ratepayers’ monthly bills expressed in 2019 dollars, is expected to be $1.46 for residential consumers, $13.05 for commercial consumers, and $110.10 for industrial consumers. Although these rate increases seem small, they will raise total electricity costs by $160 million per year. Using the BPU’s consultant numbers, this is a 1.4 percent increase for residential customers, 1.7 percent for commercial customers, and 2.1 percent for industrial customers. This $160 million annual cost increase translates into $266,000 per job-year. The costs could be higher depending on the cost of additional transmission that may be needed to support the project. Using the BPU consultant’s discount rate of 7 percent, 20 years at $160 million per year is equivalent to a total of $1.86 billion. In other words, the economic costs of $1.70 billion to ratepayers exceeds the $1.17 billion of economic benefits by $530 million before accounting for environmental benefits.

Funding this industry, at least for the foreseeable future, will require electricity rates to increase, which have a negative effect on economic growth and employment. This basic economic fact was recognized by the BPU’s own consultant using the phrase “manna from heaven.”

‘We should be skeptical’

The consultant continued: “An economic effects analysis should account for the net direct effects of a project that increases costs to businesses and households. To the extent that retail electricity bills increase to cover the additional cost of ORECs [Offshore Wind Renewable Energy Credits], firms and households have less money to spend on other goods and services, which has a negative effect on the New Jersey economy. Neither the N.J.A.C. rules nor the Guidelines explicitly requested that the economic impacts analysis be provided as net effects, and none of the applicants provided an analysis of net effects. Hence, the quantitative effects of changes in New Jersey state gross product and wages, for example, must be evaluated against how much of those gross project effects are mitigated by reductions in other economic production activities in the State. This netting aspect is a qualitative issue for the Board to factor into any award decisions (p. 17).”

Conducting the proper economic analysis requires running an economic model, but we can get some idea of its size by performing the following simple calculation. Assume that with less disposable income, New Jersey residents reduce their dining-out expenses by $160 million per year. Assuming approximately one-third of a restaurant bill goes to wages, that would translate to $53 million less wages for food service workers, who in New Jersey earn about $27,300 per year. That would mean 1,901 less food service workers every year. The net job impact of this wind project works out to be negative 1,301 jobs per year, that is 600 minus 1,901.

Reduction in resident and business spending patterns would be much more complicated than assumed above as some of us would save less and others would economize on other aspects of their spending such as vacations, store purchases, etc. Nonetheless, we should be skeptical about the claims for large economic benefits of offshore wind for New Jersey. Future wind projects may be less expensive than this initial project as the technology continues to improve and the regional supply chain develops, although the dash to offshore wind may result in equipment and labor shortages and the need for additional transmission lines, which would result in higher costs.

There are extremely good reasons to pursue a clean-energy economy, primarily for health and environmental benefits from the reduction of hazardous air pollutants and to reduce greenhouse gases. These reasons also translate into economic benefits and are rightly being considered by the BPU.

However, the BPU should change its rules and guidelines to require a comprehensive economic analysis that includes any rate increases due to all future wind and other clean-energy projects. The importance of getting the economics right holds not just for pedantic matters, but because it is at the heart of the case for transitioning to a clean-energy economy. At the end of the day, the timing and extent of this transition depends on broader public support, and that support will not be sustained unless policymakers are transparent and candid about both the net benefits and costs.