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Coal’s Soaring Costs: Wind Power’s Friendly Breeze

But lagging state mandates slow Michigan’s road to green manufacturing

March 31, 2008 | By Keith Schneider
Great Lakes Bulletin News Service

Heritage Sustainable Energy
  Martin Lagina (left) had to travel to Germany to see the wind turbines that Fuhrlander A.G is building for the wind farm his firm is developing southeast of Traverse City.

McBAIN—The broad ridges south of here, snow-covered in winter, cloaked in hay and corn and beans in summer, are just months away from sprouting a couple more permanent fixtures in their scenic landscape.

Come June, a Traverse City company named Heritage Sustainable Energy will erect a pair of 350-foot-tall windmills capable of generating 2.5 megawatts each, or enough electricity to power roughly 700 homes apiece.

The huge machines, manufactured by the German company Fuhrlander A.G., are among the world’s largest. They are intended to be the first phase of a $330 million project to build 60 windmills on 12,000 acres outside of this small town about an hour southeast of Traverse City. The mammoth industrial undertaking, led by Martin Lagina, a 52-year-old energy industry executive, would put the 14,400 residents of Missaukee County at the leading edge of the clean energy economy that is gradually unfolding in Michigan and the Midwest.

But whether Mr. Lagina and Heritage Sustainable Energy will get that far with their Stony Corners Wind Park is not at all clear, say authorities in finance and renewable energy. The impediments to success lie like shards of glass in the project's path. Some are all about markets; others have everything to do with what Michigan lawmakers are and are not doing to encourage the rise of renewable-energy generation and a renewable-energy manufacturing industry in their jobs-starved state.

But Mr. Lagina and other green-power entrepreneurs are optimistic; they believe that time and the economics of wind energy are on their side, and that the state is edging closer to enacting the policies they need to help green Michigan’s power supply.

Lansing Languishes on Renewable Energy
So far, Lansing’s lawmakers have been unable to reach agreement on legislation to require utilities to purchase electricity generated from renewable sources of energy, and thereby establish the kind of steady market needed to give alternative energy development the push it’s received elsewhere in America. More than 20 other states have established such "renewable portfolio standards," or RPS, and their alternative energy markets are growing.

Meanwhile, boosted by the hot markets that RPS has established in other states, and by the escalating costs of raw materials, the price of wind turbines, towers, and other components is soaring. And investment capital is becoming more difficult to acquire as United States financial markets reel from the home mortgage crisis and mounting home foreclosures.

But there is one market advantage to generating electricity from wind that is becoming much clearer in Michigan: its operational cost. Mr. Lagina, who focused in the 1990s on developing northern Michigan's natural gas reserves, asserts that if Heritage receives about 10.5 cents a kilowatt-hour for the power generated by his wind turbines, the project will be a financial success.

"In today's numbers that's what it will take," he said in an interview. "We think that is very competitive with coal or any other energy source."

Indeed, while lawmakers in Lansing argue about whether to establish a formal market for renewable energy, and while Michigan homeowners and businesses contend with ever-rising bills for electricity—nearly all of it generated from coal-fired power plants—energy generated from wind has quietly and steadily become cost-competitive with energy generated from coal. By next year, say energy economists, it will be even more so.

Wind Saves, Makes Money
How come? One big reason is that constructing big power plants gobbles up huge amounts of concrete, copper, steel, and other commodities, and their rapidly rising costs are pushing up the price of large generating facilities by about 10 percent annually. Last September, for example, Consumers Energy filed papers with the Michigan Public Service Commission that predicted its proposed new 800-megawatt coal-fired power plant in Bay City would cost over $2.4 billion; that is twice what the company told the PSC it would cost barely two years ago, in 2006.

A second reason: The presidential candidates of both major parties have promised to act on global warming, and policy analysts in Washington predict that Congress will approve new regulations to limit emissions of carbon dioxide from power plants. Developing equipment and techniques to do so could add $1 billion of more to the cost of each new coal-powered plant, say engineers.

A third reason: Coal prices, which reached over $85 a ton earlier this month in West Virginia, have more than doubled since 2001, when they averaged $35 a ton, according to the Energy Information Administration, a unit of the federal Department of Energy. The price of coal also is tied to the rising price of oil because it is mined and shipped using fuel-consuming equipment.

Last September, when construction, fuel, and transportation costs were considerably lower than they are today, Consumers Energy told the Public Service Commission that the cost of producing electricity from its proposed Bay City plant would be 10.3 cents per kilowatt hour, or just fractions of a penny less than the price Mr. Lagina says he needs from the wind-power market to be profitable.

"Look, we're faced with some of the same cost increases as the utilities who want to build new coal-fired plants," said Mr. Lagina, who is investing $15 million to construct the first two windmills and connect them to transmission lines. "We use steel, and copper, and concrete too. The price of a turbine is up about 50 percent since 2004.

"But our advantage is that once the windmill is up the costs are fixed," he continued. "Wind is free. There are no other impacts. No pollution. The problem with coal is it’s hard to measure all the true costs. What will be the cost of regulating mercury or carbon dioxide? What will be the fuel costs? Coal powered plants are highly dependent on the price of oil because it takes great big machines to dig coal out of the ground, process it, and put it on trains and ships. That's why wind is cost-competitive and will be more so as we go along."

State Could Help
Still, said Mr. Lagina, wind energy could use help from the state to ensure a market for power generated from new windmills. Legislation is pending in Lansing that would require utilities to produce 10 percent of their energy from renewable sources by 2015. Such legislation, if it passes, assures investors of a ready market for wind energy, as similar renewable portfolio standards have done in other states.

And the legislation would do more than hasten the growth of wind power in Michigan, proponents assert. A market guarantee is likely to prompt renewable energy manufacturers to settle in Michigan, too.

Democratic Governor Edward Rendell, of Pennsylvania, told a conference of union, business, and environmental leaders in Pittsburgh earlier this month that 3,500 new jobs have developed in his state's clean-energy industrial sector since 2004. That was the year that Pennsylvania approved its RPS.

"This is one thing that just makes me ill," said Mr. Lagina. "The towers for the two units we're installing are being made in Canada. I can't believe that I have to go to Canada for these towers, which cost close to $1 million each. If the state would enact a RPS, that equipment would be built here, along with the gearboxes, electrical components, bearings, turbines—lots of things Michigan would be good at making."

Jammed About Customer Choice
But the legislative proposal to establish an RPS faces strong opposition from the state's two big utilities, who are seeking their own, somewhat different state-sanctioned guarantee. The companies want to lock in customers, and thus a stable market, for electricity produced by any big new electrical generating stations they build. That is because Wall Street investment firms, which earlier this year told utilities they are leery of financing any big new coal-fired power plants, are thought to be even more unlikely to invest with utilities that are not sure about who will buy the power.

So, in return for supporting a renewable energy standard, Consumers Energy and DTE Energy—the state’s two largest electric utilities—are seeking to amend Michigan's eight-year-old "customer choice" statute that enables business customers to buy electricity from the lowest-cost producer. The RPS legislation and the amendment to the customer choice law are currently "tie-barred," meaning one cannot be passed without the other.

A spokesman for Consumer Energy declined to comment for this article. But late last year, David G. Mengebier, senior vice-president of governmental and public affairs at the company, told the Bay City Times how crucial a stable market is to the company.

"It takes eight years to build a large base-load power plant," said Mr. Mengebier. "If customers can continue to come and go, we won't know after the end of eight years that that customer is there to help pay for the plant."

Opposing the utilities is an unlikely and informal alliance of environmental organizations, free market policy groups, trade organizations, and Michigan's Republican Attorney General Mike Cox.

Environmentalists, who seek to block any new conventional coal-fired power station in Michigan, see preserving customer choice as an opportunity to make it more difficult for utilities to raise money to build coal plants.

Mr. Cox, a free market adherent, says the customer choice law has helped reduce electricity prices for some major businesses and kept state utility prices from rising faster than they would have without the law. But he also opposes passage of a renewable portfolio standard for Michigan, asserting it would raise electricity rates.

"This package of bills is anti-consumer and anti-competition," Mr. Cox said in a statement on March 11. "It will hit hardest on seniors, the poor, and all those on fixed incomes, at a time when Michigan families are already struggling to make ends meet. Michigan's job creators will also be hit by higher energy bills. The one certainty is that these changes will cost rate-payers more."

Indeed, aside from the rhetoric, say energy economists, Mr. Cox is on the mark with one of his assertions: the future cost of electricity. Some of the oldest coal-burning power plants in the nation operate in Michigan, and the cost of operating them is rising due to sharp increases in the price of fuel, equipment, and transportation. The average 10 cents per kilowatt-hour that homeowners pay has been climbing steadily since last year and will rise at an even faster rate in 2009, say utility industry economists and regulators.

What's new is that replacing the old coal-fueled power plants with new coal-fired plants (about $2.5 billion and rising for a medium-sized plant without carbon controls, $3.5 billion and rising with) or big nuclear plants ($4 billion and rising), will be more costly to homeowners and businesses than new energy conservation practices and electricity generated from renewable sources.

The price of electricity, say utility analysts, is almost certain to rise 30 percent within a decade, and perhaps 50 percent if new coal-fired power stations are built and required to control emissions of carbon dioxide to respond to global warming. The inevitable rise in electricity prices could be considerably less—20 percent to 30 percent, say some analysts—if Michigan aggressively pursues an energy strategy that combines energy conservation with renewable energy production.

"From my perspective, the way this thing is playing out, given the numbers and the reality of future needs, it looks pretty good at this point for wind," said Mr. Lagina.

Keith Schneider, a nationally known writer and producer, is the director of communications at the Apollo Alliance, a national coalition of labor, green, and business groups, based in San Francisco, that advocates new policies to advance the clean energy economy. Keith founded the Michigan Land Use Institute in 1995 and served as executive director and in other senior positions until September 2007. Reach him at keith@mlui.org, and read his blog, Mode Shift.

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