Long-term energy contracts under consideration by state lawmakers risk higher prices for ratepayers, report finds

As Massachusetts lawmakers consider requiring the state to solicit long-term contracts for buying offshore wind energy and hydropower, a new study released by an independent consulting group is warning lawmakers to be aware of the potential risks of these long-term contracts.

"Long-term contracts can provide benefits as well as risks, which need to be carefully weighed and managed," wrote authors from the Brattle Group, a Cambridge-based economic consulting firm, adding that the risk of increasing customers' costs "is an especially salient concern."

David Cash, dean of the McCormack Graduate School of Policy and Global Studies at UMass Boston, who contributed to the report, said there are ways for lawmakers to address these concerns about cost. "There are a variety of different ways the long-term contracts can be structured so you mitigate the cost impact to ratepayers while sending the right signal to developers that 'hey, we're serious about this, you're going to be able to get the financing that you need,'" Cash said.

Massachusetts is required by state law to reduce carbon emissions by 25 percent between 1990 and 2020, and by 80 percent by 2050. The state is also figuring out how to replace power generated from retiring coal and nuclear plants, while not driving up the state's already high electricity costs. For the last year, Gov. Charlie Baker and lawmakers have been considering ways to boost the use of renewable energy.

Baker last July proposed a plan to require utilities to solicit long-term contracts for hydroelectric power. The legislation would authorize Massachusetts' utilities to buy power with utilities in Connecticut and Rhode Island. The goal would be to let Massachusetts utilities get better rates because the state would be buying in bulk.

The bill requires utilities to solicit long-term contracts for hydropower. The legislation would also authorize utilities in Massachusetts to work with utilities in Connecticut and Rhode Island to buy power together.

This May, the House released its own energy plan to require the state's energy distribution companies to solicit long-term contracts to purchase 1,200 megawatts of offshore wind power and 1,200 megawatts of hydropower by 2027. The distributors would be required to enter into contracts as long as the bids were reasonable and cost-effective. Bids could be solicited regionally.

The House bill is likely to get a makeover before it comes to a vote in the Senate.

Energy companies say the House bill would raise energy costs by locking much of the market up in long-term contracts. Environmental groups say it would not do enough to increase the use of locally generated onshore wind and solar power. Key senators have said they want the bill to be more comprehensive, addressing energy efficiency and storage.

State Sen. Marc Pacheco, D-Taunton, chairman of the Senate Committee on Global Warming and Climate Change, said the Senate will release its own version in the next couple of weeks, which would then be passed by the Senate and sent to a committee of House-Senate negotiators. Lawmakers have until the session ends July 31 to pass a final bill.

The Brattle Group, with management from UMass Boston and funding from the Boston-based Barr Foundation, a non-profit that addresses climate change, issued a report Tuesday summarizing literature related to the cost, complexity and benefits of using different types of clean energy to reduce greenhouse gas emissions.

The study found that from an economic perspective, long-term contracts have costs and benefits. On one hand, developers of new offshore wind and hydropower resources will only invest in new projects if they have a long-term client. Large amounts of new energy imports will also drive down wholesale energy prices.

On the other hand, the importation of new hydropower and offshore wind raises questions about whether existing energy resources – including potentially solar or onshore wind – will remain financially viable. There are also concerns that a reduction in wholesale electricity prices may deter future investment in new energy projects, unless the state agrees to contracts that are above market value. Both these risks could potentially drive up energy prices for consumers.

The Massachusetts House on Wednesday pushed aside concerns of various advocacy groups and easily passed a bill to expand the state's procurement of hydropower and offshore wind.

The report concludes that while long-term contracts are necessary to encourage the development of certain types of renewable energy resources, policymakers need to structure the contracts in a way that reduces customers' risks of over-paying. For example, lawmakers should encourage competition in soliciting proposals, and should solicit them in a way that as technology and costs change, the rates consumers pay changes as well.

Lead author Judy Chang said the state must provide protections "to make sure that...ratepayers also reap the benefits should costs go down."

Pacheco said lawmakers will have to consider both the positives and negatives of long-term contracts in drafting legislation. "Long-term contracts obviously bring a more affordable pricing with them," Pacheco said. "It doesn't take into consideration what new technology might be happening in the middle of a set contract."

The report also urges the state to develop a comprehensive energy planning process, so someone is overseeing the big picture of all factors relating to the state's energy mix.

Peter Fox-Penner, a professor at the Boston University Questrom School of Business who contributed to the report, said the process of moving to a renewable energy-based energy economy involves transportation, buildings and the power grid. "Those three parts of any state's economy normally don't talk a lot to each other," Fox-Penner said. "In the planning process, they have to start doing that."

The easy passage of a House bill expanding the state's procurement of hydropower and offshore wind was greeted with criticism from advocacy groups, who said the bill would raise energy costs and would not do enough to increase the use of renewable energy.

The report said the state's energy mix should include diverse resources: hydropower, offshore wind, onshore wind, solar, energy efficiency and storage. It suggests that procuring 2,000 megawatts of offshore wind and 2,200 megawatts of combined hydropower and onshore wind by 2030 – both of which are slightly higher than the amounts suggested by the House bill – would be consistent with meeting state goals. It says Massachusetts should increase requirements for what percentage of energy utilities must get from renewable energy sources. Massachusetts should also focus on developing energy storage, which lets the state store energy generated by weather-dependent resources, like solar and wind.

Read the full report here [pdf].