The Wisdom and Power of Hydropower

Allowing larger hydropower to qualify as an eligible energy source under the renewable energy standard would protect ratepayers and protect jobs without compromising Minnesota’s commitment to low-carbon electricity

Currently, only hydroelectric power plants with a capacity less than 100 megawatts may qualify as a renewable energy source under the state’s renewable energy standard (RES).   S.F. 1906 proposes to eliminate the size restriction on hydropower and provide a meaningful companion to wind power to help meet the state’s RES.  In doing so, the proposal would lower the risk of future electricity rate hikes posed by the state’s current dependence on wind to meet the RES, which, in turn, helps guarantee lower electricity rates for Minnesota families and businesses.     

Minnesota lawmakers enacted the RES in 2007 with very little understanding of how the requirements of the law would impact ratepayers.  Nearly five years later, some utilities report higher rates due to the RES and others report no impact on rates.  While it is likely that utilities are underreporting the rate impact, it is possible that recent additions of wind energy sources posed little to no impact on electricity rates.  But that’s not because wind energy is a cost competitive energy alternative.  Rather, it’s because the federal government heavily subsidized wind energy development.  Indeed, federal taxpayers have been footing the bill for Minnesota’s RES.

Looking to the future, Minnesota cannot depend on federal subsidies to cover the cost of the state’s RES.  These subsidies are set to expire at the end of 2012 and they are unlikely to be renewed in the current economic and political environment.  Navigant Consulting compared the levelized cost for a 100 MW wind plant depending on certain policy scenarios.  The cost was around $40/MWhr in 2011 with all of the federal subsidies in place.  After the federal subsidies expire, the cost rises to around $100/MWhr in 2013.  In its December 2011 Resource Plan update, Xcel reports that “post-2012 wind projects may be significantly more expensive if they are unable to rely upon the availability of the [federal Production Tax Credit.]”

While utilities currently hold federally subsidized long-term contracts for wind energy that will allow them to meet the RES in the near term, utilities must make plans for meeting the RES when these contracts expire.   Under current law, utilities will have little choice but to rely on wind power to meet the RES.  Thus, if nothing changes, the rate impact of Minnesota’s RES will continue to be directly tied to the shifting political moods on subsidizing wind. 

Allowing larger hydropower to qualify as renewable under the RES would allow utilities to develop a portfolio of renewable energy that poses less risk to ratepayers.  Importantly, it would do so without compromising the goal of burning less carbon to meet our electricity needs. 

To be nationally and globally competitive, Minnesota’s economy and the jobs and families it supports must have access to competitive energy rates.  With the exception of Wisconsin, Minnesota’s electricity rates have only grown less competitive as our neighbors’ rates have grown more competitive.  No doubt, less competitive electricity rates in Minnesota are, in large part, tied to the state’s aggressive efforts to promote green energy, including the state’s RES.  S.F. 1906 would help moderate the rate impact of Minnesota’s green energy policies. 

Peter J. Nelson is director of public policy at Center of the American Experiment.