Just how costly is renewable energy?

When Minnesota passed one of the nation's most aggressive renewable portfolio standards in 2007, Minnkota Power wasted no time ramping up its wind capacity. Believing wind power would get more costly, the Grand Forks, N.D., co-op locked in contracts to cover its needs for 25 years.

Then the economy went south, dragging electricity demand and wholesale prices down with it. Minnkota, along with the 11 rural electric distributors it serves in North Dakota and northwest Minnesota, found itself stuck with more wind power than it needed. It's been selling the excess at a loss ever since, making up the difference with a half-cent per kilowatt-hour surcharge on customers.

The fees have helped fuel the perception, particularly among rural electric co-ops, that Minnesota's renewable energy policy is driving up the price of electricity. Others, though, including state energy officials, point to the utility's unusually large and early hedge on wind prices as a primary cause of its recent losses.

The case illustrates just how complicated it can be to calculate the impact of state renewable mandates on electricity rates. Variables such as fuel prices, wholesale rates and energy demand are in constant flux, and decisions about what and when to buy can affect the return on capital investments.

With many states' renewable targets ramping up right as their economies struggle to rebound from the recession, politicians are scrutinizing costs of the mandates and requesting information about how they affect electricity rates.

They're not likely to find a simple answer.

However, the most comprehensive studies to date and the experience of utilities so far suggest that, by and large, renewable portfolio standards haven't had a significant impact on customers' bills. Still, there's room for more study, and in some states, including Minnesota, there remains relatively little data about the ratepayer impact of the standards.

The legislation appears likely to pass because both supporters and critics of the state's policy believe a cost study will provide evidence that supports their position. The Chamber says it is neutral on the issue.

"We get folks who call us and say, 'Hey, my utility rate is going up. How much of this is [because of] the renewable energy standard?'" said Bride Seifert, the Chamber's energy policy manager. "We'd like to know the answer, because there's 20 studies on each side of the table."

One of the larger reviews of renewable portfolio standards was a 2008 report from the Lawrence Berkeley National Laboratory that looked at data on a dozen state renewable policies enacted before 2007. The estimated impact on electricity rates varied by state, but it was a fraction of a percent in most cases and just over 1 percent in Connecticut and Massachusetts. "There is little evidence of a sizable impact on average retail electricity rates so far," the report concluded.

Study co-author Galen Barbose said they are collecting data for an updated report. So far he hasn't seen any information to suggest their conclusion will change much.

A 2009 study by the U.S. Energy Information Administration modeled the potential impact of a 25 percent nationwide renewable electricity standard. It, too, noted that rate impacts would vary by state, with renewable-rich regions like the Great Plains and Northwest meeting targets more easily. Overall, it projected no impact on rates through 2020, followed by a less than 3 percent increase by 2025. By 2030, however, it projected little difference in rates with or without a national renewable mandate.

Xcel Energy, the state's largest utility, has come up with its own estimate: 0.3 cents. That fraction of a penny is the difference Xcel forecasts between its projected per-kilowatt-hour energy price in 2025 under its proposed wind expansion plan compared with a hypothetical scenario in which it stopped adding new wind capacity after 2012.

Xcel spokesman Steve Roalstad called the impact so far insignificant.

Otter Tail Power, which serves about 130,000 customers in North Dakota, South Dakota and western Minnesota, would have added wind capacity regardless of Minnesota's renewable standard, said Todd Wahlund, vice president for renewable energy development. That's because it's been the most economical option.

"Absent these wind resource additions, an alternative resource would have been needed, and from our analysis, other options would have been higher-cost," Wahlund said.

Minnesota Power, in Duluth, was among the first utilities to cite complying with the state's renewable standard as a factor in a rate increase case with state regulators. But spokeswoman Amy Rutledge said renewables accounted for only a small portion of the hike.

Long-term benefits

Warren Leon, project director for States Advancing RPS, an association for state policymakers who work on renewable mandates, says states should be asking about more than costs: "Are there benefits ... that also deserve to be studied, even though they are harder to pin down?"

Supporters say there are environmental and job-creation benefits, which, as the legislation is currently written, wouldn't be a part of the reporting process proposed by the Minnesota Chamber.

Meanwhile, Minnkota is paying a premium it can't recoup through sales as the cost of new wind generation has continued to go down, in large part because of weak demand during the recession. Minnkota is now selling its wind power for 2 cents less per kwh than it's paying for it, and it's assessed the loss to customers in the form of a surcharge.

A December report from the Minnesota Office of Energy Security said Minnkota's "dilemma" should serve as a caution about the risks of overbuilding renewable capacity. "It remains to be seen how Minnkota's customer-owners ultimately will be affected," the report notes.