Winter hasn’t officially commenced yet, but the early returns don’t bode well for New England’s electricity market and its ratepayers. In the past month we have seen wholesale electricity prices climb to 30 cents per KWh for four-hour stretches—and natural gas prices at New England zones have exceeded seven times the national average. On Thursday, the New England Independent System Operator (ISO-NE), the organization that manages the region’s grid, issued an alert for all of New England due to capacity deficiency. ISO has been saying for well over a year now that New England is becoming too reliant on natural gas for electricity generation and reality has reared its ugly head—in the form of ever-climbing electricity rates for residents and businesses.
For the past week or so, New England’s “fuel mix” for electricity generation has seen nuclear and coal plants exceed 100% of their capacity, while natural gas plants have been running at less than 50% of installed capacity. Some of this can be attributed to seasonal variations—the result of local distribution companies (LDCs) purchasing firm capacity to supply their customers with home-heating fuel to keep their homes warm—leaving the “scraps” and higher prices to generators. LDCs are able to secure contracted pricing for their natural gas, which insulates them from paying the spot market prices that natural gas electricity generators are forced to pay—which has led to wholesale electricity prices exceeding 30 cents per KWh for extended periods of time.
Market prices for natural gas have climbed 30% this year—and while they are still near historical lows nationwide—this rise alters the electricity generation dynamic in New England dramatically. With natural gas generators setting the price for electricity 80% of the time, New England ratepayers are becoming more-and-more susceptible to natural gas prices. Don’t look for relief in the form of pipeline expansion anytime soon either. LDCs are buying capacity to meet demand for new (natural gas) home-heating customers, but pipeline expansion to meet that demand will be small in scale and will do nothing to relieve the pipeline constraints that affect electricity generators.
A much bigger concern for the region is what the future may bring. Vermont Yankee, Brayton Point and Salem Harbor are all scheduled to close in the next few years—with only Salem scheduled to replace its existing generation (with a natural gas plant) if legal challenges can be overcome. ISO-NE has gone on record as saying that Brayton Point and Vermont Yankee aren’t needed to meet capacity requirements for New England’s grid. However, twenty percent of current generating capacity is in the form of oil-fired plants, which, because of economics, haven’t provided the region with more than 5% of its generation since 2003. Brayton and Yankee represent approximately 2,000 MW of generation—which means that a quarter of our capacity is either highly uneconomical or soon to be offline.
One reason that residential prices had been on the decline was the emergence of competitive suppliers in the region, many of whom had taken advantage of the very low natural gas prices and provided residential ratepayers with much-needed savings. However, with the price of natural gas climbing, some of these suppliers may face hard times. Last winter, one supplier was temporarily forced out of the market because they had insufficient capital to buy high-price electricity for its customers. Reducing competition in the electricity market is a step in the wrong direction if the goal is to reduce rates.
Unfortunately, policy-makers don’t seem to be focused on reducing electricity rates–instead promoting legislative initiatives that pick winners and losers when it comes to generation. Depending on the state, these policies shift every year based on the composition of the legislature and the power of a particular group of lobbyists. This often results in polices being changed before they can be properly evaluated (not a sound energy policy by any means), and having long-term (and detrimental) impacts on the regions electricity supply.
NERA has written on numerous occasions that policy-makers and stakeholders need to support initiatives that bring additional resources into the region and reduce our over reliance on natural gas. We need more resources that will provide reliable, affordable, base load power for businesses and residents. Several manufacturers have recently left New England for states with lower electricity rates and we have no way of measuring the number of businesses that don’t come here because our electricity rates are among the highest in the country.
Politicians are always preaching about the need for better jobs—specifically “blue-collar” jobs like those provided by manufacturers. They need to understand that you can’t create manufacturing jobs by supporting policies that raise the cost of electricity to the industries that provide the jobs, while simultaneously raising the cost of living to its employees.
Marc Brown is the Executive Director of the New England Ratepayers Association, a nonprofit dedicated to protecting ratepayers.