This has been a cold winter—and ratepayers shouldn’t expect their electricity costs to thaw anytime soon. Wholesale electricity prices have exploded as frigid temperatures have driven up demand for natural gas for home heating purposes. This results in most natural gas generators paying a premium for what little gas remains in the pipe. This in turn has led to an increase in expensive oil-fired generation just to keep the lights on.
How high have prices climbed? How about nearly ten times last year’s average wholesale price for hours at a time — and weekly averages at three time the price over the last two months. Incredibly, for the week of January 20-26, the average wholesale price of electricity was $0.26 per kilowatt-hour—seven times the average wholesale cost in 2012.
Unfortunately, the bad news is only going to get worse. Brayton Point—a generating plant with 1500 MW of capacity has announced that it will close its doors in 2017 despite a determination by the New England Independent System Operator (ISO-NE) that the plant is needed to meet future electricity demand and ensure grid reliability. While Brayton Point’s retirement is already being celebrated by environmental groups, ratepayers will be paying for years to come. Brayton’s closing leaves New England’s generating capacity tenuous (at best) for the next Forward Capacity Auction (FCA), with ISO stating that, “there has been an abrupt change in supply and demand in New England, from a years-long capacity surplus to potential capacity shortage in the upcoming FCA 8.” This led to ISO to request an administrative price based on an “Inadequate Supply and Insufficient Competition”—doubling generators’ capacity payments to $2 billion from FCA 7’s $1 billion. Those costs will ultimately be paid by ratepayers.
One of the inherent flaws in the structure of New England’s electricity markets is that it encourages price volatility over stability—which in turn reduces incentives for new investment in base load power sources that our region desperately needs. In addition to market structure flaws, regional regulatory policies enacted by our legislatures have contributed to the short-sightedness of our grid. Renewable Portfolio Standards (RPS) force electric utility and competitive electricity suppliers to purchase a percentage of their electricity from politically preferred classes of renewables. RPS has created markets for renewable energy generators that wouldn’t exist if not for the grace of government. Don’t be fooled when renewable advocates tout “zero fuel costs” and “energy security” when proclaiming that wind, solar and other renewable resources are cost-effective. They can’t have it both ways—if they were cost effective they wouldn’t need an artificial market created by politicians to ensure their survival. Electricity suppliers don’t care from which resource they buy their power—they just want cheap, reliable power for their customers. If not for government requirements they certainly wouldn’t be buying wind, solar or biomass.
Recently, the New England Governors announced a plan to socialize the expansion of natural gas pipelines into the region to take advantage of “cheap” (be careful—the price has doubled since 2012) natural gas. Pipeline expansion is a worthy endeavor—one that should be undertaken by the private investment of pipeline companies based on capacity commitments from natural gas generators and local distribution companies. What happens if we build the pipeline and the price of natural gas climbs to levels we saw as few as ten years ago? Then ratepayers will get hit twice—once for the pipeline and again for the expensive electricity. If we have learned anything over the past decade it is that government doesn’t make very good decisions when it comes to energy policy.
A better solution for our electricity problem would be for our leaders to create an environment that incentivizes private investment that would result in lower costs to consumers and an efficient, reliable grid. One idea would be for ISO to expand the FCA beyond three years. This would provide stability to existing generators so they would make long-term investments in both infrastructure and jobs, but wouldn’t stand in the way of new, efficient, cost-effective resources from entering the market. If a plant isn’t receiving energy payments because it isn’t “in merit”, and becomes uneconomical, the plant could sell its capacity payments at a discount to more efficient resources and retire.
An important question for elected officials and ratepayers to consider (especially commercial and industrial customers)–is what kind of market structure would you prefer? The current market — which provides lower prices in the short-term, but high volatility that sends mixed signals to investors—or a more stable market, that keeps prices steady and in the long-run may ultimately lower prices by spurring investment in new resources?
Marc Brown is the Executive Director of the New England Ratepayers Association, a nonprofit dedicated to protecting ratepayers.
(A version of this column originally appeared at Fosters.com.)