For the past two years, New England has seen its energy rates rise from 3.6 cents per kilowatt-hour in 2012 to 5.6 cents in 2013 — more than a 50 percent increase. New England ratepayers paid an additional $3 billion for the energy we consumed last winter and as a result of capacity shortages in the most recent auction we will be doling out an additional $1.8 billion in payments to generators just to be available.
The regional organization that oversees our energy grid, ISO-New England, has repeatedly warned us of our overreliance on natural gas for electricity generation, which currently accounts for more than half of our capacity. Add to that 8,000 megawatts of expected-to-retire generation over the next decade and New England is looking at a real future capacity shortfall — a gap that all of the energy efficiency, conservation and demand response in the world won’t be able to close.
Rightfully, ISO’s warnings have led to panic among the region’s legislators and bureaucrats, which is ironic considering that they and their predecessors supported, promoted and enacted policies that have led us to our current situation — high prices and dwindling base load capacity. Policies like renewable portfolio standards, the Renewable Greenhouse Gas Initiative, net metering and others have favored expensive, intermittent renewable power at the expense of more affordable and reliable base load options.
We are going to need new base load generation to power our homes, businesses, hospitals and schools. Unfortunately, the way the energy markets are designed offer little incentive for new investment. Capacity markets are too shallow (three years) and are subject to price “caps” that are in place to protect ratepayers, but in the long run may do more harm than good. Extending capacity to five, six, seven (or more?) years might be enough incentive to bring new capacity into the region. It may also provide some financial security to natural gas electricity generators, allowing them to make longer-term fuel commitments, which in turn should spur private investment in new natural gas pipeline. Ratepayers could ultimately benefit from a market that trades higher capacity payments for lower energy payments.
New Hampshire’s Northern Pass (1,200 megawatts) and the Salem, Massachusetts, Footprint natural gas plant (700 megawatts) are two projects that could bring much-needed base load power to New England, but both have met with opposition. Footprint, whose future is in question, has been opposed by environmental groups like the Conservation Law Foundation because it is a fossil-fuel generator, despite the fact that it emits half of the carbon dioxide and none of the sulfur oxides of the plant that it would replace. Northern Pass has been opposed by myriad environmental groups as well as the New England Power Generators Association, a trade organization representing the owners of more than 100 electric power plants in New England who control more than 80 percent of New England’s generating capacity.
NEPGA’s responsibility is to advocate for its membership, many of whom have benefited from the high prices that have hit ratepayers the past two winters. ISO’s day-ahead electricity auction is a “clearing auction,” which means that all generators that clear the market receive the marginal (or highest) cleared rate. For example, if a 1,000-megawatt generator bids into the market at $20 per megawatt-hour to cover its cost of generation and the market clears at $50 per megawatt-hour, the generator will make $30/megawatt-hour in profit, or $720,000 for that day. During a cold week this past January, when the average day-ahead price exceeded $262 per megawatt-hour, a 1,000-megawatt generator would have received over $44 million in energy payments alone.
We certainly won’t condemn generators for taking advantage of the current marketplace, but under no circumstances should we be deluded into thinking that ratepayers are at the top of their list of concerns. The current profit-making by NEPGA members is threatened by new supply (i.e. Northern Pass), which is likely the real reason behind their opposition to the project. Lower marginal rates are good for ratepayers, not so good for generators.
New England electricity customers are looking for relief from high energy costs, regulators are looking to ensure reliability and — despite their poor track record — policymakers are looking to address our long-term energy needs. Sooner, rather than later, New England is going to need more base load electricity to replace retirements.
The Farmers’ Almanac is predicting another bitterly cold winter for New Englanders. Vermont Yankee and its 600 megawatts (600,000 homes) will be powering down for good at the end of December. Run to your local hardware store and get your generator now because if January 2015 is as frigid as January 2014, rolling blackouts might be in our future. And while not all of us will be surprised, some of us will have a lot of explaining to do.
Marc Brown is the executive director of the nonprofit New England Ratepayers Association.
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