Wholesale Electricity Prices Are Down, But For How Long?
This winter’s wholesale electricity costs haven’t reached the historic levels seen during the 2013-2014 winter, but that doesn’t mean that all is well with New England’s electricity markets. We still have the highest regional electricity costs in the United States and impending capacity shortages will be a challenge to policymakers for years to come. ISO-NE has repeatedly warned that 8,000 MW (25%) of New England’s electricity capacity has either retired or is “at-risk” of retiring. The region will be challenged to meet its 2020 Installed Capacity Requirement (ICR) without new resources or the repowering of mothballed plants. More importantly, ISO’s calculations don’t include Pilgrim (Massachusetts) or Millstone (Connecticut) nuclear plants, which represent an additional 2,500 MW that some experts have considered to be at risk of closing.
How did we get here? Over the past fifteen years New England has implemented short-sighted electricity policies that have led to a hodgepodge of mandates and regulations that favor renewable energy generation and state-decreed long-term contracts between electricity suppliers and renewable electricity generators. A significant factor in the premature closing of Vermont Yankee nuclear plant was the continued expansion of RPS and the PPAs that accompany them. Add that to the federal production tax credits that benefit wind farms, giving them a $50/MWh head start on their competitors in the marketplace. This allows them to submit negative bids into the market, artificially depressing prices which provides short-term savings, but ultimately leads to more base load retirements and long-term pain for ratepayers.
So why have electricity prices not reached the historic heights of last winter? Two reasons: First, it has not been as cold this winter and this has put less pressure on electricity demand. Second, and more importantly, we have had an increase in liquefied natural gas (LNG) imports mainly due to the inclusion of LNG in the winter reliability program.
The Winter Reliability Program was implemented last winter (without LNG) and was largely responsible for keeping the lights on during last winter’s cold snap—and has played a similarly important role this January. This out-of-market program is designed to incent oil, natural gas and dual-fueled generators to carry inventory (oil) or to contract for fuel (LNG) ensuring that they have sufficient fuel reserves to operate when called upon by guaranteeing compensation for unused oil inventory ($18/barrel) or unused LNG contract volume ($3/MMbtu).
Last summer, New England’s winter LNG strip prices were being offered with the highest forward prices—which means that LNG tankers from Trinidad chose New England over Europe or Asia. The Northeast Gateway, an LNG receiving facility located 13 miles off of the coast of Boston, has provided the region with an additional 1 bcf of LNG this winter from a facility that has laid dormant since the Spring of 2010. The added LNG has led to “crushing” of the basis pricing for natural gas at the Algonquin Terminal, which reached a single-day record high last winter of $73.39, but has barely breeched the $10.00 mark this winter. We can thank ISO’s changes to the Winter Reliability Program for the increased LNG supplies, but is this a long-term solution? While the program has kept the lights on and the influx of LNG supplies have suppressed prices this winter—it would be foolhardy to depend on LNG imports as a long-term solution to future electricity supply shortages. Should global LNG markets change with other countries like Japan or Korea offering higher prices we will likely see a return to the volatility that hammered our electricity markets last winter.
The ongoing debate on electricity prices has focused on natural gas pipeline expansion because of our growing reliance on natural gas for generation. There have been a number of pipeline projects proposed throughout New England but proposals like Kinder-Morgan’s Northeast Energy Direct Project, which could bring up to 2.2 bcf/day of natural gas has been met with fierce opposition from residents in both Massachusetts and New Hampshire. Local resistance to pipeline expansion coupled with recent opposition to natural gas plants in Salem and Methuen, Massachusetts and Oxford, Connecticut is going to make both increasing natural gas supply and generation capacity in the region difficult endeavors.
This winter’s lesson is clear. Expanding natural gas pipeline capacity is a must to lower electricity costs in New England, as is importing large-scale hydroelectricity from Canada. Both can be done without ratepayer subsidies or any legislative actions that will increase costs to ratepayers. When faced with policy decisions our elected officials need to answer one simple question—will passing this bill raise the cost of electricity? If the answer to that question is yes, then their vote on the bill needs to be no. Until that happens we will continue to lose jobs to other parts of the country. For those who disagree, maybe you should speak to the thousands of out-of-work millworkers in Maine or machinists in New Hampshire and hear what they have to say.
Marc Brown is the Executive Director of the New England Ratepayers Association, the non-profit dedicated to protecting ratepayers in New England.
