Electricity Grid and Markets Need Fixing
By MARC BROWN
This has been a cold winter, and rate payers 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 10 times last year’s average wholesale price for hours at a time — and weekly averages at three times the price over the last two months. Incredibly, for the week of Jan. 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. Brayton’s closing leaves New England’s generating capacity tenuous (at best) for the next forward-capacity auction (FCA).
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 shortsightedness 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, creating 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. 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, 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 recently as 10 years ago? Then rate payers 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 block 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 rate payers 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 executive director of the New England Ratepayers Assoc., a nonprofit dedicated to protecting rate payers in New England.