Archive for the ‘Electricity’ category

To Divest or Not to Divest Electricity Generation

April 9, 2014

Whether or not New Hampshire’s largest electric utility should divest its generating facilities is a hot topic again. The NH Public Utilities Commission issued a preliminary report last week which concluded that it is in the economic interests of PSNH’s retail customers for the company to divest its generating assets. The report was less sanguine about the economic impacts on customers not purchasing electricity from PSNH, but that depends on how the stranded costs are allocated in any divestiture.

“Staff continues to believe that over the long term, PSNH’s default service rate will be substantially higher than market prices resulting in continued upward pressure on default service rates. Based on La Capra’s forecast of wholesale prices in New Hampshire and adjusted for retail, Staff’s rate analysis indicates that PSNH’s default service customers would be better off under a divestiture of the PSNH assets if the stranded costs were recovered from all customers. Customers who do not receive default service from PSNH, however, would see rate increases through the imposition of a stranded cost charge. While we recognize the volatility in today’s energy markets, the value of PSNH’s “hedge” will likely diminish over the long term and will continue to be at risk due to potential environmental legislation.”

There are also smart and well-meaning people in New Hampshire who argue that that PSNH’s generating assets provide a valuable ‘hedge” given the volatility of fuel (primarily natural gas) prices and the impending retirement of several regional electricity generating facilities. But the value of that hedge depends, in part, on the price paid for it. This winter’s cold snap and concomitant spike in natural gas prices are times when the PSNH hedge did provide some benefits. But even in those instances, the net electricity generated by PSNH was below what it was in the early and mid-2000s (the latest available data is for January of 2014 so this may change with February and March data). The figure below shows the capacity utilization of PSNH’s coal-fired generating units on a monthly basis during three separate time periods. Capacity factors are the ratio of net electricity actually generated to the total potential electricity that could be generated by a facility (for this analysis I used the average of winter and summer coal-fired capacity for each facility -Merrimack and Schiller stations – rather than the nameplate capacity).

Monthy capacity
The chart shows that from 2004 to 2009, PSNH’s coal-fired generating units were primarily ‘baseload” generators, operating at 60% of capacity or higher. I have previously written about how electricity gets sold into the regional market and which generators will provide that electricity (which determines their capacity utilization) so I won’t cover that again here. Baseload generating units typically operate 24 hours per day year-round baring maintenance outages. At the other end of the spectrum are peaking generators, which mainly operate when hourly electricity load demand is at its highest (think the hottest summer and coldest winter days). Intermediate (or cycling generating units) operate between base load and peaking generators, varying their output to adapt as demand for electricity changes over the course of the day and year. After 2009 the decline in natural gas prices along with higher generating costs, including environmental, associated with PSNH’s coal facilities have resulted in the price at which it can supply electricity to the regional grid being higher than many other generators. As long as their generating cost remain higher, except for times of peak demand, limited capacity by other generators, or when events like the spike in natural gas prices occur, PSNH’s coal-fired units will produce little electricity for sale to the regional grid. During 2013 alone, there were six months when the coal units operated at less than 10% of capacity. PSNH’s coal-fired units have gone from baseload, to intermediate generators and as the chart below shows, when averaged over 12 months, they are looking a lot more like peaking units. Whether this pattern will continue is the heart of the debate over whether PSNH should be required to divest its generating assets.
Annualized generation
It becomes a lot harder to amortize the costs of generating units as their capacity utilization is lowered. There may be times when the hedge provided by PSNH’s generating assets provides a benefit and that would be truer if the units were baseload generators. But even with the extremes of this winter’s cold, price spike in natural gas, and high demand for electricity, the chart above shows, over the course of a year, the facilities have moved from baseload generators, to intermediate, and are trending toward peaking units. The NH Public Utilities Commission, its consultants, and a lot of other knowledgeable people think that, despite current market conditions and the uncertainties surrounding regional generating capacity and natural gas supply and price, these trends will continue.

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Energy Prices Won’t Be Our Savior

March 24, 2014

For as long as anyone can remember New Hampshire (and most of New England and the Northeast) has had high energy prices compared to most other states.  We may narrow the gap some but as sure as tomorrow will be Tuesday, compared to most other states and regions of the country, our energy prices will be higher. There are a number of reasons for that and they can’t be adequately covered here so for now let’s move on to the real concern of this post.  Many will disagree with me about the prospects for relative energy costs in the state but even if I am wrong, and NH and New England could somehow be truly energy price competitive with the rest of the country, we are likely to be very disappointed in the resulting economic benefits.  I am all for lowering energy prices and doing whatever we can do to accomplish that.  Reducing energy costs will give households more discretionary income, ease the burden high energy prices place on many households, and benefit the cash flow of many businesses.  These are real economic benefits but based on op-eds and comments about how high electricity and energy prices are killing business, including by people and groups I like and respect, you might think that reducing the price of electricity will bring a new industrial revolution to the state.  The problem is, a new industrial revolution has been occurring and it is one that relies less on energy and is, in part,  a result of those high energy prices.

Energy BTUs per GS

Energy prices are becoming less important to the success of the New Hampshire economy all the time.  As the chart above shows, the energy content of what the state produces has been declining for decades.  More of what we produce relies less on energy content and the lower energy intensity of the NH economy indicates a lower price or cost of converting energy into GDP.  Reducing the price of an input that is becoming less important each year to the output of the NH economy is not a prescription for revitalizing the NH  or any state’s economy.

To cite just one example, high energy prices have hurt but certainly didn’t kill the pulp and paper industry in New Hampshire.  Industrial electricity rates in Georgia are almost exactly one-half (5.97 cents/kwh) what they are in New Hampshire (11.97 cents/kwh avg. as of Dec. 2013) but Georgia lost 10,000 pulp and paper jobs (40% of the industry in that state) over the last 11 years.  Industrial electricity rates are 40% lower in Wisconsin and Pennsylvania than they are in New Hampshire and those states lost 11,000 and 10,000 jobs respectively in paper-making industries.  California lost more than 13,000 jobs in the paper industry, Illinois 12,000, Ohio 10,000 etc., etc. etc., to the tune of about 200,000 jobs lost across the country and in states with both high and low energy prices.  So if you thought that lower electricity prices would reverse that  industry you would be wrong.

I hope NH does lower electricity prices and if we do, congratulations, we will have won a battle for the 1970’s and 1980’s.  Maybe then we can turn our attention to the battle for the future.   If you want an example of a NH paper company that is fighting (and winning) today’s and tomorrow’s battles consider Monadnock Paper, you can read an excellent online Forbes article about them here.

The future is as much or more about reducing energy intensity as it is about lowering energy prices.  In fact, while lowering energy prices would have been great for NH circa 1980, it might also have delayed the long-term economic adjustments and reductions in energy intensity needed for our state and region to thrive. An industry that can’t thrive in NH because of energy prices is an industry that probably could not thrive in a global economy for a number of other cost-related reasons.   Maine’s industrial electricity prices are about one-third lower than they are in the rest of New England and I don’t think it is a coincidence that Maine is the only state in the region with an economy as energy intensive as the rest of the nation (chart below). Maine’s reliance on more energy intensive natural resource industries hasn’t served that state’s economy well in recent decades.

state by state energy intensity

Our state’s (and our region’s) comparative advantage will never be natural resources or lower costs such as electricity.  For the most part, state economies have been adjusting to account for that fact in what has been at times a painful but necessary adjustment.  As the chart below shows, states with high electricity prices also generally use less electricity per dollar of gross state product.

Eelectricty prices and energy intensity

Although it can, becoming a less energy and electricity intensive economy does not just mean ‘de-industrializing” or becoming a more services-oriented economy.  The dollar value of what New Hampshire’s manufacturers produce continues to climb in real dollars, they just do so just using less electricity every year.  As the chart below shows, the electricity content per dollar of manufacturing output in the state continues to decline and it is not a coincidence that our manufacturing sector has been evolving from traditional to more advanced manufacturing.

electricity content of manuf

Although much of this trend in manufacturing  has to do with the loss of more energy-intensive industries and the emergence of newer, less energy intensive industries, as Monadnock Paper demonstrates, some is also about traditionally energy-intensive industries adapting to the state’s less competitive energy climate.   In either case, the NH economy and individual businesses are way ahead of energy policies in the state.  The question is whether energy policies can catch-up enough to help facilitate the energy and economic transitions and adaptations that are occurring in the state’s economy

Residential Customers are Reshaping NH’s Electricity Market

July 9, 2013

You can’t write about energy debates in New Hampshire without writing about the largest provider of electricity in the state – Public Service Co. of NH.  This is not an anti-PSNH post, they already have enough people calling for their heads and I am uncomfortable among crowds.  I have known and worked with too many good PSNH employees to want to “pile on” with criticisms and even if I did the company has too sophisticated a public and community relations operation to be concerned with the writings of a blogger.   By way of disclosure, I am not currently involved either professionally or personally in any issue that directly affects PSNH.  I am, however, intensely interested in energy markets and energy policy in NH and the nation.

The NH Public Utilities Commission and Public Service Company of New Hampshire have sharply differing views on the outlook for the electricity market and what should be done about it.  Whichever view is deemed more accurate by the PUC will likely determine the how electricity markets are regulated and deregulated in NH in the coming years.   In this post I look briefly at the most prominent issue facing customers, regulators, and PSNH,  and the issue at the heart of what will be the most important policy debates (no offense Northern Pass proponents and opponents) over the electricity market in the state.

For decades electricity markets were affected much more by large commercial and industrial customers than by residential customers but that has chganged.  As I suggested at the beginning of the year in my post “The Coming Consumerism of Residential Electricity Customers”, competition for residential electricity customers would likely accelerate in NH.  As the chart below indicates, the migration of residential electricity customers away from PSNH has been accelerating and the implications are enormous.

residential customers

As PSNH’s electricity customers switch to competitive suppliers revenues decline, and  more importantly for the future of the market, the customer base shrinks.  For a company like PSNH with high “fixed costs” in electricity generating plants and other system costs, these fixed costs do not shrink with a reduction in electricity sales or a decline in the customer base .  The result is that fixed costs are recovered from a smaller number of customers which of course leads to higher prices and a further migration of customers and still greater costs for the smaller number of customers of that remain.  For an electricity provider with high fixed costs and a regulatory system that allows those fixed costs to be recovered from its customer base, revenues will not decline in proportion to declines in electricity sales.   As the chart below shows, the decline in PSNH’s electricity sales has been much larger than has been the decline in its revenues from electricity sales.

Energy sales and revenues

When revenues decline more slowly than do sales of electricity, the revenue derived per unit of electricity sold increases, despite a decline in both sales and revenues.

revenue per MWh

That can temporarily help cushion an electricity provider from the impacts of declining customers and sales but  is not a sustainable long-term strategy or good thing for customers and the economy.  It seems that both PSNH and the Public Utilities Commission agree on that.  What they don’t agree on is how long these trends will last, how far they will go, and most importantly, what to do about them.  Some of these issues will be topics of future blog posts.

The Outlook for Natural Gas Prices in New England

May 3, 2013

There is a lot of discussion, debate, advocacy and lobbying about whether New England’s energy future is becoming more vulnerable because of the region’s increasing reliance on natural gas for electricity generation.   Some see the prospect of rising natural gas prices (because of increasing demand in the region and nationally) as a vulnerability and others are concerned about constraints on the pipelines that bring natural gas into the region.  I’ve posted a lot about natural gas and electricity related issues and as I have previously stated my belief that regional increases in demand along with greater U.S. production of natural gas are more likely than not to create scenarios that will increase the capacity of the regional pipeline infrastructure. New England has traditionally been a region with a relatively low percentage of its energy consumption in the form of natural gas.  That is changing rapidly, but increases in U.S. production of natural gas along with demand driven incentives to increase infrastructure capacity in the region should reduce a lot of the volatility of natural gas prices in New England.

Apparently there are other folks who feel similarly.  The U.S. Energy Information Agency (EIA) released its “Annual Energy Outlook” last month and it has a wealth of historical data, forecasts and projections.   Their forecast of natural gas prices across the country are based on many economic, energy demand, production and other variables.  They also produce a range of forecasts based on different assumptions about economic growth , energy demand and prices.  The good news is that their baseline forecast for natural gas prices in New England (chart below) shows that  prices in the region, which are traditionally higher than in most other regions of the country, are expected to align with the national average early in the next decade, and then move lower than the national average over time.  Even better news is that this forecast is not dependent on a much weaker economy in New England than in the rest of the country (which would imply lower increases in energy demand in the region compared to the rest of the country).  I don’t think EIA would be forecasting lower relative prices in New England if they did not see  region’s pipeline infrastructure issue as being addressed.
NE Nat Gas Price vs US Forecast
The EIA also projects that the price of natural gas relative to coal will continue to increase.  Coal will probably almost always be a cheaper fuel than natural gas but today’s typical “combined-cycle” natural gas generating facilities are much more efficient than coal-fired plants.  When the ratio of natural gas prices to coal prices is approximately 1.5 or lower, a typical natural gas-fired combined-cycle plant has lower generating costs than a typical coal-fired plant.   Natural gas-fired electricity generators enjoyed a strong competitive advantage over coal plants in 2012 but natural gas plants will begin to lose competitive advantage over time, as natural gas prices increase relative to coal prices.    The retirement of older coal-fired generating plants, however, will mean that coal continues to generate a smaller percentage of the region’s and the nation’s electricity.

Some see New England’s increased use of natural gas as a concern.  There are issues that need to be addressed but none that are insurmountable or that should have the region reconsider its increasing reliance on natural gas.  Long-range energy price forecasts are notoriously difficult but New England’s energy needs and interests are finally becoming more aligned with the rest of the nation.  For too long New England has been an anomaly as the most oil-dependent and least natural gas-dependent region in the country.  Personally, I would rather have 300 million people concerned about my energy needs than just 15 million.

Electricity Prices Highlight the Benefits of Markets and Choice

March 28, 2013

Four of the six New England states (CT,ME, MA and NH) had lower average retail prices for residential electricity customers in January of 2013 than they did in January of 2012 (chart below).

Chang in Avg Retail Price of Electricity

Most of that is a result of the increasing sales into the region’s electricity market  of electricity generated by natural gas which is priced lower than the electricity generated using other sources.  The decline in the average price in NH is smaller than in some other states but it could have been, and could still be,  larger if retail competition in the residential electricity market takes hold.   The chart below shows the average cost of retail electricity for residential customers in the continental United States in January of 2013.  New Hampshire and all of New England have among the highest average rates but based on the contract information from the largest competitive suppliers of residential electricity in New Hampshire, the average price would be significantly lower (at least until November of 2013) for those who choose the lowest rates available from competitive suppliers (other higher rates are available that let customers choose to purchase a higher percentage of electricity generated from ‘green” sources).

Avg Residential Price of Electrictyby State

I was going to make this a much longer post and include a discussion of why the warnings by some about an “over-reliance” on natural gas in the region are overstated but not inaccurate (the natural gas pipeline limitations to the region are real but more likely to be remedied than not with increased natural gas usage in the region) but I will save that for another day.  The reputation and belief in free(er) markets and competition have taken a beating over the past several years so  for now I am just going to enjoy highlighting  of  one of their recent successes.

Between a (Black) Rock and a Hard Place

March 19, 2013

If I am the state’s largest electric utility I have to be hoping that the limited natural gas pipeline infrastructure that supplies the New England market never gets expanded, that shale gas production has even more environmental impacts than it appears to now, or preferably both.  I’ve written probably too many times about the electric power industry (as well as the commercial and industrial sectors) switching to natural gas (primarily at the expense of coal but also oil) because of its lower carbon intensity and significant decline in price over the past decade.  Increased demand for natural gas along with New England’s limited pipeline infrastructure have caused natural gas prices to rise in New England more than in most other parts of the country but I don’t think that is reason to “jump ship” from natural gas.   Natural gas production is increasing and it will likely be sometime early in the next decade before the increase in demand for natural gas in this country outstrips growth in supply (even though it feels like it in New England because of our pipeline limits).  Coal is cheaper and becoming cheaper still for good reason, the demand for coal as a fuel for electricity production is declining rapidly and despite being a lower cost fuel, that doesn’t mean facilities that burn coal can sell electricity more cheaply than can producers using more expensive fuel.

I  briefly noted how electric power gets sold into regional markets in an early post.  The Cliff Notes version of that is this: The suppliers of electricity (generating companies) in a region offer to supply electricity to the market at a given price and the offers are accepted beginning with the lowest cost providers first, until enough energy is supplied to meet expected demand in the region.  The price of electricity offered by the last electricity generator needed to meet the regional demand determines the market price paid by companies that supply the electricity to businesses and consumers.

So here is the rock (black) – our state’s largest utility has a large generating facility that burns cheap coal but because it costs a lot to burn coal in a way that doesn’t make NH look like Beijing on a bad day, the price of that electricity is high relative to other electricity producers in the region who are also offering their electricity in the regional market (primarily natural gas  generators).  The electricity generated by the coal burning facility has increasingly not been sold into the regional market.  As the graph below shows, the longer-term trend indicates that the percentage of New England’s electricity that is generated by Merrimack Station has been cut by more than half.  It is a 12 month moving average to smooth the results and prevent readers from getting nauseous from bouncing lines, but the trend is clear and troubling if you are a generator with a coal-burning facility.

Merrimack Station

The “hard place” is the growing loss of its residential customer base as retail competition finally takes hold.  A lot was made of the financial difficulties of one competitive supplier to NH’s residential market and the resulting return of its customers to the default service provider, but anyone who thinks that is going to stop the train from leaving the station is going to find themselves looking for another way to get to their destination.

When your generating business is weakening and your retail business is declining, all that is really left for growth is your transmission business.

Tilting at Windmills?

February 11, 2013

“Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless.”     

Don Quixote

I hope I am not, but I probably am, the only person that sees the irony in the fact that the latest wind farm battle in New Hampshire involves a Spanish developer of wind farms (Iberdrola Renewables).   The proposed wind farm near Newfound Lake has many of the residents in that area concerned about the visual and noise impacts of the project.  Electricity generation from wind has grown significantly throughout the country over the past several years and along with this growth has come a concomitant increase in opposition to the projects.

Wind generators accounted for a significant portion of capacity additions since 2007 (see chart below), and were the largest source for generating capacity additions in 2008 and 2009. If all planned wind generators in 2012 come on-line, as reported by industry participants, wind capacity additions could top 12,000 MW for this year. This would account for 45% of total additions and exceed capacity additions from any other fuel source, including natural gas, which was the leading fuel source for electric generating capacity additions in 2010 and 2011.

additionsbytype

The wind energy production tax credit (PTC), along with state-level policies, has boosted the growth of the U.S. wind industry over the past decade and the anticipated expiration of the PTC at the end of 2012 created a rush to complete projects in 2012.  This tax credit was first implemented in 1992, when the United States had less than 1.5 gigawatts (GW) of installed wind capacity. By the end of 2011, wind capacity stood at more than 45 GW, about 4% of U.S. power generating capacity, and provided 3% of total U.S. electricity generation in 2011.

The most recent state level data available on electricity generated from wind (2010) show that less than 1% of NH’s electricity was produced by wind but with recent projects in the state that figure is outdated.

Wind Generation by state

I don’t know what the future of wind power is in New Hampshire.  I have no professional or business stake in the issue. Like everywhere, aesthetic issues and local opposition will play a prominent role in determining its growth but there are other issues that must be considered if policymakers are to make reasoned decisions about its efficacy in meeting the state’s power needs.  The two most often cited concerns about wind as a source of electricity (besides aesthetic and local opposition) seem to be that turbines are so inefficient that they actually increase carbon dioxide emissions, and that they are so unreliable that they require constant backup from conventional coal and gas-fired generators.  Concerns about increased carbon from wind seem misplaced to me.   As electricity demand increases, say on a weekday morning when people are waking up and getting ready to go to work,  power plants increase output to meet it. Plants with the lowest marginal cost – that is, those that can produce additional electricity most cheaply – are selected first by the market. Here wind beats gas and coal, as no fuel is needed to generate electricity.  So in theory at least,  adding wind power to the energy mix should displace coal and gas, and hence cut carbon.  On the important matter of reliability, the obvious worry is that because the wind does not always blow, the system will sometimes not be able to supply electricity when needed.  This seems like common sense.   But the reliability of wind power does not depend on the variability of wind, it depends on how well changes in wind power output can be anticipated. Forecasts of wind farm output are increasingly accurate, and drops in output can be predicted and compensated for using conventional power stations.

I have driven by wind turbines in several states and am in awe of their size visual impacts.  I don’t know how I would feel about living near them,  but I also can’t ignore that the world (especially in the UK) is increasingly using wind power as a way to limit fossil fuel consumption and carbon emissions.


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