Posted tagged ‘electric generation’

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.

The Disconnect Between the Cost of Generating Electricity and Retail Prices

October 24, 2012

It is hard for consumers of electricity to understand why retail prices are what they are and how they are determined.  It is beyond one blog entry to fully describe the process but in overview, 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.  Retail prices are a function of the market price of electricity, plus many other costs such as transmission, special infrastructure charges, and profits by suppliers, among others.  Much of these costs are determined at the state level by regulators, as well as the characteristics of the retail electricity market in the state (competition) and the practices and policies of the companies that supply electricity to retail markets.

The end result is that retail prices for electricity in any state bear only a limited relationship to the cost of generating electricity in the state.  The chart bellow shows that the cost to generate 1 million BTUs of electricity in New Hampshire is about in the middle of all 50 states.  Vermont is also relatively low.  Both states have a relatively lower generating cost per million BTUs because a significant portion of the electricity produced in their state is from nuclear generators.

The correlation between the fuel costs to generate electricity in a state and retail prices per 1 million BTUs is modest, explaining less than one-third of the price per million BTU at the retail level.  The chart below show that despite fuel costs that are in the middle of the pack,  NH, VT and CT have high retail prices per million BTU of electricity.   The regional nature of electricity markets along with the policies of state governments and the actions of individual retail sellers of electricity all play a role in disconnect between costs for generating electricity  and prices at the retail level.  We don’t have much control over the  supplies of electricity beyond our state but we do have some control over the mix of suppliers of electricity which determine the cost of fuel for generation and we have a lot of control of the structure of retail markets and many other factors that determine the non-generating costs of electricity in the state and ultimately prices at the retail level.


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