Posted tagged ‘electricity prices’

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

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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