As of this writing (mid-January), we’re reaching the end of our first major cold snap here in New England, so let’s take stock of how New England’s electric system and market are faring. In short, we are doing much better than expected, to the great surprise of the many “experts” who have said we are in a “crisis.”
Despite months of talk about energy shortages and ever-higher prices, wholesale prices for electricity and natural gas are running well below last year, and power plants are getting the fuel they need to run, even in very cold weather. After big power plant retirements, the system is working well, and the forward prices that will set future retail electric rates are also down. Unfortunately, many customers’ bills remain extremely high thanks to poorly timed energy buys by electric utilities, but rates are already falling. The new, calmer reality we are seeing this winter should force rational policymakers to dial back the energy crisis hysteria.
There is no question that there were challenges last winter. As we’ve discussed before, the spot prices for natural gas delivered to New England spiked to incredible heights, and, because natural gas power plants are the dominant power providers in New England, wholesale electricity prices followed suit. Prices stayed very high through March. On a few of the coldest days, some natural gas power plants didn’t get enough fuel to run. Older, dirtier, costlier power plants filled the gap, running much more than usual. While regional grid operator ISO-NE has described the system’s condition as precarious, there wasn’t actually a power shortage or emergency due to natural gas constraints. (On one occasion in December 2013, sudden loss of imports from Hydro-Quebec did cause the grid operator to dip into short-term reserves. A similar incident happened earlier this winter, on December 4, 2014.) As CLF has pointed out, the real issue last winter was a failure to deal adequately with the increased use of natural gas for power generation, not a major deficit in pipeline capacity.
So far, what happened last winter isn’t happening this winter:
- In December, New England wholesale power prices and natural gas prices were down 55% and 64% from last year, respectively. The average spot price of power was about 4.3 cents per kilowatt-hour. So far in January, we’ve seen an increase in these prices on cold days, especially during the morning and evening “ramps” when we see very brief “needle peaks,” but the increase has been much less than last year.
- Even in the coldest weather, natural gas power plants are getting the gas they need to run. While December was somewhat warmer than last year, we’ve seen some bitterly cold weather in January, and there has still been enough gas to heat our buildings and serve power plants. And we don’t have any more pipeline capacity than we did last winter. In general, it appears that ISO-NE, power plants, and pipeline companies have learned lessons from last winter about timely communication, coordination, and fuel supply, something federal energy regulators are pushing as well.
- ISO-NE has implemented a number of meaningful pricing reforms in the wholesale electric market. These changes seem to have helped contribute to more accurate, moderate wholesale prices, including the innovation—well-explained recently by my colleague Jerry Elmer—of allowing negative prices. The power plants running during negative price events are actually paying into the electric grid for the right to operate, reducing the amount we all have to pay. We saw negative spot prices on a number of occasions in December, and we even saw them on a fairly cold night earlier this week. ISO-NE has a more thorough description of its most recent market changes here.
- Liquefied natural gas is helping. As CLF has argued for several years, making greater use of our existing LNG infrastructure to help supplement natural gas deliveries through pipelines can be a smarter, lower-cost option than building new pipeline capacity and is much cleaner than relying solely on oil-fired power plants. Unlike last winter, ISO-NE opened its “winter reliability program” to LNG this year. The price of LNG is tied to global oil prices, which have fallen dramatically, making LNG deliveries—a new shipment reached the Everett, Massachusetts terminal just this week—an even more cost-effective way to meet high winter gas demand.
- The market appears to be taking the 2014 retirements of several major power plants (Vermont Yankee, Salem Harbor, and Mount Tom) in stride. CLF sees these retirements as appropriate technology turnover and major opportunities to build the region’s clean energy future. In the wake of these retirements, energy efficiency and renewables are playing an increasingly important role, with thousands of megawatts of these resources expected to come online in the next few years.
- Looking into the future, New England natural gas and power futures for the rest of this winter and next winter are way down from their recent highs, and less than they have been in more than a year, before last winter’s challenges spooked the market. This trend suggests that market observers are not expecting last winter’s challenges to recur to the same extent in future years.
If this is what is happening in the market, why are many customers paying so much for power this winter? The answer: profoundly terrible timing and insufficiently flexible buying practices on the part of utilities. The utilities charging the highest rates this winter locked in power buys last fall, at astronomical multi-month rates that in some cases doubled the previous supply rates in customer bills. The upshot: some retail customers are paying more for each and every kilowatt-hour of energy they use through the spring than the wholesale market prices on even this winter’s coldest days.
There are silver linings for even these electric customers: customer bills will return to earth when new rates are set. This week, two utilities that avoided setting rates last fall—Central Maine Power and Bangor Emera—set their prices for this year, and their supply costs dropped almost 15%, to 6.5 cents per kilowatt-hour—less than half what many customers in other New England states are paying this winter. Competitive energy suppliers also are beginning to offer lower prices, and retail choice may allow customers to find a lower rate even sooner. Other utility customers should see substantial drops when their rates change next, and most will have lower bills in time for summer and air conditioning season.
Taking a broader view of customer energy bills to include transportation and heating fuels, the sustained decline in oil prices means that most New England households and businesses are likely to spend less on all their energy this year than last year, even if they pay a high electric rate this winter. While this drop in oil prices may benefit us in the short term and take the bite out of winter electric hikes, relying so much on fossil fuels is a sword that can cut both ways; until we more aggressively shift to the “free” fuels of renewable resources, we will be living with and need to manage the risks of the fossil energy rollercoaster.
Where does this leave the ongoing discussion about our regional energy future? Over the last year, you’ve probably heard the dire prognostications of state officials, industry advocates for new gas pipelines like Kinder Morgan’s Northeast Energy Direct and power lines like Northern Pass, and even representatives of ISO-NE. The message: we don’t have enough gas pipeline; our old power plants are retiring without reliable replacements; we need much more imported power; electric rates will be sky-high until we “do something.” That something is the so-called “grand bargain” solution, concocted behind closed doors, then put on hold last summer, but likely to reemerge in some form this year. The plan: build lots of big new energy infrastructure, with electric customers footing the bill. We’ve been told that, until that billions of new infrastructure comes online, households and businesses would pay devastatingly high electric bills. So far, this winter has shown that the payoff on this multi-billion-dollar bet is far from assured and likely to be much less than assumed from last winter’s experience, as it’s not clear how much new infrastructure we really need and the region is already saving a great deal without new mega-projects.
With the winter energy crisis narrative fizzling before our eyes, and new political leadership in several state capitals, New England has an opportunity to set a different course this year. We can craft incremental, market-oriented measures that help ensure we meet our energy needs at a reasonable cost, reduce our fossil fuel use and greenhouse gas emissions, and make full use of the infrastructure we have. In a market that can turn on a dime, these are smart moves, and they are already paying off this winter.