Will Flooding in Queensland Australia Increase My Power Bill in Virginia?
(Source: Weekly highlight from Platts Energy Week for February 6, 2011.)
Coal is already a global market, but the opportunities for high profits through exports are on the rise. The recent torrential rainfall and tragic flooding in Queensland, Australia caused a significant amount of damage to both the mining and transportation infrastructure. Though the damage is repairable, it will interrupt or slow shipment volumes from one of the world’s largest coal exporters. That loss of supply at a time when the world’s economy continues to demand more and more coal for power production will lead to price increases as customers bid for more limited supplies.
One of the places in the United States that is most suited for responding to the opportunity is my new home state of Virginia and its neighbor in West Virginia. The state hosts a well established coal mining and transportation network that can take massive quantities of coal out of the mountains and ship it to one of the largest coal terminals in the US in Newport News. I fully expect that the rail traffic will pick up during the next few weeks, perhaps diverting shipments that would have supplied power plants inside the state. That is the nature of free markets, the suppliers can and should sell their product to the highest bidders.
Just yesterday, I heard a radio commercial from the head of Allegheny Power, my local supplier. It started off by saying that electricity prices have been increasing due to investments required to bring existing coal fired power plants into compliance with clean air regulations and because the price of coal has increased. I would bet that commercial was recorded before the flooding effect was known. It is time to brace for more increases since fuel cost adjustments can be almost automatically passed on to consumers with little delay or regulatory scrutiny.
That radio commercial then continued with advice on how to reduce consumption in order to lower bills. Since I live in a well-insulated, nearly new home with energy efficient lights installed throughout, I am not sure what more I can do to reduce our consumption. I suppose I could turn the thermostat down to 64 or 63 instead of the 65 that we have already selected. A better plan for us is to adjust the budget to allow for higher electric bills. I am fortunate to have a good job that enables me to make that choice; not everyone has the same flexibility. I sure hope that Allegheny has some favorable long term contracts locked in place.
I’m always a bit suspicious when electric utilities raise prices due to certain market conditions. Changes that drive up the price of electric generation in the global market, that do not impact some suppliers, should not be a reason to increase prices in these same suppliers local retail markets.
I am not happy when Hydro Quebec raises my rates because prices have gone up in their export markets, given that the cost of producing power for them has not changed.
A lot of people just don’t understand this, it seems, but as consumers, we are constantly in a bidding war with other potential buyers of {$productOrService} – it’s just that we don’t *actively* haggle on an individual basis as we used to. Haggling in the modern age is based on supply and demand. Basically, if a producer has excess capacity, they reduce their prices to sell off the excess capacity – that is, the market has told them they are charging more than people are willing to pay, so they lower prices accordingly.
In the case of this article that Rod is talking about, Hydro Quebec’s power rates are constantly in competition with other producers. I don’t believe HQ actually has much in the way of coal burning plants (isn’t most of their production hydro and nuclear?), but in this case, since a lot of their *competition* is burning coal, if the price the competition has to charge goes up, then the rate HQ can charge goes up too. It is the nature of business that, often, just because you don’t *have* to raise your rates, because, e.g. you don’t use coal to generate your power, you still will, because you *can*. That’s the whole haggling/bidding war thing I was talking about.
The way I look at it is this: smart investors who invested heavily in alternative energy technologies like hydro and nuclear, *should* reap the rewards of that decision when their competitors prices go up. Why? Because it creates incentive for other investors to follow suit (which, long term, ultimately, brings prices back down, as supply expands). A lot of ink (or, well, digital bits) has flowed from people talking about how the private investment markets do not want to invest in nuclear power because the upfront costs are too high, the regulatory uncertainty makes it too risky, and the payoff isn’t guaranteed – and if it does happen, it’s decades away. The single greatest thing that can happen to get people more interested in nuclear power is for nuclear power companies to get windfall profits when the price of power goes up, because of shocks to fossil fuel prices. It will, longer term, make investors see the very real value proposition of nuclear power.
So, in summary, companies who make investments in new technologies which are risky and speculative, but ultimately based on good science and engineering *should, justly* be allowed to earn windfall profits when their smart investments work out. It’s all about risk and reward. Why should investors take risks, if they are going to be told by governments/people that they should not be allowed to take the profits from those risks? It completely screws up a free market system to not allow the people who made the best investments to make the most profits. Those profits are the incentive that *ultimately* makes Free Markets act rationally.
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For some reason my first comment appeared as ‘Guest’
Hydro Quebec has only one old 660MWe oil burner in Tracy that they rarely use, and three gas-turbine peaking stations.
While I understand the free-market reasoning behind this, I will note that HQ did not feel too proud to take bond guarantees, backed by my taxes, to build the company, and most of it’s larger assets. If someone wants to invoke the free market to justify something, it should break both ways.
The other issue is that HQ is not in competition with other producers; it has always worked in a seller’s market, even in export, thus there is a case that raising domestic rates has the faint ordure of price gouging.
Rod, I couldn’t find your e-mail address, so I’m asking it here:
What happened to this article:
Gasland Controversy – Platts Interviews and Industry Spokesman and a Defense Lawyer
Feel free to send me a direct message (I follow you on Twitter)
Cheers,
d.
@Dietwald: Good Question: That article is showing up for me when I go to Google Reader (Google Reader is a web-based RSS Feed reader), but it does not show up on the Atomic Insights main page. You might try using an RSS Reader of some sort to see if you can read the article that way. Hope Rod gets the problem sorted out.
I deleted the post after realizing that the embed code from the site linked to the wrong video, so the video showing up on my site did not match the post. I did not have time to revise the post with just a link back to the video.
Rod you need to keep up now that you work outside the beltway. About 5 years ago China stopped exporting slave labor coal from dangerous mines. This resulted in the world price of coal going up and American being able to export coal nudging up the cost of fuel in the US.
This is why we are building new nukes in the US.
Subsequent to that 2005 miles stone, coal plants have been subjected to new regulations that cost about $300 million per plant. Check your AEP bill and you will see about $20 per month added for that. The pinch point is 2019. The utility CEOs that had the foresight to get new nukes will have happy investors and rate payers.
The cost of coal ash lagoon ruptures and rail transportation are also factors favoring new nukes. Just be patient, building nuke plants is the long game.
Can someone explain to me what these posts are I see pretty frequently in blog comments, which appear to be just links right back to the article you’re already reading? It doesn’t make any sense to me. . .
“Droughts, Floods and Food” – another look at what’s driving up coal prices
And here is another look at what Paul Krugman and Pat Robertson share in common.
Sinners repent, for the end of times is near!
That I have to agree with, @Brian – Krugman is demonstrating a disturbing tendency (I won’t call him alarmist as he qualifies his statements) – this year’s grain prices likely have nothing whatsoever to do with AGW. Bottom line – climate is not weather.
Krugman basically gives us three ways to look at rising commodity prices: cheap cash (from central banks), market speculation, and good old fashioned supply and demand. His mention of climate change as a factor is speculative