Power In New England: Why are Prices Increasing so Rapidly?

On October 20, IBM announced that it was spinning off its chip division by paying GlobalFoundries $1.5 billion. GlobalFoundaries appears to have won the deal with its geographic position of owning fabrication facilities in New York as well as in Germany and Malaysia. The move didn’t surprise many, as there have been rumors that IBM has wanted to jettison the division for years.

The move was significant for the State of Vermont, as the company’s chip plant in Essex, Vermont has been one of the state’s largest employers, with around 4000 employees, and an additional 4000-6000 jobs being directly supported. One of the concerns the company has voiced in recent years has been about the potential impact of rising electricity prices.   IBM pays over $35 million annually for electricity at its Vermont facility. A 25% increase in electricity prices could be enough to encourage the new owners to shift production to lower cost facilities.

Within just a few weeks of IBM’s announcement, several New England electric utilities announced disturbing price increases starting early this winter. The Massachusetts utility, National Grid, announced a 37% increase in electricity prices beginning in late Fall. Liberty Mutual soon followed by announcing price increases of 50%. Unitil, one of New Hampshire’s largest utilities, announced that prices would go up by nearly 100% from $.08/KWh to $.15/KWh.

Vermont residents were temporarily spared from similar price increases. Vermont utilities held consumer prices relatively constant as they gradually distributed $17.8 million received from Entergy as a share of profits made at Vermont Yankee from electricity sales during the winter of 2013-2914. That source disappears when the plant stops running.

Governors and politicians immediately responded with deep concern and even anger at such increases.   Why are these prices increasing so rapidly and what does this mean for the region? How will large-scale energy consumers such as IBM be impacted?

New England is losing non-gas power generation resources faster than they’re being replaced. ISO-New England (The New England electric grid operator) has announced that it will be losing about 3300 MW of generation capacity by 2016. Between early shutdowns of several large coal power plants, including the Salem Harbor Coal and Oil Power Station, and the Vermont Yankee Nuclear Power Plant, roughly 10% of ISO-NE’s reliable power generation capacity will stop operating during the next two years.

As power plants decommission over the next several years, their power output isn’t being replaced by new generation. This leads to an increased reliance on natural gas, distillate fuel oil, and hydro – the only available reliable generators – for power production. Regional hydroelectricity cannot expand beyond current capacity.

Oil-fueled electricity generation is substantially more expensive than other reliable power sources, hence the reason why it’s regarded as a peaking generator. Like natural gas, oil burned in power plants competes with heating demand. It also competes with diesel fuel customers. It’s advantage over gas in power generation is the ability to store a few days worth of fuel on site.

While natural gas is usually one of the cheapest producers of power, the region is struggling to balance residential consumption with the growing demand from power producers. Natural gas, which is almost as difficult to store as electricity, is often unavailable to New England power generators when it is needed the most.

Over the past 20 years, there has been virtually no investment in expanding supply pipelines in New England. When there is more demand for gas than the available pipelines can deliver, prices skyrocket, occasionally spiking by a factor of ten or more almost overnight. Between 2000 and 2013, the percentage of electricity on the New England grid coming from natural gas increased from 15% to 46%.

During the winter when residential consumer heating gets priority for natural gas because of the firm delivery contracts that distribution utilities sign, less supply is available for use in power generation. Over the past several years, residential demand has increased as more households move away from using heating oil. In January 2014, a strong cold-spell hit New England. This was a particularly strong cold-spell and residential gas demand reached record levels. Natural gas prices on the spot market rose as high as $120 / MMBTU from a pre-cold wave price of about $4-6 / MMBTU. Gas-fired generators without firm supply contracts could not afford that gas. Simultaneously, electricity demand spiked.

As oil-fired power stations came online to meet the grid demand, electricity prices spiked as high as $1290/MWh (compared to the annual average of $36/MWh) and consistently held over $200/MWh over hour-long periods. The obvious concern is that New England is going to be losing an additional 10% of its non-gas generation capacity inside of a 2 year period. Periods like those experienced in January are unfortunately going to become commonplace as oil becomes more heavily relied upon as a peaking energy source. The 30%+ price increases that we are seeing could be just the beginning. At least for the time being, the region’s energy prices are going to be held hostage by the price of natural gas.

With no new pipelines under construction and no non-gas predictable generating stations under construction, regional energy prices are going to remain high for the foreseeable future.

A new natural gas power plant will be sited at the former location of the Salem Harbor Coal and Oil Power Station. The plant will have a capacity of 700MW (roughly the size of Vermont Yankee) and the original plan was to have it online by June 2016. With an appeal made by a number of locals to the EPA holding up the construction of the facility, the original deadline is now unrealistic. Footprint Inc., the company planning the site, has requested that the anticipated start-up date be moved to June 2017, a twelve month delay.

Some of the largest capacity growth in the region is going to come from residential solar power. With current capacity hovering around 500MW throughout New England, by 2020, an additional 1500MW of capacity will be added. While this is significant (capacity equivalent to roughly 2 Vermont Yankees), it will do little to lower electricity prices on cold winter days.

Perhaps the most promising development for regional energy costs is a plan proposed by Spectra Energy Corp and Northeast Utilities to significantly expand the Algonquin Pipeline. The proposal, if approved by the Federal Energy Regulatory Commission, would allow for an additional 40 miles of pipeline and new compressor units. An additional 345 million cubic feet of natural gas daily, enough to heat about a million homes or fuel 2,000 MW of electric power plants running at constant load, would be brought to the region when the project is completed in 2018.

Those who are going to be hurt the most deeply are the employees currently working at the region’s largest manufacturing facilities. While electricity prices are temporarily dropping in Vermont – because of the $17.8 million payout from Vermont Yankee mentioned above – they will increase along with the rest of New England in the near future. While the exact implications for the GlobalFoundries facility in Essex are unknown, price increases beyond the 25% number can be expected.

Ultimately, the most important thing for politicians, business leaders and community figures to recognize is that it will take sacrifice to maintain the competitiveness of the region. To obtain stable prices, new power plants, power lines and pipelines will be required. While it’s easy for any of us to argue “Not In My Backyard”, we have to realize that in blocking useful pipelines or power plants, we are simply pushing the responsibilities and employment opportunities somewhere else.

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