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.
I just finished writing a short paper briefly looking at the economic impact of using nuclear power on Puerto Rico. One of my main conclusions was that the territory needs to keep electricity prices as low as possible due to its economy’s reliance on manufacturing (ever hear of “Pharmaceutical Row?”). Puerto Rico is taking steps to reduce its dependence on oil, but it isn’t hard for anything other than renewables to be cheaper than #2 fuel oil. The effects of high electricity prices are clearly seen with the IBM plant and it’s very disturbing to see this happening for no other reason than nonexistent long-term planning.
It’s an embarrassment that a whole region in the MAINLAND is INCREASING its use of oil-fired and natural gas generation which have proven to have storage problems in the winter.
I’m surprised that other states and classes of out-of-state electric customers haven’t sued the state of Vermont for tortious interference for conspiring to shut down Vermont Yankee.
Yes, the hurt would fall on the Vermont taxpayers, but they are the ones who elected Schumlin and the rest.
@Engineer-Poet
I’m also surprised that the plant owner did not introduce the argument that Vermont Yankee is a production facility engaging in interstate commerce that should not be required to seek a “certificate of public good” from a single state just because it happens to be located — just barely — inside that state’s borders. When the state government put pressure on Entergy to provide Vermont utilities electricity at a sharply discounted rate compared to the rates charged to everyone else, it was interring in interstate commerce.
Our representatives signed a document in 1789 or in which we agreed that such arrangements would not be enforceable.
Rod
I am delighted to see Evan Twarog’s excellent post on this subject. A subject dear to my heart!
Rod and Engineer-Poet, the Commerce Clause was indeed one of the legal arguments that Entergy made in its lawsuit against the state: that insisting “no Certificate unless Vermont utilities get a really good deal!” was against the Commerce Clause of the Constitution. The judges went back and forth on that one, finally ruling against the state on the narrower grounds that the state pre-empted NRC and federal prerogative on nuclear safety. As I remember (should look it up), Murtha ruled for Entergy on the Commerce Clause, which also meant that the state had violated Entergy’s Constitutional rights and had to pay Entergy’s legal bills. The appeals court ruled for Entergy also, but not so strongly on the commerce clause, so the state didn’t have to pay Entergy’s legal bills, because it was no longer a constitutional matter. This ruling was actually a strong incentive for the state to NOT take the case to the Supreme Court, since a yes-and-then-no ruling like that could easily go back to the original ruling. If it did the State would to pay the legal bills. I should really link to my blog post on this….oh well. Maybe later today.
Right now, I need to link to this morning’s article in Vermont Digger about the January VY layoffs. Misery.
http://vtdigger.org/2014/11/19/entergy-lay-165-vermont-yankee-workers-january/
Meredith
Well, here are some of my posts on this. Looking at the first post almost brings me to tears. Law School Professor Cheryl Hanna has since committed suicide.
http://yesvy.blogspot.com/2013/08/vermont-yankee-wins-in-appeals-court.html#.VG3hJShCrA4
http://yesvy.blogspot.com/2013/08/preemption-why-state-wont-appeal.html#.VG3iyChCrA5
http://yesvy.blogspot.com/2013/08/preemption-why-state-wont-appeal.html#.VG3iyChCrA5
Wow, I didn’t even realize that that was written by Evan until seeing you point it out, Meredith. The writing was of the same high quality as Rod provides, so I didn’t even note a difference. Good work, Evan (and decide to be a Mechanical Engineer)!
Rod usually notes that a post is from a guest author.
The Internet and search engines are a strong meritocratic force, bringing the best (regardless of age or paper qualifications) to the top.
@EntrepreNuke
That’s right, but Evan has earned his own byline. I thought it was pretty clearly marked on the post.
It is clearly marked, but I glanced right over it.
I simply felt the need to point out that it is a credit to his writing skills as a 16 or 17 year old that nothing jumped out to me (as a 30 year old) to think it wasn’t good ‘ole atomicrod’s writing.
Very well-researched article. New England is a microcosm of the entire nation, and the problems with electricity cost, distribution, and reliability are an “early warning signal” to other regions. A similar analysis can made for the west coast and other “energy poor” regions of the U.S.
I am very grateful to live in the U.S. Southeast, where about 5,600 MW of 90+% capacity factor carbon emission-free power will be added to the grids between now and around 2018 or 2019.
“The 2010 Connecticut power plant explosion occurred at the Kleen Energy Systems power station in Middletown, Connecticut, United States at 11:17 am EST on February 7, 2010. The plant had been under construction from February 2008,[2] and was scheduled to start supplying energy in June 2010.[3] The initial blast killed five and injured at least fifty; one of the injured later died in hospital, bringing the total death toll to six.[1][4]”
Here is another reason the area is short of power generation. Natural gas is dangerous.
One of the questions I have about the emissions data published by the EIA is, whether the gas consumed at the compressors is included. I had a very interesting revelation at the FERC, when my boss, an econometrician, had me working on a comparison of the economic benefits of three competing proposals for transporting Prudhoe Bay gas to the 48 contiguous United States. It turned out that the largest cost difference was the value of the gas burned in the compressors. Admittedly, that was a very long haul — comparable to the Keystone XL proposal.
Albert Rogers-
EIA consumption information breaks out Pipeline & Distribution use separately. Click on the definitions link and Pipeline use includes compressors.
http://www.eia.gov/dnav/ng/ng_cons_sum_dcu_nus_m.htm
I can imagine that pushing gas from Prudhoe to the lower 48 would consume a lot of gas along the way!
Any CHP projects under consideration? Seems like the situation you’re describing will present opportunities.
It appears that Natural Gas Storage Injection season has ended.
Week of 11/07/2014: 3,611 Bcf in storage
Week of 11/14/2014: 3,594 Bcf in storage
http://ir.eia.gov/ngs/ngs.html
Also, Henry Hub prices are up a bit over last year at the same time……….with the subsequent large spikes induced by the Polar Vortices.
http://www.wtrg.com/daily/oilandgasspot.html
I agree. Anti development, superficial knee-jerk approaches to environmental and climate concerns, and/or NIMBY have overridden reasonable and responsible energy policies. We are already seeing problems.
Incidentally at least two regional electricity supply groups reported all time highest electricity demand for a November in this latest weather episode.
PJM 121,987 megawatts (old record 114,699 MW)
Texas ERCOT 50,677 megawatts (old record 46,954 MW)
“Incidentally at least two regional electricity supply groups reported all time highest electricity demand for a November in this latest weather episode.”
Does this mean that there will be upcoming transmission projects to bring the power to places where it is needed such as New England and other places where high demand is expected? With all the anticipated coal plant closures, the intermittent supply from wind energy and load growth, I could envision that possibility. What’s the expectation?
I dont know what the plan is. Everyone seemed to be banking on low NG prices and this winter not being as bad as last. It doesn’t look like either is going to hold. Another cold episode is arriving around thanksgiving.
Could the inclement weather prompt the powers at be to keep some plants open that are planned for closure? Those electric rate increases seem rather severe. They sort of remind me of Enron. I wonder if there is another smoking gun story to be told about them.
It does look like a lot of substation work for years to come.
Eino-
Vermont Yankee will shut down. It physically doesn’t have enough reactivity left in the core to keep operating. Today, it can only run at 84% power.
http://www.nrc.gov/reading-rm/doc-collections/event-status/reactor-status/2014/20141121ps.html
Besides, even if shutting down VY guaranteed power outages and sky-high electricity rates, I still think the politicians in the state would prefer the plant to close.
What happened to James Bay and Hydro Quebec? Didn’t Vermont have a long-term contract?
Ed,
Just a quick note. Yes, we have contracts with Hydro Quebec, but the new (2010) contracts are market-follow…that is, they are NOT fixed price. They won’t help very much. My ancient blog post on this….
http://yesvy.blogspot.com/2010/12/bad-deal-with-hydro-quebec.html#.VHCaGihCrA4
[facepalm]