Commentary: Why Electricity Costs Spiked

by Meredith AngwinMeredith Angwin

A Valley News letter writer was speaking for many recently when he asked about huge electric rate increases this winter and paltry explanations for them. David C. Montgomery of Hanover New Hampshire said his electricity bill had increased by 72 percent, even as petroleum products have dropped in cost. “All we have seen,’’ he wrote, “is a rather unconvincing claim about the need for more natural gas pipelines in New England and a series of what seem to be diversionary workshops on insulation.”

His letter states the problem succinctly. Oil prices are down. Gasoline prices are down to levels not seen for years. Natural gas prices are still low. “The need for more pipelines” does seem a rather weak claim, compared to the cheapness of the commodity carried in them. Also, why would we need more pipelines now, when we didn’t need them five years ago? The demand hasn’t changed that much.

The answer is that the grid itself has changed in our region. Power plants have been retired: Salem, Mt. Tom, Vermont Yankee. When coal and nuclear plants shut down, existing gas plants run longer and use more fuel, to make up for that power. More gas-fired plants are also being planned for the future.

More Gas Needed

Around 2000, about 15 percent of New England’s electricity was made by burning natural gas. It was expensive, and used only during times of peak demand. The rest of the time, electricity was supplied by a mixture of coal, nuclear, oil and hydro. Back then, with only 15 percent of electricity coming from natural gas, pipelines to the Northeast were adequate.

Now, the price of natural gas has fallen, and nearly half of our electricity demand is met with the newly inexpensive natural gas. With increased demand, the pipelines are no longer adequate. Particularly during very cold weather, when homes use more natural gas for heating, there isn’t enough available for power plants.

Last year, when temperatures plummeted and natural gas ran short, power plants burned oil, diesel and even jet fuel. The price on the grid went up as utilities bought power produced with more-expensive fuels. Last year, bulk electricity prices often soared past 40 cents per kWh (kilowatt hour) during times of high demand. (It’s usually 3 to 8 cents per kWh.) You can track realtime prices on the grid operator site (ISO-NE) on the Web.

Other costs also go up when power plants retire, but these aren’t so easy to track. For example, capacity payments go up. So far, I have described prices for kWh . . . that is, for power produced. There’s also something called a “capacity payment”: a payment for a plant to be available to produce power. The capacity payment auction takes place three years in advance. In 2013, the auction yielded $1 billion for power plant operators. Then a number of plants retired. With more scarcity, the 2014 auction brought $3 billion to plant operators. These billions are not as visible as the “price on the grid,” but the money comes from ratepayers and raises everyone’s cost of electricity.

Winter Reliability

Then there’s the reliability issue. The grid operator will do whatever it must to ensure reliability. For the past two winters, our grid operator has run “winter reliability programs” and frankly, that program saved us last winter. Last winter, the operator paid about $70 million to power plants that could burn oil. The plants used this money to stock up — with a supply on site, they had fuel available when they were called upon. Indeed, when gas-fired plants could not get gas, the oil-burning plants went online.

Last year, the Winter Reliability Program cost $70 million in the Northeast. This year, it is budgeted at $80 million. These multimillion dollar programs get translated into our winter power bills and winter price rises. However, there is a bit of hope for the future. This has been a milder winter, with low oil prices. To date, the grid’s Winter Reliability Program has spent far less than last winter, and that is a hopeful sign for the future.

Renewables

What about renewables? I will not focus much on renewables or their costs, because they are a very small portion of the electricity supply. I have been watching the hourly fuel supply on the grid rather closely, and wind has never been more than 2 percent of the supply. Renewables, including biomass and refuse, are about 6 percent of the supply. Renewables are not the cost-drivers on the grid.

Solutions, Maybe

I’ve explained the reasons for recent price rises, but do I have a solution? Well, a partial solution, maybe. First, I believe in conservation, and I just invested a great deal in improved insulation for my house. (And I want to thank Efficiency Vermont for picking up part of the cost.) To me, workshops on insulation are not merely diversionary. They are terribly important.

Being in favor of insulation is about as controversial as favoring real maple syrup. My second point is a little more controversial. Supposedly, we need more pipelines because gas is the fuel of choice . . . now. It’s abundant and cheap. But I don’t think it will remain cheap. Should we be building more pipelines because of low-priced gas? I am not sure. If the price of gas goes up, the pipelines will not be fully used.

Instead of more pipelines, I think we need a diversified grid. If we choose, we can build more renewables with a diversified grid, just as we can build them with a mostly-gas grid. And with a diversified grid (yes, I mean keeping our nuclear, coal, oil, Hydro-Quebec power as well as gas), we won’t have all our eggs in one basket.

If we are going to have a heavily natural-gas grid, we could keep our costs more stable (for now) and our grid more reliable by building more gas pipelines. But I think it would be better to choose conservation and grid diversity. With that, perhaps we could have reliability and prevent further drastic price rises in the future.

- Meredith Angwin of Wilder is a physical chemist who worked for electric utilities for more than 25 years and now heads the Energy Education Project of the Ethan Allen Institute.  

{ 2 comments… read them below or add one }

Doug Richmond, Underhill February 2, 2015 at 6:47 pm

I am still pushing for diversly located, but real reliable electric power sources.

With all the incredible electric generating and distribution equipment located to serve the Vernon plant – – We should use the electri generator there, either by a new nuclear plant, which would be set up to regernerate the old fuel rods, or some other more politically correct fuel source. Then a large, nuclear, Nat gas, generation plant on the lake shore of Chittenden County to serve the population center of the state.

I am deeply concerned that so much of our energy is now controlled by Quebec, almost as a single source, owning GMP, VT Gas, Hydro Quebec, etc. In a disaster, they must have first loyalty to Quebec, and Canadian, laws and needs. I remember the ice storm taking down the towers bringing Hydro Q. to us. Vt. was smart enough to sue them over that!!!

Reply

jim bulmer February 3, 2015 at 2:56 pm

Hey, Shumlin and your fellow travelers, are you hapy now that your worst nightmare has come to life with the closing of Vermont Yankee? As electricity costs sky rocket, come election time the folks wil know whom to blame and who to throw OUT of office. Say good night Dick.

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