Guest Blog by Gus Fromuth, FREEDOM ENERGY LOGISTICS
“ Our 3 Energy Market Disruptors”
My subject topic is on the disruption presently occurring in the Energy market, specifically electric energy here in New England, and why we should be celebrating it. While I will focus on the Eversource/PSNH franchise market, much of what I have to report is applicable throughout the region. I’ll start with a screenshot from the Union Leader of this past December – “High-Priced Power for NH Industry” The New England average is 12.19 cents, while New Hampshire is 12.33 cents.
NH as well as all New England is portrayed in this story as having very costly rates, especially in comparison to other parts of the country. If there were no way around this for the Eversource rate payers it would vastly disincentivize anyone from considering expanding business to NH, if energy were a big cost of doing business.
The 12.33 cents is basically the cost of the commodity coming from Eversource, who, with over 500,000 customers serves upwards of 70% of the NH retail electric market. So, this is where we are today; I’ll return to this topic. First I will cover the upheavals that have brought us here. Disruptions by their very nature are unpredicted and unexpected. In the case of the New England’s energy market, the first move, implemented by elected officials in five of the six states was certainly expected to be a game changer.
The First disruptor to roll out:
Legislation that passed in the late 1990s deregulated the electricity market in New England and required regulated utilities like Eversource to divest generating stations to competitive suppliers. That caused a lot of changes. As you may know, Eversource held on to its power plants, except for the Seabrook Nuclear. This radical makeover of the industry was the most profound since enactment of the industry’s first comprehensive regulation by Congress in 1935. Overnight this lead to the creation of what are called Merchant Power Plants- generation facilities once owned by franchise utilities, now owned by commercial operators, free to price their power at whatever the market will bear.
Also entering the energy market place where a new breed of energy traders, marketers, brokers and vendors; generally referred to as Competitive Energy Providers. For many business and commercial customers, they replaced the utility as the energy provider.
Starting about 15 years ago a competitive market was birthed here in New England. On one hand, you had a newly acquired power plants, freed from the rate of return restrictions imposed by utility regulators. These could seek profit-maximizing returns as they peddled their power throughout New England. on the other hand, jumping at this economic opportunity for electricity marketers. They would compete head to head with utilities and with each other to sell commodity power to the millions of eligible business and household consumers in the region.
The natural tension created by forces that sought to sell power at high prices vs those luring customers with the lowest possible pricing created a market that is more efficient and functions more equitably then the old regulated system. This injection of customer choice, this abundance of buyers and sellers and removal of rigid pricing models is but one compelling feature of this new electricity era.
The second disruptor to hit the market and foul up carefully laid plans:
The cost to make electricity plummeted. The regional power grid operator, ISO NE, reports the wholesale price of electricity has fallen from 6.3 cents in 2014 to 4.1 cents in 2015 (35%) and 2.89 cents in 2016 (29%)
What’s the reason? Look no further than western Pennsylvania and the Marcellus shale geographic region of the state. Abundant natural gas deposits have overwhelmed markets and displaced other fossil feels that once generated far more power. Coal and Oil have largely ceased to play anything other than a seasonal or peaking role in the New England generation fleet.
Other factors suppressing price is the notable absence of growth in demand for electricity. Energy efficiency measures have also taking market share in the sense that investments in new forms of lighting and conservation expenditures are running ahead of expansion in usage. Aside from plummeting prices there is another headline associated with the growing dominance of natural gas as the preferred fuel for generation. And it’s far less polluting then cousins Coal and Oil. The transition away from those fuels, starting in 1999, has brought with it a 26% reduction in power plant emissions of carbon dioxide, a 66% drop in nitrogen oxide and 94% of sulfur dioxide pollution has been eliminated.
The third financial asteroid to hit the Energy market:
This has all been very good news for consumers. But it has been harrowing for generators that don’t fuel with natural gas. Let’s look at the New England supply stack. This graph tells the story of how a power plant is financially dispatched to run. This system runs the cheapest generators all the time. The progressively more expensive plants kick in as powered demand rises and compensation to the generator increases. The thing is, that the new were forms of energy generation are cheaper than the legacy power plants with tomb they are competing. The supply stack shows the emergence of wind and solar on the very front and at the dispatch chain.
While very cheap to operate, they are also irregular and unpredictable performers. Unlike other power plants they do not have on and off switches. Weather permitting, they will put out the same quality electrons as a nuke, Hydro or gas plant. But the economics for wind and solar operators are hugely different than their rivals in the legacy generation business. Armed with capacity income, renewable subsidies and tax allowances, wind and solar can operate profitably even if they are paid zero, or less than zero for their energy. Yes, you heard that correctly. Looking at the supply stack, if the price were to drop below zero, wind and solar resources would very likely continue their electricity production. This creates a price sink into which all the other generators up the price latter are sucked into.
Solar and wind are way behind in terms of the volume of energy they can produce. But renewables, coupled with the economics of the gas effect, have caused the owners of two nuclear plants to terminate operation. This is troubling on a number of fronts. Renewables are a good thing but they aren’t equipped to be our prime-time suppliers of energy. Without storage capacity, the random nature of their energy production can’t maintain the reliability standards every household and business depends on.
In the case of nuclear- it provides clean, abundant energy at very affordable prices. They were a long-term investment and now the most expensive part of the relationship is behind us. The benefits are flowing.
I began this commentary with the headline from three months ago that declared New Hampshire and greater New England to be ground zero for high energy prices. If I were to summarize, the benefit of the disruptions I have described are not naturally flowing through to you, the rate payer. In other words, some proactive steps must be taken by you, the business owner, and you the home owner, to get access to the cheaper energy available in NH and New England. In other words, don’t rely on the headline.
Profound disruptions in the energy economy have created significant material opportunities for you, the energy consumer, to buy an expensive power. You must know where to look for it and we will provide some tips on how to do just that in a future blog.
The Faces of Energy Management
Gus and Bart Fromuth of Freedom Energy Logistics, LLC
The Freedom Team