Wednesday, January 4, 2017

Flow with It* - Energy Efficiency in New Hampshire – Part 1

Much of our energy debate in New England centers around its supply – does it come from natural gas, coal, or nuclear; do we bring in hydro power from Canada or put up turbines on our hills? Supply is important, but we don’t pay enough attention to the other side of the energy equation – that of demand. How we use energy is, I think, even more important than energy supply. Focusing on how we use energy, and working toward becoming more efficient in our consumption, could have profound impacts on our energy needs and our economy (we could spend the money from energy savings in other ways), our planet (we would need fewer power plants and transmission lines and would reduce pollution and greenhouse gas emissions), and society (lower-income families would spend a smaller portion of their paychecks on heating and keeping the lights on).

What we have already gained from energy-efficiency investments is remarkable. The International Energy Agency (IEA) now refers to energy efficiency as the first fuel because the savings from avoided energy use are now greater than the supply of any single energy source (oil, electricity, or natural gas) in Australia, USA, and certain EU countries. The IEA estimated that, in 2015, energy-efficiency investments worldwide were of the order of $221 billion. The following quote, taken  from the foreword of their recent report, captures the importance of energy efficiency and its central place in any energy policy, whether it be local, statewide, or country-based.

“It is becoming increasingly clear that energy efficiency needs to be central in energy policies around the world. All of the core imperatives of energy policy – reducing energy bills, decarbonisation, air pollution, energy security, and energy access – are made more attainable if led by strong energy efficiency policy. As the world transitions to clean energy, efficiency can make the transition cheaper, faster and more beneficial across all sectors of our economies. Indeed, there is no realistic, or affordable, energy development strategy that is not led by energy efficiency. For the IEA, it is the first fuel.”

In a report entitled “The Greatest Energy Story You Haven’t Heard: How Investing in Energy Efficiency Changed the US Power Sector and Gave a Tool to Tackle Climate Change,” the American Council for an Energy-Efficient Economy (ACEEE) noted that energy efficiency in the US is presently the third-largest electricity resource, after coal and natural gas, and is projected to become the largest resource by 2030. If we had not implemented various energy-efficiency measures since 1990, we would have had to build 313 additional power plants. ACEEE forecasts that, by 2030, energy-efficiency savings could be equivalent to the generation from 800 power plants!

Energy efficiency (EE) is important for all the obvious reasons: it reduces peak power demand and power plant construction; it decreases environmental and health impacts that result from the harvesting and burning of natural resources, such as coal and natural gas; it extends the life of those resources, and greenhouse gas (GHG) emissions are reduced. It also reduces expenditure on energy for homes, businesses, factories—money that can be spent elsewhere. Energy-efficiency investments create jobs, improve local resilience, and have been shown to be the lower cost option when compared with power plant investments. Increasingly, a host of multiple benefits that stem from EE initiatives is now recognized. Some of these were highlighted in a recent IEA report, as depicted in the figure below. These numerous outcomes lead to a cascade of multiplier effects throughout the economy, in which EE savings lead to reduced energy consumption, which stimulates economic development, resulting in increased prosperity and reduced poverty. Quite frankly, it is simply the right thing to do to extend our future on this planet and, as noted in the IEA quote above, needs to be front and center of any energy strategy. 


Source:EIA

The starting point for consideration of energy-efficiency measures is knowledge of the large-scale supply and consumption of energy. A good way to visualize these is through Sankey or flow diagrams. (For more information about Sankey diagrams, take a look at one of my early NH blogs.) The Sankey diagram below was generated by the folks at Lawrence Livermore National Lab (LLNL) based on 2012 data. The LLNL experts annually prepare these useful and informative diagrams for energy flow in the US and they appear in energy-related presentations all over the place. They don't update the diagrams for individual states every year, however, so the NH data are a bit dated, but still informative.




The diagram shows that the bulk of New Hampshire’s energy supply comes from oil, nuclear, natural gas, and biomass. Over time, renewables such as hydro, wind, and solar are becoming more important, while the use of coal is diminishing.  

With respect to consumption, transportation consumes the bulk of the energy, followed by households and commercial enterprises. The pie chart below shows the breakdown of energy usage in NH. To obtain the greatest benefit, the data suggest that state EE measures should be focused on the transportation, household, and commercial sectors.


Source: LLNL Data

When looking at the Sankey diagrams, I am always astounded at the rightmost side of the diagram. It shows the amount of energy that ends up in energy services compared with rejected or wasted energy. Of the 360 trillion BTUs of primary energy supply into NH, two thirds (!) is lost as waste heat. The bulk of this waste comes from inefficiencies in energy generation and transportation losses and, although there are physical limitations as to how much useful energy (such as electricity and motion) we can draw from burning stuff, there is still considerable room for improvement. We can, and should, take a much harder look at improving gas mileage standards for vehicles and incentivizing electricity generators to improve their overall efficiency, for example. It is noteworthy that the move from coal to combined-cycle natural gas electricity generation has improved efficiency. Moreover, the separation of generation activities from the utilities and the development of electricity markets naturally created market incentives for generators to become more efficient: the more effective they are, the lower their costs become. Prior to deregulation, the costs of inefficient generation were simply passed on to ratepayers.

Interestingly, the data show 35% energy waste from residences and commercial enterprises, but only 20% from industrial firms. Energy costs are often a significant component of industrial operating costs, so many companies have a laser-like focus on minimizing these. Nevertheless, reducing energy losses from residences, commercial, and industrial enterprises presents important opportunities for improvement: state-administered EE programs are often directed at these areas, even though they are not (as we note from the Sankey diagram) where the big savings are to be harvested.

Having established the key energy supply and consumption flows for New Hampshire, it is worth examining their historical patterns. The figure below shows the history of energy consumption in NH over 20 years since 1994. Overall, there has been an increase over this period: usage peaked in 2004, fell off for a few years, but, since 2013, there has been an uptick in consumption again.


Data: EIA

Overall energy consumption is an interesting number, but it does not take account of structural changes in the economy and demographics. It is more useful to consider gross measures of EE in terms of energy intensity, which is defined as the energy consumed per unit of gross domestic product (GDP) or as energy use per capita. Historical data for NH’s energy intensity are shown in the figure below. It is notable that, even though there are fluctuations from year to year, NH’s energy intensity has declined since 2000, mirroring the change that we have seen across the the US and the world.
Source: EIA

These numbers are interesting and encouraging, but it is useful to consider them in context and in comparison with the other New England (NE) states and the US average.


Source: EIA

This comparison raises some interesting questions. I was particularly surprised at the three-fold variation in energy intensity across states in a relatively small geographic area. We go from a low of 2.8 in Massachusetts to a high of 8.4 in Vermont and also see big variations in the reduction of energy intensities from 2000 to 2013. The southern NE states generally seem to be doing better than the northern states. I don’t have ready answers to explain these variations, but they are likely to be due to the nature of the economies in the various states, the industrial mix, cost of energy, state regulations, and a host of other factors. The energy intensity in NH is very much in line with the US average, but the decrease in NH over this time period has been lower than the US overall.

The other measure of energy efficiency is energy use per capita, as shown in the figure below. This has also shown a general decrease since 2000, despite an uptick in the last few years, which is perhaps a reflection of the particularly cold winters we experienced.


Source: EIA & US Census

The table below shows comparative data for the New England states and the US.


Source: EIA

Again, the southern NE States have lower per capita energy consumptions, but the spread of values is a lot less than that for energy intensity: 60% vs. 300%. Generally, the values for NE are in line or much lower than the US average. The reasons are complex and state-specific, and depend on population density, transportation networks, and the nature of the industries in the various states. Energy intensity and energy per capita are gross measures of energy efficiency and so one needs to cautious in applying them. Nevertheless, interstate comparisons are useful because they provide opportunities for benchmarking and the adoption of best practices from other states. Generally, the trends are good: energy consumption per capita and per dollar of GDP are down, indicating that we are generally being more efficient about using our energy. I find this encouraging; there is, however, so much more that we can do.

This post has been a rather broad-brush view of energy efficiency, but it has allowed me to update some NH data from earlier blogs and also provides a useful jumping-off point for more specific posts on energy-efficiency programs in NH that I will be posting over the next few weeks. In the meantime, my best wishes for 2017—and do your part for energy efficiency by turning off the lights when you leave the room.

Mike Mooiman

Franklin Pierce University
mooimanm@franklinpierce.edu



(*Flow With It - a soul-tinged tune from St. Paul and the Broken Bones, a new R&B group out of Alabama. I just love this stuff.) 

Saturday, October 1, 2016

Back Home* – Electricity Prices After the Mild Winter of 2015/2016

After a year away on my sabbatical in Botswana where I spent my time researching off-grid solar systems and learning about energy challenges in Southern Africa, I have returned home and am back to teaching and doing research at Franklin Pierce University. My time in Botswana was interesting, complicated, frustrating, and ultimately very rewarding. I had the opportunity to meet some very interesting people, I visited solar installations in some very unique and remote places, and was involved in the installation of a 20 kW photovoltaic system in a village just outside of Gaborone, the capital of the country. During my time in Botswana, I developed a far more nuanced understanding of the challenges associated with energy supply and demand in the developing world and learned to appreciate the reliable and inexpensive electricity and water supplies we have here in the US.  

Even though I plan to continue my interest in Southern African energy matters, I am now focusing again on NH energy issues. I thought it would be fitting to start where I left off a year ago and take a look at electricity prices and what the future might hold, especially after the mild weather experienced in New England last winter.

When looking at electricity prices, I always start by looking at wholesale prices. We have a very dynamic market for electricity in New England because we have a formal and well-run market organized by the independent system operator in New England, ISO-NE. (See my blog Extraordinary Machine to learn more.) We have 350 generators of electricity bidding to sell their electricity into the market. This includes nuclear power plants, coal, natural gas- and biomass-fired operations, as well as wind, solar, and hydro. This all makes for an interesting and dynamic market.

The figure below shows historical wholesale prices for electricity going back to 2010. It is interesting to note that, after three winters of spiking electricity prices, prices were very calm this past winter. This resulted from several factors.

Source: EIA

 First and most important, it was a mild winter – some have called it the winter that wasn’t (while I was away in Africa, my snow blower only received one workout). A good indication of how mild the winter was comes from examining the heating degree days (HDDs) (see A Hundred and Ten in the Shade for an explanation of heating degree days). The chart below shows HDDs for the past 12 years. We normally experience about 7000 HDD over a year (July to June) in NH and 6000 for the whole of NE; this past year, the values were ~15% lower, with values of 6000 and 5300, respectively. That was indeed a whole lot warmer, but I was taken by surprise that the HDD values for 2012/13 indicated an even warmer winter that year. Like many other folks, I tend have a short memory about past winters, except when they are extreme, but the data show that the winter of 2012/13 was the warmest in the past 12 years – at least as measured by HDDs values. An examination of the wholesale prices for that winter in the figure above shows some daily prices spikes, but nothing to the degree we experienced in the following three winters.
Source: ISO-NE

The other key driver for low electricity prices is low natural gas prices. Over the past winter, ~55% of the electricity produced in New England was from natural gas: as a result, natural gas prices had a big impact on what we paid for electricity. The two big uses of natural gas in NE are for home heating and electricity production. With the mild winter, there was enough natural gas to go around for both heating and generation. Daily prices did not spike, which was quite different from previous years. The figure below shows the extraordinarily tight correlation between natural gas prices and electricity prices in NE – when natural gas prices spike so do electricity prices.

Source: ISO-NE

Wholesale prices for electricity are presently of the order of 2 c/kWh. This is great, but what are the implications for us as retail electricity customers? Well, less positive than we would like. In NH this past winter, retail electricity prices were in the region of 18c/kWh, almost 9 times the wholesale rate, as shown in the figure below.

Source: EIA

It is important to appreciate that wholesale electricity prices are a small component of what we, as rate payers, shell out for electricity. Baked into the retail rates are a host of charges: there are charges to pay for the transmission and distribution networks; there are long-term contracts that the utilities have entered to purchase electricity (most likely at higher than 2 c/kWh); there are overheads, salaries for the utility company employees, etc.; and, in the case of Eversource, there is the cost of operating their generating facilities – which produce electricity for a whole lot more than 2 c/kWh. On top of this is the profit that the regulated utilities are allowed to earn on their investment in infrastructure. It is a long list of costs and additional charges that gets us all the way from 2 to 18 c/kWh and well worth a closer look in a future blog. It turns out that the utilities from which we buy our electricity end up buying a relatively small portion of their electricity from the wholesale market – a lot of their supply is from long-term contracts that they signed up for years ago. Of course, when wholesale prices are low we don’t like this but, when prices spike up to 45 c/kWh, as they did in the winter of 2013/14, we are quite grateful that our electricity suppliers have locked into lower cost long-term contracts.

Despite last year’s mild winter weather, if this upcoming winter were to be a very cold one, we should expect to see spikes in both natural gas prices and wholesale electricity rates that will impact what we pay for electricity. ISO-NE has taken some important steps in New England to mitigate these spikes through their winter reliability program and by increasing storage of liquefied natural gas, but we have not taken any steps to significantly increase natural gas supply. If we have a very cold winter again, we will see price spikes and then we will go through another round of handwringing and planning for increasing natural gas supply. The truth of the matter is that we do not have a long-term view about our energy supply here in New England. Plans to increase natural gas supply have been scuttled due to opposition or our desire to have the pipeline companies take all the risk. These are both good reasons for not increasing supply, but we must bear in mind that most existing energy infrastructure in the US has been built with some government intervention via regulated monopolies. Ultimately, every one of those infrastructure investments impacted somebody somewhere. If we do not want to invest in energy efficiency, we as energy consumers will end up paying in one of two ways: we will pay for infrastructure investments through costs and direct impacts on our property, our environment, and way of life, or we will suffer the consequences of not investing in infrastructure and creating unreliable supply conditions. Ultimately, it is our choice.

I like to take a look at what the futures markets are predicting for NE electricity prices and, even though futures markets are about looking forward, I also like to look back at their prices from the previous year and see how things have changed, especially with the warm winter we had. The figure below is a comparison of the future prices from last year with those at present. It is clear that there has been some change in the market’s view of upcoming electricity prices. As usual, we are seeing a market forecast of winter price spikes, but, compared with last year, the spikes are smaller and the base-line prices are also lower. This chart also gives one a sense of the challenges the utility companies face as they look to lock in sufficient electricity to supply us over the coming years. Do they secure long-term higher-priced electricity contracts, do they subject us to the whims of the short-term markets and maybe prices won’t spike again like last winter, or do they mitigate potential price spikes by buying insurance through futures contracts. These are important and challenging decisions that the utilities make under regulatory supervision because ultimately it is NH ratepayers that end up paying for whatever choice they make. What would you do?

Source: CME

As we consider the consequences of choices, I am going to wrap up this data-heavy post with an updated chart for default electricity rates for the four NH regulated electricity utilities. (Remember that default rates only reflect the retail costs of electricity and do not include the distribution costs.) These rates, shown below, are a direct reflection of the choices the utilities have made, under regulatory mandates, regarding the sourcing of electricity. Presently, PSNH default rates are substantially higher than those of Liberty, Unitil, and the NH Electric Cooperative. The rates for PSNH presently reflect the high costs associated with operating their own generation facilities, including the coal-fired Merrimack power plant. Even though there have been times that the rates for the other utilities have been higher than those for PSNH (due to wholesale market price spikes), their default rates have generally been lower. Now that the divestiture of the PSNH generating assets has finally started, it will be interesting to follow how PSNH’s rates in the future will compare with those of the other NH utilities.

Source: NH PUC

That wraps it up for this post. It is good to be back teaching in NH and learning about statewide energy matters. Feel free to email me to suggest topics for future blogs and, in the meantime, remember to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu



*Back Home A great upbeat singalong tune by Andy Grammar

Tuesday, August 4, 2015

Next Year* - New Hampshire Electricity Price Update

While we are all enjoying the fine summer weather, I thought it would be useful to take a look back at electricity rates for this past winter and to think about what the coming winter might hold for us. Before we get into this topic, however, I need to note that this will be my last blog on New Hampshire energy issues for the next year. I am heading off to Botswana, Southern Africa, as a Fulbright scholar, where I will be studying energy matters in Botswana, with a particular focus on the solar energy field and storage technologies. As you can imagine, the energy issues in a developing country are quite different. Here in NH, we are all used to reliable, inexpensive electricity whereas, in Africa, two-thirds of the population do not even have access to electricity, it can be very expensive, and, when available, it is often not reliable. In NH, we sometimes seem intent on blocking the development of any energy projects, whereas in Africa energy infrastructure development is welcomed, encouraged, and supported. The energy field and the associated issues will be quite different and I am looking forward to learning more. While down in Southern Africa, I will be firing up a new blog, titled Energy in Botswana, so if you are interested in following my energy explorations in this part of the world, drop me an email and I will put you on a notification list. But back to NH energy matters…

In my last blog on electricity rates in NH, Gonna Take You Higher, I noted the following:
  • Wholesale prices (and thus retail prices) for electricity during the 2013/2014 winter increased due to natural gas pipeline constraints.
  • The three deregulated utilities—NH Electric Co-op, Unitil, and Liberty Utilities— substantially increased in their winter default service rates, with price increases ranging from 60 to 75%.
  • PSNH rates only increased by 4% and they ended up with the lowest rates in the state.
  • The increases were due to the fact that Unitil and Liberty Utilities were compelled to lock in electricity prices from the short-term 2014/2015 futures market for electricity where prices had skyrocketed due to the high prices of the 2013/2014 wholesale market.
  • I made the recommendation that the utilities should not be restricted to purchasing their future electricity supply to just six months out and that they be allowed to adopt a portfolio approach of both long- and short-term electricity supply agreements to mitigate the effects of short-term price spikes.

I thought it would be interesting to take a look at what actually happened over the winter and what has happened since then.

As shown in the figure below, wholesale electricity prices did spike over the winter but nowhere near the frequency, duration, or magnitude of the previous winter. Peak prices were even lower than those of the 2012/2013 winter.
Data Source: EIA

Compared with the previous two winters, prices increases this year were moderate and actual wholesale rates were lower than the futures prices at the start of the season. In October 2014, futures prices for the winter peak in January and February were ~18 c/kWh (see Gonna Take You Higher).  In January and February 2015, although the wholesale market prices peaked at ~12 c/kWh for January and 20 c/kWh for February, the daily averages for those months were a lot lower—at 8.7 and 13.7 c/kWh, respectively.

This means that when  the electrical utilities bought electricity on the futures market, it is likely they overpaid relative to actual day-ahead wholesale prices. However, this the essence of hedging (or locking in) the price of a commodity ahead of the time you actually need it:  if actual prices turn out to be lower, you end up overpaying, but, if prices end up higher, you are very pleased. Hedging is just like paying for insurance – you pay a premium to protect yourself: it is not about getting the lowest possible price; rather, it is about reducing risk and avoiding exposure to excessive price increases.

After those very large winter increases, the summer default rates plummeted and the three deregulated utilities ended up with rates lower than that of PSNH, which again had the highest rates in the state. The figure below gives an historical record of the default rates for the four NH electrical utilities.

Data Source: Courtesy of NH PUC

Futures prices for electricity for the upcoming winter are currently pretty low compared with those of years past (see the figure below).  The futures markets indicate prices of the order of 12 c/kWh for the Jan/Feb 2016 winter peak, with further decreases expected in the following winters. These lower futures prices are most likely a reflection of the changes that we are seeing in the New England electricity market. The local electricity supply coordinator, ISO-NE, has worked hard to mitigate the extent and duration of the winter spikes by implementing a winter reliability program in which owners of oil-based generating facilities and liquefied natural gas storage operations are paid to store fuel. This ensures a reliable and predicable backup supply of alternative fuels to generate electricity should there be bottlenecks in the natural gas supply from pipelines. 

Data Source: CME
My predictions for electricity rates for the next few years are that we will continue to see short-term winter spikes due to natural gas pipeline congestion during high demand periods but that these spikes will moderate over time as ISO-NE expands and improves its winter reliability program, as some the natural gas pipeline projects get implemented, and as more Canadian hydro power makes its way down to New England.

Since the deregulation of electricity supply in NH, customers are no longer compelled to purchase their electricity from their default provider. Given the big fluctuations in default energy rates and the availability of competitive suppliers, I thought it would be interesting to look at how customers have responded – are they flocking to competitive suppliers or are they staying with their default utility? I took a look at the customer migration numbers for PSNH – the largest NH utility. The chart below shows data for the past three years. The data in orange show that, from about July 2012, the number of residential customers purchasing their electricity from competitive suppliers started to accelerate, and this trend really kicked in in the first quarter of 2013 when there was big movement of customers to competitive suppliers. The numbers reached a peak at the end of 2013, when approximately 28% of PSNH residential electricity customers were supplied by other companies. Since then, there has been a slow decrease and, presently, some 20% of the electricity supply to residences comes from competitive suppliers. The data in blue, which is for all PSNH customers (including small and large commercial and industrial enterprises), show that, in October 2013, almost 60% of all electricity distributed by PSNH came from competitive supplies. The numbers have fluctuated since then but, this past winter, this number fell below 40%, corresponding to a big migration back to PSNH due to their lower default rates. There is now a slow movement away from PSNH again, as lower summer rates begin to appear attractive to the commercial and industrial enterprises. 

Data Source: NH PUC

Some months ago I wrote about a website called shopenergyplans.com, which allows you to compare electricity costs from competitive suppliers in your service area. At that time, shopenergyplan.com was only presenting information for suppliers who agreed to have their rates posted. Shopenergyplans.com has advanced since then and now provides details for a larger number of competitive suppliers. In my last blog on this topic, I noted that rates for only three competitive suppliers were listed for the Manchester service area. Yesterday, I noted that are now seven different suppliers listed, with 40 different plans, ranging from 1 to 36 months, and including various renewable energy sources. A few weeks ago, shopenergyplans.com notified me of two electricity supply plans from competitive suppliers offering lower rates in the PSNH service area. This website is a good place to start if you are considering looking for a competitive supplier but I caution you to do your research and make sure that you understand the contract terms – remember that there can be costs for switching and the competitive suppliers can shunt you back to the service utility in your area at their discretion.

As I noted at the start, this will be my last blog until I return next year.* If you are interested in following my energy adventures down in Botswana, please drop me a note at my email address below. In the meantime, thank you for your interest in my work. Keep in touch, let me know what is happening in NH while I am away, and remember to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu


(*Next Year - A very appropriate song by the Foo Fighters featuring the ubiquitous Dave Grohl. Great video too. Enjoy Next Year.

Wednesday, June 10, 2015

Gimme Some Money* – The PSNH Divestiture Settlement Deal - Part 2

In my last post, I covered some of the details regarding the PSNH/Eversouce divestiture deal that rolls the three big outstanding PSNH matters – the scrubber costs and recovery investigation, the sell-off of PSNH generating assets, and the impact  of PSNH’s ownership of generating assets on its default service customers – into a single settlement. Legislation related to the deal, in the form of Senate Bill 221, made its way through the NH General Court.  This Bill is not an approval of the deal but does permit the securitization of stranded costs to take place once the PSNH electricity-generating assets have been sold. The details of the settlement have been outlined in the agreement between the State negotiating team and PSNH but it will be up to the NH Public Utilities Commission to finalize all the details and to figure out who will pay what and when.

In Last Fair Deal Gone Down, I laid out my general understanding of the big issues at stake in this complex deal. However, I have a particular interest in the numbers and where the various piles of money will end up once this particular money tree gets shaken. As is usual with utility rate cases, when the numbers are spread out over billions of units of electricity, kilowatt hours (kWh), they don’t seem so bad but, when the absolute dollar amounts are calculated, they can be staggering. In utility cases there are two sets of numbers that need to be tracked: the total dollar amount and then that amount divided by the number of kWh. Both are important and both are relevant.

Let’s start with some of the big kWh numbers.

According to the  PSNH customer migration reports, there were approximately 390,000 customers getting their electricity supplied through PSNH’s default electricity supply service in 2014. The total amount of electricity supplied through this service in 2014 was ~3.8 billion kWh. This means that the average amount of electricity consumed by each customer was 9800 kWh/year or 810 kWh/month. These so-called default-service (DS) customers are largely residential in nature along with a few smaller industrial and commercial customers.
However, PSNH also has another set of customers. These customers purchase their electricity from competitive suppliers but that electricity still has be delivered over PSNH’s transmission and distribution lines. This pool of transmission and distribution customers is larger because it includes the DS customers. There are some 504,000 transmission and distribution (T&D) service customers and, in 2014, the total amount of electricity transmitted through the PSNH lines was ~7.9 billion kWh. This means that 52% of the electricity transmitted by PSNH was supplied by their competitors. These non-DS customers are largely the big commercial and industrial users of electricity, however it is notable that ~20% of residential customers buy their electricity from competitive suppliers. Graphically, the two sets of customers appear as follows:




Now that we have a sense of PSNH’s two customer pools, let’s turn to the big piles of money that are involved in this deal.  Bear in mind that these numbers are approximate only and they will change as the calculations are refined. They are also very dependent on the exact timing of the approval and completion of the deal, the final sales price for PSNH’s generating assets, as well as when the sale of the generating assets actually takes place.

These are the big piles of money:
  1.  Lower DS Rates: Let’s start with the good news. The whole point of deregulation is to provide utility customers with access to lower cost electricity that should result from a competitive market. Generally speaking, default service rates from utilities that access electricity supply from the competitive wholesale markets in NE have been lower, as shown in the chart below.
    The other NH utilities—Liberty, New Hampshire Electricity Cooperative, and Unitil—completed their deregulation activities a while ago and sold off their generating assets. As can be noted from the chart above, their rates, in general, have been about 20% or 2 cents/kWh lower than the PSNH rates. This has not always been the case because competitive markets are subject to supply constraints and growing demand. As a consequence, prices can increase and sometimes quite sharply. We saw this just this past winter when the rates for these three deregulated utilities shot up above the PSNH rate. Going back to the historical savings of 2 cents/kWh, the hope is that, going forward, PSNH DS customers will benefit from these savings. If this is indeed the case, then this 2 cents/kWh savings multiplied by the 3.8 billion kWh of electricity sold to DS customers every year would result in annual savings of $76 million. This would end up in the pockets of DS service customers only. A nice chunk of change—but not at all guaranteed because this is very much subject to the constraints of the New England wholesale electricity market which, in turn, is held in check by natural gas supply and pricing. As mutual fund and investment gurus continually remind us, “Past performance is not an indicator of future results.”
  2. Stranded costs: This is the difference between the book value of PSNH assets and their eventual sale price. This is estimated to be of the order of ~$400 million. PSNH will get a check for this amount which will be funded by the issuance of rate reduction bonds (see Walking on the Wild Side) – which is the purpose of Senate Bill 221. In other words, PSNH customers—including those buying from competitive suppliers—will end up borrowing money at market rates, hopefully at about 4%, to pay PSNH for these stranded costs. PSNH customers will be on the hook for these costs for the next 15 years. The $400 million borrowed at 4% over 15 years will result in an annual cost of $35 million. Spread over the 7.9 billion kWh of electricity delivered to all PSNH customers annually, this will result in an increased cost to both DS and non-DS customers of about 0.44 cents/kWh.                                                                          
  3.  Deferred payments on the scrubber returns: The scrubber went into service in 2011. It was estimated then that the payments to PSNH to cover their operations and maintenance (O&M) costs as well as their return on the scrubber should have been ~$65 million per year. This cost would typically have been recovered through DS rates. However, as I have noted in previous posts, the scrubber costs have been controversial and a prudency review was initiated to investigate the cause of the cost overruns. In the meantime, an agreement was negotiated that allowed PSNH to recover 2/3 of the scrubber-related costs. These were built into the DS rates. PSNH has therefore not been collecting their full costs and return on the scrubber and that unpaid amount has been accumulating. By the end of this year, it will have grown to about $140 million. Per the proposed PSNH deal, these costs will be recovered from all PSNH customers over seven years. The annual cost is $20 million ($140 million/7 years) which, spread over the 7.9 billion kWh of electricity delivered to all PSNH customers, will result in an additional  0.25 cents/kWh for all PSNH customers. This amount will likely change as starting in January 2016, all scrubber costs, including the deferred amounts will go into the DS rates, until such time divestiture is complete.
  4. Power purchase agreements:  PSNH has long-term power purchase agreements (PPAs) for renewable energy with the Lempster wind project, owned by Iberdrola, and the converted Berlin paper mill that was turned into a large wood-burning electricity generator, Burgess Biopower, that need to be honored as part of the deal. The costs will be picked up PSNH customers. The consultant report commissioned by the PUC estimated that the Lempster PPA is contracted at close to market prices and there $5 million gain to PSNH if it were sold. The Burgess Biopower PPA, however, is an entirely different matter. The consultants have estimated that, if this agreement were sold, PSSH would have to pay the acquirer ~$125 million to compensate for the above-market prices. The costs for these PPAs are likely to be paid by all PSNH customers. These costs are estimated to be of the order of $10 million per year, which, when divided by the 7.9 billion kWh supplied to DS customers, results in a further cost of 0.13 cents/kWh. The annual costs will vary depending to market prices for electricity and renewable energy credits and could be higher.                                                      
  5. Two-year moratorium on T&D Rate Increases. As part of the deal  PSNH agreed to hold off on annual increases in their T&D rates for two years (except for reliability enhancement projects). This should result in an annual savings of $35 million, which is equivalent to 0.44 cents/kWh for all PSNH customers but just for two years.
All these savings and costs are summarized in the table below. The grey columns show the total savings or costs and how they will be spread between DS and non-DS customers. The green-highlighted columns show the costs in cents per kWh after dividing by the annual kWh in each customer pool.


It should be noted that my numbers differ somewhat from those that have been published in press releases. In the original press release, a savings of $300 million over five years was touted for DS customers. My calculations shows a savings to DS customers of  $273 million over five years – most likely because I used a higher interest rate for securitization. My estimate is that over the 15-year life of securitization, the savings to DS customers could be over $800 million dollars, but—and this is important—this is based on, as I noted earlier, a very squishy DS savings of $80 million per year.

This might all seem well and good for DS customers, however, it needs to be appreciated that these savings are occurring on the backs of the PSNH customers that are presently getting their electricity supply from competitive suppliers. These non-DS customers will not realize any savings – they will only pick up costs, as shown in the table above.  I have calculated that this will cost them about $128 million over the first five years and $373 million over the 15 years of the securitization. When you look at these numbers, it is clear why the large industrial electricity users who migrated to competitive suppliers many years ago are not at all impressed with this deal.

So there you have my understanding of where and how the big piles of money will end up in this deal. A lot of details need to be worked out and there is still much discussion and negotiation underway to determine how the various costs will be allocated between DS and non-DS customers. One of the proposals under consideration is that the DS customers will pick up a larger portion of the securitization costs.

This deal is a complicated matter but it seems to provide more certainty than the alternative which is not proceeding with divestiture. However, the time aspect of this deal cannot be overstated. The longer this is dragged out, the more expensive and more complicated it will become: interest rates will go up, the accumulation in the deferred scrubber cost account will increase, and costs will generally increase. Timely resolution would seem to be the prudent course of action.

Until next time, remember to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
6/8/2015

(*Gimme Some Money – A tune from one of my favorite rock movies “This is Spinal Tap”, the mockumentary of the fictional Spinal Tap rock group. Some great tunes in this movie and the famous Stonehenge scene still makes me chuckle. Gimme Some Money features The Thamesmen appearing on British TV, a la early Beatles and Stones. Enjoy and Go Nigel Go!)