It Don’t Come Easy* - Wood-Fired Electricity in New Hampshire – Part 2

As I have been learning about the wood-based electricity industry in New Hampshire, I have come to appreciate that this industry is an important part of the State's economy. The wood-fired power plants generate electricity from a renewable energy source we harvest right here in NH and, in the process, they support the livelihoods of foresters, wood harvesters, equipment dealers, sawmills and many other associated industries. As important as these biomass plants are, they are facing some significant operating challenges. In an earlier post, Songs from the Woods, I noted that operating wood-fired electricity plants in NH were built in the late 1980s and, through state renewable energy incentive programs, were able sign 20-year contracts with our largest electrical utility company, Public Services of New Hampshire (PSNH), to sell electricity at attractive and pre-agreed rates. 

Twenty years have now gone by, and a few years ago many of these contracts came to the end of their terms. At this time, PSNH did not want to extend the purchase agreements as the contracted purchase price of electricity was higher than what PSNH could get selling that electricity on the local wholesale electricity market in New England, known as ISO-New England. At the same time, the plans for the large Berlin biomass electricity plant were coming together, and the developer of this plant began negotiating with PSNH for a power purchase agreement, which was a critical step in getting funding for the project. The operating wood-fired power plants took advantage of the opportunity, and in 2010 and 2011 they campaigned against PSNH signing a rate order to purchase electricity from the Berlin wood-fired power plant. In a compromise with PSNH, five of the six smaller biomass plants managed to negotiate for 20-month power purchase agreements to sell electricity direclty to PSNH, thereby giving them some additional time to adjust to selling electricity at prevailing wholesale electricity prices. These agreements allowed PSNH to contract with Berlin Biopower and the project was able to secure financing and move forward.

This year we come to the end of those 20-month power purchase agreements. The wood-fired power plants are now faced with the reality of having to sell electricity into the New England wholesale electricity market just like any other merchant electricity producer. Like any other business, these biomass power plants are faced with the two most fundamental issues that any for-profit enterprise has to deal with: the first is the price they can sell their product for and the second is the cost of producing that product.

 

Let's start with the price for their product. Later this year these wood-fired power plants will only be able to sell the electricity they produce at the prevailing rates in the ISO-New England wholesale market. These prices do fluctuate and the historical values for wholesale energy prices for NH are shown in the chart below. Over the 10-year span of the data, it can be seen that there is considerable fluctuation in prices and even recently, in January and February of this year, we had a spell where prices spiked. This particular price spike occurred because we are heavily dependent on natural gas for electricity generation in New England and during the cold spells there is additional demand for natural gas for home heating. With limited natural gas pipeline capacity and increased demand, prices for natural gas spiked and electricity prices followed. However, despite these occasional spikes, there is an overall downward trend in wholesale electricity prices over the past decade. This is show by the red linear trend line I have overlaid on the price data: it is clear that we have gone from an average price of $62 per megawatt hour (MWh) to $49/MWh – a 20% decrease in the price of electricity. (A megawatt hour is roughly the amount of electricity an average US home uses per month.) This downward trend has, in large part, been driven by low natural gas prices. This past summer, wholesale prices were even lower and averaged about $30/MWh. Natural gas prices have risen substantially from their market lows last year and, as a result, we are not likely to see electricity prices this low for a while.

 

Lower prices for their product is part of the headwind that the wood-fired power plants are facing. Fortunately, they have access to another source of revenue. Because burning wood to generate electricity is considered to be renewable energy production, these operations are able to sell the renewable attributes of their production to counterparties who need these attributes to meet certain obligations. These renewable energy attributes, called renewable energy certificates (RECs) or green tags, are traded separately from the underlying electricity. For example, a NH wood-fired electricity plant can sell each megawatt hour of electricity for the prevailing price on the wholesale electricity market, say for $50 a megawatt hour, and then they can sell the renewable energy attribute for each megawatt of renewable energy produced. Each megawatt of renewable electricity gets assigned a unique certificate number and a date of production and it then becomes a tradable instrument - a REC that can be bought and sold like a stock or bond. The counterparty who buys this REC could, for example,  be a state-regulated utility in Connecticut that is required to produce 20% of their electricity from renewable energy sources. If the utility does not have the renewable operations to meet that goal, they can purchase the renewable energy certificates from a facility out of State that does produce renewable energy.

 

If the state-regulated utilities do not meet their renewable energy quotas, they are required to make what are termed "alternative compliance payments" to their state for every megawatt hour of renewable energy they did not produce or source. These alternative compliance payments are essentially fines to encourage the utilities to produce or support renewable energy, but one thing they do do is put a cap on the REC market. Once REC prices exceed the alternative compliance payments, the utility will elect to pay the fine, i.e., the alternative compliance payment. Generally speaking, the REC market is a complicated one as there are different classes in each state for these RECs, depending on how the renewable energy is produced; there are different local markets in each state and there are also different alternative compliance payments in each state. This is a topic we can perhaps cover sometime in a future blog.

 

As it turns out, a great deal of the RECs from the wood-fired power plants in NH are sold into the Connecticut market, where local utilities purchase them in order to meet their renewable energy obligations. If these utilities cannot generate sufficient renewable power themselves or purchase the equivalent RECs, they have to pay an alternative compliance payment of $55 per MWh to the State of Connecticut. As I have discovered, sales for these RECs go through brokers who work to match buyers and sellers and, in the process, they take a commission. Much of the trading information on these RECs is considered to be proprietary and it proved to be difficult to find recent market data. However, a call I made to a broker who deals in RECs for the Connecticut market, indicated that he had a shortage of NH biomass-based RECs and was willing to pay up to $55/MWh (the cap price created by the alternative compliance payment) for 2012-based RECs.

 

For the biomass electricity producers in NH this is good news as the REC market is presently in their favor. This has not always been the case. The chart below shows how pricing in the various state-based REC markets has fluctuated over the past few years. This chart only shows information to May 2012 but it does indicate that in 2010/2011 there was a fallow period when the RECs in the New England market were trading at a low of $15/MWh. Since then prices have increased. The most current data on this chart indicate that RECs in the Connecticut market were trading for $48 in May 2012 and, as I noted above, prices have now risen further to close to $55/MWh.

 Source: US Department of Energy

 

Prices have risen because demand for NH-based biomass RECs exceeds the supply, which is always a good situation for a supplier of a product. I was not able to determine how large the NH biomass REC demand overhang was, but, as an operating producer of biomass electricity in NH, I would be concerned about the start-up of the Berlin biomass plant. Wood burning-wise, this plant is a behemoth, and is three to four times the capacity of the average NH wood-burning plant. This plant will be producing a great deal of renewable energy and a boatload of NH biomass RECs. There is likely to be considerable impact on the REC market when this additional supply becomes available.

 

When we look at the revenue stream for these biomass plants, it is clear that they have two products to sell. They have electricity which they will be selling into the wholesale market, where prices are now of the order of $50/MWh, and they have the associated RECs that they sell into the New England state compliance markets and where prices are presently close to $55/MWh. So, in total, the NH biomass plants are earning approximately $100 to $105/MWh, which is certainly more than what a fossil fuel-based electricity generator, that can only sell electricity with no accompanying RECs, will earn. In some respects biomass plants are better off, revenue-wise, than a fossil fuel plant but there is some apprehension associated with their revenue streams. Specifically, their concerns are:

• There has been a long-term downward trend in the price of electricity with some recent large decreases driven by cheap natural gas. With the recent increase of natural gas prices, electricity producers are hoping that local wholesale prices may stabilize or even see an increase.
• The REC market for NH biomass has improved since 2011, but the availability of a lot of RECs from the large Berlin biomass plant could put downward pressure on REC pricing later this year.

On top of these revenue concerns, biomass plants also have to deal with the second central business issue and that is the cost of producing electricity. Even here, the biomass plants are facing challenges. Prices for their fuel, wood chips, have increased, and the Berlin biomass plant is certain to put  additional upward pressure on this market - but that is the topic for next week's post. Clearly, it don't come easy* if you are running a biomass electricity plant in New Hampshire.

Until next time, remember to turn off the lights when you leave the room. You will be saving energy, water and trees.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
4/22/13
 

(* It Don't Come Easy was a 1971 hit record for Ringo Starr recorded after the breakup of the Beatles and it has become his signature tune. It was written by George Harrison and the original recording featured Steven Stills on piano. Here it is from the Concert for Bangladesh and it was also recorded by the Smithereens, a highly underrated and still performing New Jersey group from the 1980s.)

 

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Where Have All the BTUs Gone?

I have been away for a few weeks at conferences and have chatted to all sorts of different experts about energy issues. However, during my time away I have been nagged by an important open question. In my last post, I stated that I don't consider the 25% renewables by 2025 goal to be an achievable one, and I presented data that showed that whatever progress we have made over the past few years has been as a result of energy usage reductions rather than increased amounts of renewable energy. Regardless of my viewpoint on the achievability of the goal, these energy savings are great as I believe we can accomplish more through energy savings than we can from new renewable energy sources. Nevertheless it is critical to understand what we are doing to save energy so we can do more of the same. So to paraphrase the words of the old Pete Seeger song "Where Have all the Flowers Gone," I want to know "Where Have All the BTU's Gone?" 

In-state energy use in NH has decreased by 9% since 2005 - see my last post. Some possible reasons include: 

 

• The Great Recession of 2008/2009 resulted in lower economic output and therefore less energy consumption.
• Increased fuel costs have caused us to moderate our energy-consuming habits.
• Through various State, Federal and privately funded energy savings programs, we are becoming more energy efficient, and we are able to accomplish more with less energy input.
• We have a smaller population and therefore fewer of us in NH are using energy.

Let's dispense with the last point first. From 2000 to 2010, the NH population grew from 1.24 million to 1.32 million – a 6% increase. So not only are we using less energy – we are using less energy while the State population is growing. Because census data are only collected on a per decade basis, it is useful to look at energy usage on a similar basis, so let's take a look at energy consumption since 2000, shown in the chart below.

The blue bars show that in the first half of the decade (except for the post 9-11 economic downturn in 2001), there was a continuation of our decades' long run up of energy consumption. In fact, from 1990 to 2000 our energy consumption increased 16%. We reached a peak of in-state consumption of 331 trillion BTU in 2004. Since then energy consumption has turned around and had dropped off 11% by 2010. I have overlaid data for the NH Gross Domestic Product (GDP) as the red line, and, except for the post 9-11 slow down in 2001 and a dip for the 2008/2009 Great Recession, the decade saw a 14% increase in GDP. So our decrease in energy consumption preceded the Great Recession by a number of years. There is no doubt the recession did encourage further energy savings as we, like Jimmy Carter, turned down the thermostats, took to wearing more sweaters and sat closer to the fire.

Dividing energy consumption by GDP dollars yields a number called GDP energy intensity, which is a measure of the amount of energy, in BTUs, it takes to produce a dollar of GDP output. In the table below you can see our energy intensity for some key years and how it has changed since 1990.

Our decrease in energy intensity is clear and this mirrors a long-term decrease for the whole US. In fact, in NH our energy intensity is typically 30% lower than the USA average. Generally speaking, our energy intensity has decreased and we are able to produce more GDP output with smaller energy outlays. This comes from an increasing awareness of the energy components of our industrial output as well as our move away from energy-intensive industries such as mining, steelmaking and general heavy manufacturing.

Another energy intensity measure that is often calculated is energy use per person. These numbers for NH and the USA are shown below.

 

Here we see an increase in per capita consumption to 2004 and then a 12.5% drop off from 2004 to 2010. Again our per capita consumption is, on average, about 30% lower than that of the US total. In fact, on a state basis, NH is way down the list in per capita energy use – we are at position 44. Rhode Island and New York, which have the lowest use of energy per person, have per capita values 15% lower than ours. On the other hand, states like Alaska and Wyoming have usages three times greater than ours.

So our energy usage has declined and is lower than the US average, but it still begs the question – "Why?". To get a better view of the decrease, I have looked at the four main components of our in-state energy consumption, viz., transportation, commercial, residential and industrial use and how they have changed since 2004. I have plotted the data for 2004 and 2010 for each of the sectors in the chart below.

 

 

 

In 2004 our energy usage was 331 trillion BTU and in 2010 it was 296 trillion BTU – a 35 trillion BTU decrease. This is an 11% decrease in our in-state energy consumption. Transportation usage only decreased by 2%, commercial use declined by 12%, residential usage decreased 10%, and industrial usage dropped by 27%.

The pie chart below shows which sectors contributed the most to the 35 trillion BTUs savings. Most of the decrease came from the industrial sector which contributed 40% of the savings, next was the commercial sector which provided 33% of the savings, followed by residences with 20% and a small portion by reduced transportation usage. I note that another blogger on NH issues, Brian Gottlob at Trendlines, has done a similar analysis. (In fact, I subscribe to the Trendlines Blog and I always find his data-based take on NH economic issues interesting. I encourage you to do the same.)
 

So where does the impressive decrease in industrial energy consumption come from? Contrary to what many folks think, this is not due to erosion of our manufacturing base. In fact, NH's manufacturing base has held up well over the past decade. On average, we get 15% of our state GDP from manufacturing, compared to 12% for a US average and based on some recent data we are even seeing an increase. What is different is that our manufacturing is changing – it is no longer the heavy manufacturing of years gone by, and, based on discussions with manufacturers, I know that energy is now a top-five expense in most manufacturing companies. Companies have invested in many projects to reduce energy costs and, as a result, manufacturing is now more energy efficient than ever before.

 

To get a better sense of the industrial energy usage in the state, I have extracted the energy used in industrial activities as well as the industrial GDP component to calculate the industrial energy intensity. This data are shown in the table below and I have included the data for the US as a whole as well. 

The key point to note is that industrial energy intensity has decreased over the past decade for both NH and the US, however there was an impressive decrease in NH industrial intensity from 2004 to 2010. This was an almost 50% significant decline in the State's industrial intensity since 2004. I don't have a ready explanation for this decrease but it is surprising and warrants further review and continued tracking.

As usual, I have flooded you with data, charts and information and there is a lot more I could ply you with. At this time I have to leave you with only a partial understanding of why we have been able to reduce energy usage in New Hampshire. There is more to this picture and I too need to better understand why we have been able to decrease energy usage in New Hampshire since 2004 even though economic output, measured by GDP, has increased. I plan to do some more research and I will share my findings with you over the course of the next few months. Nevertheless, this is what we know so far:

• Our energy intensity on a per capita and a per GDP dollar basis has decreased steadily and our numbers are amongst the lowest in the USA.
• Most of our energy savings have come from reductions in industry energy usage and from commercial applications.
• The industrial energy intensity has been reduced by almost 50% since 2004.

What do you know and what can you contribute to this discussion? Feel free to leave a comment or send me an email.

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

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
3/5/2013

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The 25 by ’25 Renewable Energy Initiative for New Hampshire – Can We Do It? - Part 1

With a new governor in place, I have been giving some thought to the initiative enacted by Governor Lynch in 2007 that New Hampshire should aim to get 25% of its energy from renewable resources by 2025 – the so-called 25 x '25 initiative. With my recent posts on renewable sources and their contribution to the NH energy supply, I was wondering how we are doing and if we are making progress towards the 25 x '25 goal. Until a few years ago, the New Hampshire Office of Energy and Planning, OEP, had been calculating and recording our progress, but they have not updated their information in a while. The last available numbers were for 2008 so in the next few posts I will be presenting updates of the OEP numbers and will be taking a closer look at the feasibility of the 25 x '25 goal and what it will take to achieve it.  

The goal is 25% renewable energy by 2025 but we need to start off by asking the question: "25% of what?" According to the OEP, the "what" is net energy usage. Net energy use refers to the energy we use in-state and excludes that associated with any energy exports. In our case, we export 51% of our produced electricity, so we need to subtract the energy used to produce this exported electricity from the gross, or overall, energy usage by NH to generate the net energy number.

All my blog posts and previous calculations, to this point, have referred to overall energy use by New Hampshire, so for net energy usage we need to reduce the 409 trillion BTU overall usage by the 113 trillion BTU used to produce exported electricity, leaving us with a new number: 296 trillion BTU. This is our net energy usage for New Hampshire for 2010 and will be the basis for the calculations and discussion for the next few blogs.

With the net in-state energy usage in hand and using the renewable energy numbers from previous blogs, we should be ready to calculate the percentage of renewable energy. Ah, if only it were so straightforward. Instead, we now face an intriguing dilemma: this revolves around how we look at that exported energy (electricity exports plus the energy waste associated with its production). The electricity produced in NH comes from renewable and non-renewable sources and even though the electrons involved in electricity flow from these sources are indistinguishable, we can view our produced electricity as a blend of green electrons (those from renewable energy) and brown electrons (those from fossil fuels and nuclear). So, when we export electricity are we exporting just brown electrons or a blend of green and brown electrons? As I have noted the electrons are indistinguishable, so we are, in essence, just playing an accounting game but this is an important game with important consequences. If we take the position that exported electricity is indeed a blend of green and brown electrons then we need a commensurate reduction in the amount of renewable energy we can claim for in-state use. Specifically: we export 51% of electricity production, so we need to reduce the renewable fraction that goes into electricity production by 51%. This significantly reduces the amount of renewable energy we can claim. On the other hand, if we take the position that we use all the green electrons in-state, then we can claim all that renewable energy that goes into electricity production.

Which is the correct answer? Well, the OEP sidesteps the issue of the correct answer by calculating the percent of renewable energy data for both scenarios. In my calculations, I adopted that same convention by performing calculations for both scenarios as well. The results of my calculations for 2010 are shown in the following table. I have used headings and formats similar to the OEP results to make for direct comparison. However, it should be noted that my methodology is a little different from that of the OEP as I have used the NH data and energy accounting approach from the Energy Information Agency, EIA, exclusively and I do not include imported electricity in accounting for renewables - even though it might be from hydroelectric operations in Canada.

At first glance, the results are not encouraging. Even if we lay claim to all the green electrons for in-state use, Option 1, we are at 14.7% renewable energy with 13 years to go. The situation is even worse if we calculate on the basis that we are exporting a blend of green and brown electrons, Option 2. In this case, we are only at 9.1% renewable energy. However, this still begs the question – which is the correct number? Well, it depends on who is playing the game and making the rules. Nevertheless, my vote is for the higher number, the one comes from grabbing all of the green electrons for ourselves. The basis of my choice that the calculation is simpler to perform, and this is an extraordinarily complex scientific reason - it is a larger number - which makes the 25% easier to achieve!

Feeling somewhat gloomy about where we presently stand, I wanted to see if we were, in fact, making progress since the 2007 start of the 25 x '25 initiative. If we were - and it was rapid progress – it would certainly be encouraging. I therefore went back a few years to calculate the percent renewable data for both options which I have presented in the chart below. I have included the earlier OEP numbers (shown as red X's) in the chart below and even though, as noted earlier, my methodology is somewhat different from that of the OEP, the agreement between the two data sets is good.

Since the start of the initiative in 2007, we have, using Option 1, gone from about 12% to almost 15% renewable energy which is commendable progress over the past 3 years. (With Option 2, we have only gone from 7.5 to 9.1% which is not as commendable and therefore, for the "complex" scientific reasons noted above, we will ignore it going forward.) At this rate – about a 1% increase per year – reaching 25% by 2025 looks achievable, which is rather encouraging. However, while we are basking in the warm glow of our collective achievement, let's take a closer look at the two sets of data that generated this chart. Specifically, let's examine net energy usage and renewable energy production in NH separately, which I have done in the bar chart below.

A closer review of this data reveals that most of the change in the renewable energy fraction has occurred as a result of the reduction in the in-state energy consumption over the past few years. We have gone from 325 trillion BTU in 2005 to 295  trillion BTU in 2010 – an impressive 9% decrease in 5 years (an annual compounded decrease of 1.9%) but, and this is rather crucial, an examination of the renewable data shows that there has been little change in the amount of renewable energy we produce in-state. As a result, we need to conclude that our progress toward the 25% renewable energy goal to date has been on the back of energy savings - and not from increased renewable energy.

Going forward, can we continue to rely on further energy savings to get us to 25% and how realistic is this? It also requires us to ask the question – where are these energy savings coming from – are they the result of a general economic slowdown in the state accelerated by the Great Recession, high energy prices, a shrinking population, the success of energy savings programs, or some other reason? This is certainly worth closer examination and I would be interested in your opinion. For the moment, and for an energy savings geek such as myself, regardless of the reason these energy reductions are positive and are certainly propelling us towards our goal. But we should stop here and ask ourselves - are they sustainable? In my next post, I will look at how net energy usage is allocated in the state and what we need to do in terms of more energy savings and/or renewable energy increases to achieve the 25 x '25 goal. It might be more difficult than we think.

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

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/10/2013

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Renewable Energy in New Hampshire – Part 2

In my last post, we took a first look at the renewable energy portfolio for New Hampshire and we examined the pie chart below.

In this post, I am going to step back in time and see what progress we have made in the last 50 years. The figure below shows what we have achieved in terms of renewable energy.

 It is clear we have made progress on the renewables front. Since 1960 we have gone from 26 trillion BTU to 43 trillion BTU from renewable energy sources in 2009 – a 65% increase. However, for the last fifty years, hydroelectric and wood have been the largest components of the renewable energy supply. In fact, from 1960 to 2000 they were the only relevant components and most of the renewable energy increases were done on the back of increased wood burning. It was only in the 21^st century,  with federal mandates for ethanol in gasoline, that ethanol began to feature. Technological advances and federal subsidies have helped spur advances in wind energy and it is now beginning to feature, albeit to a limited degree, in the NH's renewable energy equation. What is intriguing to me is that, in 1990, there seemed to be a significant surge in renewable energy, particularly from hydroelectric generation. A closer examination of data indicated that this was a one-year surge only and, in the years before and after 1990, the numbers were more in line with the longer term averages. The reasons for this one-year surge are most likely due a year of high rainfall which filled up dams and rivers, that, in turn, led to the generation of larger than usual amounts of hydroelectric energy. According to the National Climate Data Center, 1990 was indeed a high rainfall year in New Hampshire. In a future post on hydroelectric power in NH we will be taking a look at the correlation of rainfall and hydropower.

Except for the addition of ethanol into the renewables mix and a tiny bit of wind energy, it is my assessment that we have not made much progress, at least on the large statewide scale, in terms of renewable energy generation and, to be frank, considering our overall energy requirements, there is not a whole lot we can do.

For the moment, cheap natural gas has hammered at the viability of almost all other modes of generating electricity, including coal, nuclear and wood, but, interestingly, there has been the statewide growth of use of wood pellet-based heat for homes, schools and commercial operations where wood offers a competitive advantage over oil. The limited infiltration of natural gas supply into NH has made wood even more competitive in most communities.

Large-scale solar here in New Hampshire is unlikely to be competitive in the near term. More wind plants will make some difference: again this will be a relatively small fraction of our renewable energy. Permitting and local approval are challenging and I am not sure if we want to plant wind turbines on every available hill and ridge in NH. Hydroelectric power is a good energy source, especially here in the Northeast where water is plentiful, but frankly I do not believe there is the appetite for developing more large-scale hydroelectric operations. They inundate large swaths of land and, if wind farm opposition is anything to go by, establishing a hydro facility to drown thousands of acres of land is simply not going to happen.

What is more likely to happen is the continuation of the small-scale fuel switching from oil to wood and the slow roll-out of small-scale residential and commercial solar photovoltaic devices. Photovoltaic panels, while perhaps not the best investment (demand reduction is a better way to go), are becoming more affordable and downright fashionable.

This is a good place to circle back to the point I made two weeks ago. Yes, renewables are important, but what is more valuable is reducing the 65% of energy we waste. Our focus should be improving energy efficiency and reducing our energy demand. As we reduce our demand, we can ratchet back our need for fossil fuels and then renewables will, by default, become a more prominent proportion of our energy portfolio. If I were to be investing State dollars on energy programs in the State, I would be investing the large part of our time and money in demand reduction rather than in renewable energy sources. That is, at least, the opinion of this writer. Let me know what you think we should be doing?

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

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/3/13

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