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

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*Back Home A great upbeat singalong tune by Andy Grammar. 

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

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

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

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(*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!) 

The Heart of the Matter* – PSNH and Electricity Price Increases in New Hampshire

In my last post, I presented the table below and made a big deal about the large winter price increases that have been put forward by NH Electrical Co-op, Liberty and Unitil, but did not discuss the surprisingly small increase put forward by PSNH (highlighted in yellow). However, in an earlier post, River’s Gonna Rise, I made the statement that, “…with electricity prices shooting up this winter and with PSNH customers, for the time being at least, somewhat shielded from these increases, this does give one pause for thought and to consider that ownership of generating operations may perhaps have some benefits.” Well, I have been thinking long and hard about this and about PSNH’s relatively low winter rates and, after some research, analysis, charts, and graphs, I have now come to a rather different conclusion. Read on.

For the three-winter period shown in the table above, I have plotted the default electricity rates for the different utilities in the graph below.  Bear in mind that these data are not exactly comparable because they involves slightly different time periods (e.g., the NH Electric Coop (NHEC) winter rate runs from October to March, whereas that for PSNH runs from January to June), but it is a convenient way to view the data. Over this three-year period, PSNH rates were generally higher than those of the other utilities except for this upcoming winter, however the other utilities tend to show larger fluctuations from season to season, which PSNH  does not.

Because the other utilities no longer have generating operations, they purchase electricity from the wholesale markets or (in the case of NHEC) directly from generators, as shown in the figure below (excerpted from my last post). As a result, the other utilities are more subject to the ups and downs of the wholesale electricity markets.

However, PSNH is still an integrated utility – it owns its own generating assets – and, as a result, generates a lot of its own electricity. The electricity supply picture for PSNH is therefore somewhat different, as shown in the following figure, where PSNH has a large supply of electricity generated from its own operations (shown in grey).

I have written about PSNH’s generating operation in several posts, including a recent overview of their hydro assets in River’s Gonna Rise and the possible sale of their generating assets in Options. PSNH has approximately 1200 MW of generating assets, as shown below.

The problem for PSNH is that their main assets are the old coal-fired Merrimack and Schiller plants and the relatively inefficient dual-fuel plant in Newington. In a market with low natural gas prices and very efficient dual-cycle natural gas plants, these older PSNH plants are generally non-competitive and there is often little call for the expensive power they generate.

To understand just how much electricity PSNH produces from its own operations, I took a close look at the data presented in PSNH’s latest filing for winter electricity rates. The filing included electricity supply numbers for the whole of 2014, which were a combination of actual year-to-date and forecast numbers.  I used this data to prepare the Sankey diagram below. (For more on Sankey diagrams, see Another View of Statewide Energy Flows in New Hampshire.)

The origin of PSNH’s 2014 electricity supply is shown on the left in gigawatt hours (GWh). The total amount supplied is 4901 GWh. The flows in grey originate from PSNH’s own generation operations, whereas green flows are from contracted suppliers or wholesale market purchases. The right side shows what happens to the electricity generated and sourced by PSNH: the bulk of it, 79%, is sold directly to PSNH customers; transmission and distribution losses are about 6%; and the remaining 15% is sold into the wholesale markets - mainly during the cold winter months.

The chart below shows the same data on a month-by- month basis, calculated as the percentage of PSNH’s total output generated by its own operations. These 2014 numbers are a combination of actual (blue) and forecast data (orange). The chart clearly shows that the PSNH operations – largely the coal-fired Merrimack plant – really ramp up in the cold winter months and are responsible for the majority of PSNH output during these times.  In the warm summer months, when natural gas is cheap and readily available, it is not financially prudent to run the coal-fired operations. Instead, it is cheaper for PSNH to buy natural gas-generated electricity from the wholesale markets. At these times, the bulk of PSNH supply comes from contracted or wholesale market purchases. (That little blip in July comes from supplying electricity for our summer air-conditioning needs.)  The final column, in red, shows that the amount of electricity that PSNH will generate from its own operations this year is projected to be right around 50%.

In the Sankey diagram above, I have included the costs of the electricity purchased by PSNH. Aggregating these costs and calculating a weighted average, I determine that that average cost of purchased energy is 5.4 c/kWh. If this purchased energy is 50% of PSNH output and PSNH is selling electricity at 9.5 c/kWh to its customers, it takes only simple algebra to determine that the all-in cost associated with PSNH-generated electricity is 13.6 c/kWh (0.5 x 5.4 + 0.5 x 13.6 = 9.5). And therein lies the rub: At present utilization rates and with low electricity prices in the summer, the PSNH generation facilities are very expensive to run. The high costs associated with its coal-fired operations weigh heavily on the rates paid by PSNH customers and explains why, more often than not, PSNH rates are higher those of the other NH utilities.

I realize that this calculation represents a gross simplification of a complex matter and it allocates the burden of all government-mandated electricity programs, like RPS and RGGI, to the generating assets only. Even so, the bulk of the costs originate from the assets themselves so I am comfortable with the simplification. This straightforward calculation, when applied to 2015 projections, clearly demonstrates that PSNH low winter rates for 2015 are not as a consequence of its own generating assets. Instead, they are a direct result of its portfolio of supply arrangements from wholesale market purchases and power-purchase agreements from wood-burning plants, including the new Burgess plant in Berlin, the wind farm in Lempster, and other generators.  So my earlier statement that, “…with electricity prices shooting up this winter and with PSNH customers, for the time being at least, somewhat shielded from these increases, this does give one pause for thought and to consider that ownership of generating operations may perhaps have some benefits,” does, in retrospect, not appear to have been well founded, at least from a electricity rate point of view.

This calculation also underscores the decision that lawmakers and regulators in NH are wrestling with at this time: Is it in the best interest of PSNH customers to complete the process of deregulation and compel PSNH to sell its generating assets?  If this happens, PSNH will be like the other utilities in NH and will need to source 100% of its electricity from the wholesale markets in New England or directly from generators through long- and short-term contracts. The next (and, I think, the most important) question is: Can this be done for less than 13.6 c/kWh once those generating assets are sold?

If PSNH has to source all its electricity from the wholesale market, they could run into a problem similar to that discussed in my last post, where, like Liberty and Unitil, PSNH could end up buying right into those winter peaks created by natural gas shortages. In my  last post I was somewhat critical of the short-term “next six month” approach that regulations compel Liberty and Unitil to use to source electricity for their customers. I suggested that a portfolio of different sources, as well as long- and short-term supply, be used. As it turns out, the regulators are ahead of me on this one:  the NH Public Utilities Commission (NH PUC) recently issued Order 25,732 to review the sourcing of electricity by Unitil and Liberty. It is very likely that any changes in sourcing approaches would apply to PSNH after the sale of its assets, so it will be interesting to follow developments in this area. 

It is important to note that this is not the whole story. If PSNH is mandated to sell their generating assets, they will − and correctly, I might add − expect to be compensated for the difference between the book value of those assets and what they will raise from their sale. All indications are that this difference, known as stranded costs and discussed in Options, will be substantial.  These stranded costs will come out of the pockets of PSNH customers. The NH regulators at the NH PUC are presently trying to determine how large this amount will be.

In the equation

Stranded costs = Book value – Sale value,

there are obviously two components, both of which are being scrutinized and debated at this time.

As I noted previously, the generating assets are listed on the PSNH financial statements at $ 1.1 billion but with a net depreciated value, or book value, of $ 660 million. This $660 million value includes the $ 422 million recently spent on the scrubber that was installed at the Merrimack plant to reduce mercury emissions from the burning of coal. The original budget for the scrubber was "not to exceed" $ 250 million, but, by the time it was completed, the price had skyrocketed to $ 422 million. A series of hearings was recently held to determine whether it was prudent for PSNH to have spent $ 422 million for a scrubber on an aging coal plant, and we are currently waiting for the NH PUC to make a determination on the prudency of this investment. I anticipate that PSNH will file an objection to the determination and we can then expect the battle to play out in the NH courts.

The second component of the stranded cost equation, the sale value of PSNH generating assets, is also being analyzed. Consultant reports have been commissioned, blogs have been written, and one thing is clear: in this low-cost natural gas market, the coal-fired assets of PSNH have relatively little value. Interestingly, the crown jewels in the PSNH generating portfolio are their hydro assets, about which I have recently written.

In the end − after all the consultant reports, hearings, determinations, and court battles − I believe the book value will be decreased and the sale value will erode, which is still going to leave PSNH ratepayers on the hook for those stranded costs. In Walking on the Wild Side, I indicate these stranded costs may be of the order of 0.5 c/kWh. This has been borne out in a recent status report issued by the NH PUC. This is an important number, but of far less importance than the numbers that will come from answering this one very important question:  Once the PSNH assets are sold, can PSNH reliably, consistently, and over the long term, source electricity at a lower cost than that incurred by their generating assets? This is the heart of the matter* and one that PSNH, ratepayers, legislators, regulators, and courts in NH will be struggling with over the next few years.

This post has covered a lot of ground, so, to wrap it up, let me leave you with the following takeaways:

• PSNH rates are low this winter but this is not a consequence of owning their generating assets. Instead, it is a result of their low cost purchases through a portfolio of long-term power purchase agreements and wholesale market purchases.

• The PSNH generating assets have value in cold winter months when natural gas is expensive. As natural gas supply to the region improves over the next few year, this will become less of an issue and the value of coal-fired operations will diminish even further.

• Scrubber prudency reviews are an important step in moving PSNH to divest its generating assets but, in the big picture, I do not anticipate that this will have a significant effect on the electricity rates that PSNH rate payers will end up paying.

• More important will be the rates at which PSNH can procure all its electricity from the wholesale markets and whether they will be able to adopt a portfolio approach to sourcing this electricity.

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

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

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(*The Heart of the Matter – The very moving song from Don Henley’s album The End of Innocence. I really like Henley’s version but it has been very well covered by India Arie. Here are both - you decide which you like best.  Don Henley or India Arie)