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.) 

It’s Time to Move On* - Competitive Electricity Supply in New Hampshire

In my last few posts, I have been writing about the electrical utilities and their winter rates. In this post, I take a look at the competitive energy suppliers in New Hampshire.

Electricity consumers in NH have a choice. They can go out and pick their electricity supplier or they can simply leave it to their utility to source and supply their electricity under the so-called default electrical service rate (see Gonna Take You Higher post).The move to competitive electricity supply has gone through two waves. In 2006, five years after the onset of electricity deregulation in NH, there was a massive migration of commercial and industrial customers to competitive suppliers. In 2011, there was a second wave of migration, this time by retail customers. Right now, about 50% of the electricity supply in NH is from competitive suppliers. The table below shows data for overall competitive supply for the NH electrical utilities and some information for large commercial and residential customers. It is clear that competitive suppliers provide most of the electricity for large commercial customers. In the case of PSNH, this is a stunning 96%, which, as I have noted before, leaves the residential customers responsible for picking up most of the costs for PSNH’s generating assets.

There are three types of electricity providers in NH. There is the utility itself which the default supplier, and then there are competitive suppliers and aggregators. At last count, there were 25 competitive suppliers and 90(!) aggregators.

The competitive suppliers approved to offer electricity supply are listed on the NH Public Utilities Commission (PUC) website. Not all of these companies supply to residential customers: some specialize just in the larger commercial and industrial  customers. Of the 25 competitive suppliers, 16 supply to the residential market but not all suppliers are active in all utility service areas.

Suppliers actually have to source the electricity and work with the utility to get it delivered to your home. Aggregators adopt a different approach. They will do the shopping for you and will go out to competitive suppliers and find a good rate for you. Once they do this, and you agree to the terms, they will then switch you to the competitive supplier. Aggregators tend to specialize in specific markets, e.g. small commercial customers or geographic areas. 

The table below shows which suppliers are active in which electrical utility service areas.

Some of you may recall the drama caused last year by one of the competitive suppliers, Power New England (PNE) and its aggregator, Resident Power, when PNE was suspended by ISO-NE for cash-flow problems created by high electricity rates in the winter of 2013. With the suspension of PNE, about 7000 customers had to be transferred back to the default service of PSNH over a weekend.

There are some key points that everyone should know about competitive suppliers:

• Competitive suppliers are not regulated. Their prices and terms are not subjected to the same scrutiny as those provided by the utilities through their default service rates.
• Do your homework. Look at the rates and request the terms and conditions.
• Competitive suppliers offer fixed and variable prices.
• There can be costs for switching.
• Competitive suppliers can shunt you back to the service utility at their discretion.
• The utility is always there as a backstop, in case your competitive supplier cannot supply electricity or goes under.

The NH PUC provides helpful information on competitive suppliers, including a useful list of FAQs and, particularly, a valuable list of questions to ask suppliers.

One of the challenges we face as consumers is that sometimes there is simply too much choice. It is well known that, in the face of too much choice, we often pick the easiest option – which is usually the default option. How many of us really have the time to call those 16 competitive suppliers and the compare their rates and terms?

This is where information-aggregation tools, such as Kayak for airline prices, are so useful. In one simple search, you can look at most airline rates on one page. One would hope that a similar tool would be available for competitive electrical supply, but, unfortunately, similar tools for NH electricity shoppers are not as helpful.

ShopEnergyPlans.com is one such site, but only a limited number of suppliers post their rates on the website. Recent examination of the website showed only three vendors in the PSNH service area. I chatted to Andre Ramirez, one of the co-founders of ShopEnergyPlans.com, about this. Although he has contacted most of the NH suppliers, there is a reluctance for many suppliers to openly exhibit their rates on an aggregator website. On reflection, I think this is understandable, particularly for a price-sensitive commodity, such as electricity, where customer loyalty is very price-dependent. It is the lowest price that will command the most interest, so many vendors choose not to post when their prices are higher.

In my chat with Andre, I did learn of a new feature offered by ShopEnergyPlans called PlanTracker. This is a notification tool that sends out emails with recommendations for actions to take regarding your electricity supplier. Having entered Manchester as the zip code for my energy service provider, this morning I received an email recommending that I stay with PSNH for the time being. A list of their recent recommendations for New Hampshire and Massachusetts are tabulated below. I think PlanTracker is a useful service and is a great way to keep on top of changes.

Although I understand why vendors may not want to post their information on an information aggregation website, such as ShopEnergyPlans, I still wanted to know what rates these other vendors were offering, so I spent a morning visiting the websites of all competitive suppliers for residential electricity in the NH service areas and collected the information in the rather large table below. In the process, I was subjected to an overdose of photographs of outrageously illuminated homes or of happy families in warm (and uncluttered) homes, playing on the carpets or looking at their laptops or smart phones, as well as more short videos featuring cute cartoon characters than one person should watch.

The table shows all competitive suppliers servicing the four NH utilities. Orange indicates that the supplier has not registered to supply electricity in that particular service area. Yellow highlights indicate areas where the supplier has registered but is not yet offering service (as indicated by their websites).  The non-highlighted areas, of course, indicate that rates were available on the various websites and I present the lowest rates for particular services. Many of these vendors offer “green,” or renewable energy, options or a blend of renewable and fossil fuel options. I did not consider these, but simply looked for the lowest rates. Here is what I learned from this exercise of cutting through the overgrowth of website based electricity supply marketing in NH.

• Many vendors offer fixed-period and variable options – variable electricity prices are not posted. It is probably a challenge to keep variable rates updated regularly and this is perhaps not a popular option.
• For the smaller utilities (NHEC, Liberty, and Unitil), competitive vendors do not seem to have made headway in their service areas and limited choices are available.
• PSNH has the most competitive suppliers offering prices.
• There can be a wide range of prices offered by competitors in a service area.
• Many of the competitive suppliers have cancellation fees associated with their fixed-term contracts, so if you want to jump early, you will end up with some additional costs.
• Not all suppliers offer contracts across all service periods. Some just offer a vanilla option of a single rate for 12 months.

I am sure I may have been able to gather price information for the vendors with unlisted prices if I called each utility, but that would have taken up even more time. It also serves to make the point that, even though NH has competitive electricity supply, finding and comparing rates is a time-consuming task.  My overall assessment of competitive electricity supply in NH is that we still have a long way to go. I would have thought that competitive suppliers would be falling over themselves in the NH market, that more choices would have been available for residents, and that price information would be more accessible.  

In the deregulation process to date, the companies that have done well are the large competitive suppliers, such as Constellation and TransCanada, that have focused on the large industrial and commercial customers and have won a great deal of this business. The table below, based on Energy Information Agency 2012 data, show that these competitive suppliers are now the second- and fourth-largest electricity suppliers in NH.

These competitors have been very successful at drawing large users of electricity away from the utilities and there is now a slower picking away at residential customers by smaller competitors focused on this market. It always astounds me that more than 50% of PSNH electricity sales are going to competitive suppliers (see the first table in this post), leaving a smaller and smaller base of residential customers picking up the tab for those PSNH plants. Rough calculations show that, if the costs in PSNH’s recent filing are accurate and we assume that 60% of their costs are fixed, and if PSNH supplied electricity to all their customers, then their costs per kWh of electricity could be as much as 30% lower than their present default rate.  

What do we take from this?  This half-hearted and incomplete process of electricity deregulation in NH has hurt PSNH residential rate payers. We understand that it is complicated but the process needs to be completed. It is time to move forward and get the job done. Either pull the plug on deregulation or get it done.

In the words of that great rock and roll sage, Tom Petty*

It’s time to move on, it’s time to get going.

And what lies ahead I have no way of knowing

but under my feet, the grass is growing.

It’s time to move on, it’s time to get going.

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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(*It’s Time to Move On – A tune from one of my favorite Tom Petty’s albums, Wildflowers. Here is Petty performing the tune live in 1994. It’s Time To Move On)

Gonna Take You Higher* – Electricity Price Increases in New Hampshire

If you are a NH resident buying your electricity from Unitil, NH Electric Cooperative, or Liberty Utilities, you are most likely reeling from the recent increases in winter electricity rates. This post begins a series that takes a look at what makes up NH retail electricity prices and the reasons behind the large increases that we are seeing for certain utilities.

Historically, electricity prices have been on the rise. The chart below shows the 24-year historical average NH residential electricity prices.  In 1990, prices were about 10 cents per kilowatt hour (c/kWh) and then climbed to about 14 c/KWh in 1998. Prices then experienced a slow decrease until about 2002, after which they continued their increase to this past winter when we saw average prices of ~17 c/kWh. The trend from 1990 to 2103 represents a compounded average increase of 2.5% per year, which is the same as US inflation over the same period.

Source: EIA

The next chart looks at residential electricity prices for a shorter time period, and compares the NH prices (in green) to those of the NE states (brown) and to the average US monthly figure (blue) since 2000.

Source: EIA

NH has generally followed the NE average, but from 2006 to 2010 was quite a bit lower. However, over this period, our electricity rates have been about 40% higher than the national average.

State-by-state comparison is always useful and interesting. The figure below shows recent state rankings based on July 2014 retail electricity prices. The NE states are all in the top 11, with Vermont and Connecticut higher having higher prices than NH. Our electricity prices are the 7^th highest in the US at 17.23 c/KWh − we can take some solace that the price in Hawaii is more than double the NH average. On the other hand, Washington state, which benefits from cheap hydroelectricity, has the lowest prices – almost half of NH’s at 8.96 c/KWh.

Source: EIA

All of the electricity prices I have presented so far are average prices and include all the charges you see on your electrical utility bill. Looking at an electricity bill is not unlike deciphering your cell bill. There are a lot of bits and pieces and it takes effort to understand them. There are three basic components. The first is the cost of power, which is usually a single line item for the cost of electricity per KWh. The second is the cost of getting the electricity to your home, i.e., the cost of distribution and servicing your account, which usually involves several line items, such a fixed account charge, a distribution charge, and perhaps even a transmission fee. Finally, there are all the odds and ends, such as taxes, charges for government-mandated programs, etc.

The reason for all these separate charges is, as I have noted previously in What’s It All About, Alfie?, is that there are three key parts to the electricity business: the generation of electricity, typically at a large power plant located in a central location; the transmission of electricity over long distances from the generation point to towns and cities; and the distribution of electricity through the community via the sub-stations, wires, and transformers to individual homes and businesses. Not all electrical utilities focus on all aspects of the business. Some, for example, such as my local electrical company, just distribute electricity. Others, such as the merchant wood-fired power plants or wind farms, just focus on generation, whereas utilities like PSNH are fully integrated organizations involved in all three aspects of the business. 

The biggest line item in your electrical utility bill is the cost of electricity. This is the focus for the rest of this post.

The electricity industry has been partially deregulated in NH and retail customers can purchase their electricity from different competitive suppliers. However, this electricity still has to run through the transmission lines and electrical wires of their local electrical utility and so customers are charged for the use of that distribution infrastructure.  Should a NH resident decide not to purchase electricity from a competitive supplier, the local electrical utility has the responsibility to source and supply the electricity to the customer. The utilities do so and apply their default electrical service rate. Although there has been competition on the residential supply side of electricity for a few years now, the majority of NH residential customers still rely on their local electrical utility company to source and supply their electricity. This is the reason that increases in default electrical service rates are so important.

There has been a good amount of reporting lately about the big increases in electrical service rates proposed by the utility companies and approved by the NH PUC.  The table below summarizes the present default electrical service rates as well as some information for previous years.  

It is important to remember that these increases all relate to electricity supply (and not to transmission or distribution charges) so let’s take a closer look at the supply side of the NH utilities. The rest of this post focuses on the three utilities, NH Electric Co-op, Unitil, and Liberty Utilities, with approved increases. PSNH's default rates - which are not yet approved by the Public Utilities Commission - will be the topic for my next post. 

Expanding the supply aspect of the simple generation-transmission-distribution diagram presented above, the picture quickly becomes complicated because, as part of deregulation and the drive for competitive supply, we have introduced various intermediaries and market participants.

The electricity supply to residences by three of the four NH utilities (NH Electric Co-op, Unitil, and Liberty Utilities) is shown in the figure below. Competitive suppliers, shown in yellow, purchase electricity directly from generators (red) or through wholesale electrical markets (green). The second source of supply is from the utility itself, shown in blue, which needs to procure electricity for its default electrical service customers. The utility can purchase this electricity directly from generators but the bulk of the purchases are through wholesale electrical markets. There are two types of wholesale electrical markets – the forward sales and the spot markets. Generators sell electricity into both of these markets.  

In order to supply electricity to their default customers, the utilities have to forecast how much electricity will be required for a six-month period and then lock in the price of the forecasted amount of electricity in advance. This is carried out in the forward sales segment of the wholesale electrical markets. Although there is a cost associated with forward purchase commitments, they offer the advantage of locking in the rate of electricity purchases for the period. Should more electricity than forecasted be required, the utility has to purchase this extra electricity on the spot market.

Three NH utilities (NH Electric Co-op, Unitil, and Liberty Utilities) have just gone through the round of forecasting for this winter electricity supply. The utilities have estimated the number of default service customers and their total electricity consumption, and have gone out to markets and solicited bids for supplying this forecasted electricity through the winter months. The bids for Unitil and Liberty were reviewed, documented, and submitted as part of their default electrical service rate application to the NH Public Utilities Commission (PUC). The costs associated with these forward purchases of electricity are then included, without any mark-up by the utility, in the calculation of a single rate for winter months. The NHEC Co-op (NHEC) is unregulated and is not required to submit its rate adjustment calculation to the PUC.

The problem for default electricity customers is that the future prices for electricity for the next six months are high, as shown in the chart below. As the utilities lock in their supply and prices for the winter months, they are buying right into the winter price spikes.

The difficulty with this approach is that the utilities are trying to forecast in September what their electricity sales in the winter will be. This is an enormous challenge because they have to forecast how cold the winter will be, how many customers they might have and their consumptions. They must then commit to purchasing that electricity in advance. However, if the winter is mild, the spot price could be lower. Of course, the opposite could happen: it could be a brutal winter, natural gas consumption could be sky high, and electricity prices could skyrocket like last winter.  This is the challenge that the utilities and their regulators face. Is it better to lock in the price now – called “hedging” – or subject your customers to the gyrations of the spot markets where prices could be higher or lower than the forward market, or should some balance be struck between committing to a 100% hedge or a partial hedge? This is exactly the same decision we face at home. Do we commit to a fixed price for oil or natural gas over the winter months, or do we take our chances and hope it will be a warm winter and that oil and natural gas will be cheaper than that fixed-price contract. What would you do?

The regulators currently require Unitil and Liberty to hedge 100% of their six-month forecasted amounts and commit to the high winter prices. This has lead to the higher winter default service rates posted by these utilities.

This brings us to the question of why future prices for electricity are so high in winter.  In two words: natural gas. As we have closed down nuclear and coal-fired power plants in NE, we are now generating 46% of our electricity using natural gas. Depending on your viewpoint, that could be a good thing: it is a domestic fuel, cheap, and less polluting than coal. It does, however, make us very dependent on the natural gas market and fluctuations in natural gas prices. Natural gas is also used for heating and cooking and, in winter, we do not have the pipeline infrastructure to bring in enough natural gas for heating and electricity generation. During winter, the natural gas utilities and  electricity generators suck very hard on the end of the natural gas straw and when demand increases, markets do what they are wont to do and prices increase accordingly. When natural gas prices increase, so do the prices of electricity. NE has experienced price spikes for both natural gas and electricity during the past two winters, as shown in the chart below.

Source: ISO-NE

Sam Evans-Brown, in a recent NHPR report, does a great job of summarizing the natural gas situation in New England. The political cartoon by Bob Englehart of the Hartford Courant points to the irony of situation: there is an enormous amount of natural gas available in the US, but NE is at the end of the pipeline and that causes problems for us in the high-use winter months.

(click here to view)

Bob Englehart

Hartford Courant

Dec 19, 2013

EditorialCartoonists.com

The future electricity prices are joined at the hip to the future natural gas prices. In the figure below, the leftmost chart shows the future prices of electricity and natural gas for the next three years, as provided by the forward markets. (The forward price of natural gas is calculated for the Boston Algonquin Citygate, which is a good proxy for NE natural gas pricing. See The Price for a discussion of natural gas citygate prices.) The winter spikes in forward electricity prices match the winter spikes in forward natural gas prices. Should you need convincing, the right-hand figure shows a direct and very strong correlation between future electricity  future natural gas prices. In fact, the correlation coefficient is 0.966, which indicates a super-strong correlation. (Correlation coefficients vary between 0 and 1. A coefficient of 1 indicates a perfect correlation, whereas a value of zero indicates no correlation.) Although correlation does not necessarily mean causation, in this case we can indeed be comfortable in concluding  that high future natural gas prices lead to high future prices for electricity.

Returning now to the table that shows the default service rates for the four utilities, we note that Unitil, Liberty, and NHEC reflect increases of 59%, 76%, and 71%, respectively, over last winter’s rates. Although NHEC also shows a large increase, their winter rates are substantially lower. Based on what I have been able to learn, these lower rates are due to diversification in the way NHEC purchases its electricity. NHEC does not hedge 100% of its forecasted needs just six months ahead. Instead, it commits to forward purchases many years out and to some just a few months out. It also purchases electricity directly from generators through long-term (20-year) power purchase agreements and will also purchase some of its power on the spot market where it is able to take advantage of lower spot prices at times. As an unregulated utility, NHEC clearly has more discretion than the regulated organizations and some might suggest that these direct comparisons are unfair. I disagree, because comparisons of these different approaches are important in trying to figure out what works best for NH ratepayers.

The Co-op model has a lot of attractive features. The customers are the shareholders and they are not incentivized by returns on capital or dividends. They want reliable supply and the lowest possible prices for electricity and the whole organization is focused to deliver this. With the other utilities, I don’t see the same incentives to keep down electricity prices. The regulated utilities, Unitil, Liberty, and PSNH, are required to pass on the costs of electricity to their customers without any mark-up so there is little motivation for them to search out alternatives to minimize energy prices.

NHEC has a long-term view of electricity prices and, to my mind, the “next six months” approach at Unitil, Liberty and PSNH, as required by regulation, is far too short-term. Wholesale reliance on short-term forward markets does not seem to be the best approach. There is certainly merit to the diversification and flexibility of supply model used by NHEC and I wonder whether consideration should not be given to incentivizing the regulated utilities to develop a longer-term view of electricity supply. One way to do this may be to allow the utilities the flexibility to diversify their electricity supply and reduce the price of electricity below that of the short-term forward markets and to share significantly in any resultant savings.

While researching this post, it struck me that there is considerable variety in the types of electrical utility and a great deal of experimentation occurring in NH. NH arrived early to the deregulation ball and then pulled back when things went awry in California (see Should l I Stay or Should I Go?). As a result we have an integrated utility, PSNH, still in the generation, transmission, and distribution business; we have two deregulated utilities, Unitil and Liberty, that are out of the generation business and who buy all their electricity on the wholesale markets; we have a cooperative in NHEC which is not regulated by the NH PUC; and we have a few municipal electric companies. With all of these options in NH, we have a unique opportunity to figure out which model is the best, and which consistently and reliably delivers low cost electricity to NH ratepayers.

The past two winters have seen a refrain of “Gonna Take You Higher”* and I anticipate that the NH annual average electricity price will rise again this year. When deregulation was introduced, we expected the markets to automatically deliver lower electricity costs. This has not always happened. Sure, we have run into cold winters, natural gas pipeline capacity issues, and the shutdown of nuclear and coal plants, but deregulation appears to have fallen short on some of its promises. This requires some reflection and is certainly worthy of a future blog post.

Electricity markets are different from other energy markets, many of which have an inventory buffers in the form of storage or stockpiles to overcome temporary interruptions and market dislocations. Electricity, on the other hand, needs to be simultaneously generated and consumed: it cannot be stored, and the underlying market components and structures are hellishly complicated. There are a limited number of market players, liquidity can be problematic at times, and − regardless of the cost − it needs to be “on” all of time. Moreover, in NE, the market for electricity now rests on top of the local market for natural gas – another commodity for which local storage is very limited and where delivery constraints come into play. With so much of our electricity dependent on natural gas, we could even reach situations where there is insufficient natural gas to generate the electricity we need. From this viewpoint, it appears that heavy dependence on natural gas has compromised the reliability of our electricity supply. This is all frightfully messy.   

I am a proponent of the letting the invisible hand of the market do its work, but it does need to do so under the very visible and intelligent hand of regulation. My 1/8 of a KWh worth is that progress has been made but there is still work to do to get things right for NH electricity rate payers.

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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(*Gonna Take You Higher – A line from the chorus of Sly and the Family Stone’s tune,  Want to Take You Higher, and a great example of the funky soul music from the 1960s. This was one of the tunes in the Family Stone’s set at Woodstock when they played it at 3 am and had the crowd chanting “Higher”. Here is a video of a 1969 show that gives you a sense of the power and drive of Sly and the Family Stone. Enjoy I Want to Take You Higher.)