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.) 

Extraordinary Machine* - ISO New England

I had the opportunity early this summer to take a week-long course from the folks at ISO New England (ISO-NE) on Wholesale Electricity Markets.  ISO-NE is the regional organization that is essentially responsible for keeping the lights on in New England. ISO stands for Independent System Operator. This is the organization that coordinates the generation and transmission of electricity in New England through a variety of regulated and free market mechanisms.

In previous blogs, What’s It All About, Alfie? and Wind in the Wires, I discussed the structure of the utility industry and particularly the electrical utility industry. There are three aspects to the electrical utility business, as shown in the figure below: there is the generation of power, typically at a large power plant located in a central location, then there is the transmission of electricity over long distances from the generation point to towns and cities, and, finally, there is the distribution of electricity through the community via the sub-stations, transformers, and wires to individual homes and businesses. 

ISO-NE is the organization that coordinates the generation and transmission aspects of the electricity business. It is your local electrical utility, such as PSNH, Unitil, or Liberty Utilities, that is responsible for the distribution step, which involves drawing the electricity from the transmission lines and getting it to your home and place of work. ISO-NE is not reading your individual electrical meter - that is also the task of your local electrical distribution company. It is important to note that ISO-NE does not own or operate generation plants or transmission lines. Instead, through a variety of market mechanisms, it is responsible for the coordination of generation and supply by a host of generation and transmission companies.

This turns out to be an extraordinarily complicated task because electricity cannot be stored (or very little of it) and so there needs to be a consumer for every electron of electricity produced by a power generation plant at every minute of the day. When you increase your demand for electricity by turning on your laptop or tablet to read this blog, someone needs to ensure that generating companies are supplying just the right amount of electricity to do so: that is what ISO-NE does.

ISO-NE operates the electrical grid in the six New England states of New Hampshire, Vermont, Maine, Massachusetts, Rhode Island, and Connecticut and has three primary responsibilities:

1. Operating the Power System: ISO-NE ensures the correct balance between electricity supply and demand every minute of the day by centrally coordinating the generation and transmission of electricity in the New England region and into (and from) other neighboring regions, if necessary.
2. Supervising Wholesale Electricity Markets: ISO-NE provides and supervises the market platforms on which wholesale electricity is bought and sold.
3. Power System Planning: ISO-NE assures that present and future electricity needs are meet through the development of reliable generation and transmission systems.

In the days before electrical deregulation, electrical utilities, such as Public Service of New Hampshire (PSNH), were given a monopoly to provide electrical service to large regions. As such, the utility was responsible for the generation, transmission, and distribution of electricity across the region. This was done largely through operating its own generation plants, running the electricity through its own transmission lines, and supplying it to its own customers through its own distribution network. However, as noted in Shall I Stay, or Should I Go?, this model has changed as consumers have demanded choice and competition. We have been swept up in the deregulation wave that has worked to unbundle the electrical industry and break it up into separate generation, transmission, and generation companies, and to allow competition in each of these areas. Although deregulation has had varying levels of success, it soon became clear that this environment required a single controlling entity to coordinate open access electricity supply, transmission, and use across all a range of independent and competitive regional companies and regulated utilities, hence the need of an Independent System Operator such as ISO-NE. 

The seeds for ISO-NE were sown in the 1965 Northeast blackout that affected some 30 million people in Ontario and large parts of New England, New York, and New Jersey. This blackout was caused by a single poorly set relay at a New York power plant that created a series of cascading electrical surges, tripped relays, and imbalances that moved through the electrical grid and shut down generation plants. In the aftermath of the blackout, several reliability councils were set up to improve coordination between electrical utilities. One of the organizations formed in 1971 was New England Power Pool (NEPOOL), which was a trade organization of New England power companies. The focus of their work was to improve cooperation and coordination among the regional power utilities. In the process, they organized much of the NE electrical grid and established a central electricity dispatch organization.

For almost three decades, NEPOOL was responsible for the coordination of the NE electrical grid, but, in the 1990s, with the advent of deregulation, the Federal Energy Regulatory Commission (FERC) – the Federal “godfather” of the electricity business – decided that deregulation required open access to the electrical grid by independent power companies and well-run competitive markets. FERC concluded that this was best done under the auspices of an independent organization, rather than a trade organization of existing participants which may not be open to increased competition. ISO-NE is one of several regional organizations that were established in 1997 to monitor deregulation, establish open and competitive wholesale markets, as well as coordinate and operate the regional electrical grid. Essentially ISO-NE assumed some of the functions that had been carried out by NEPOOL. In 2005, FERC provided ISO-NE with greater authority and independence over the transmission grid and designated it as the six-state Regional Transmission Organization or RTO. The map below shows the location of other ISOs or RTO in North America.

Source: ISO/RTO Council

Today, ISO-NE is responsible for over $10 billion of wholesale electricity transactions from 400 market participants. It is a private, non-profit organization with operations located in Western Massachusetts. It has about 550 employees, most of whom are power system engineers, computer scientists, and economists. ISO-NE does not have trucks and power line crews that go out repair the grid. That is the responsibility of the transmission and distribution companies. The ISO-NE folks do not get their hands dirty: it is a coordinating, monitoring, and planning body for the electrical grid.
Here are some key facts about ISO-NE:

•    Serves 14 million residents with 6.5 million meters across six NE states;
•    Coordinates 32,000 MW of generating capacity;
•    Coordinates 350 generators;
•    Covers 8400 miles of high voltage transmission lines;
•    Highest peak demand for electricity ever recorded is 28,130 MW;
•    Peak load in 2013 was 27,379 MW;
•    Generation of electricity in 2013 was 129,336,000 MWh;
•    Average Day Ahead Wholesale Price in 2013: $ 54.42/MWh (= 5.4 cents/kWh);
•    $8 billion in transactions from electricity sales in 2013;
•    2013 operating expenses: $157 million.

ISO-NE Control Room (Photo Courtesy of ISO-NE)

ISO-NE has created several markets, the most important of which is the wholesale market for buying and selling electricity and which accounts for the bulk of ISO-NE transactions. Another important and growing function is the capacity market, which is a forward market in which bidders commit generation capacity that will meet the electricity needs in the future. For example, a new start-up power plant can auction off its generation capacity to supply electricity in three years’ time. Of course, if this future capacity is bought, the start-up is obligated to deliver that generating capability in three years. This market provides an additional revenue stream for power plants, it allows capacity planning at least three years out, and it provides incentives for the construction of new power plants.

As a result of my research, I now have a much better understanding of ISO-NE and their function. My most important takeaway, however, was that I was simply stunned at the engineering and economic complexity involved in getting electricity from generators, moving it across transmission lines, and getting it to users in a complex deregulated market. As I noted earlier, ISO-NE folks do not get their hands dirty repairing transformers and power lines but they have built and are responsible for a very complex machine. A useful way of understanding this machine is to view it, as other authors have, as a mechanism responsible for controlling three types of flows, as in the figure below.  It is responsible for the flow of information about generation, transmission, and demand, which leads to transparent market operations and both short- and long-term planning for the electrical grid. It is also responsible for the coordination and flow of electricity from generators to users across transmissions lines. Finally, through its market mechanisms, it is the conduit for money flows from buyers of electricity or generation capacity to sellers.

I am very impressed with this machine and now understand more completely the need for an organization like ISO-NE. We often hear grumbling in NH that we export a great deal of the electricity we produce. That is true, but only up to a point. It is important to understand that NH is not an “electrical island” responsible for its own generation and use of electricity. That is old school “PSNH will take care of everything for New Hampshire” thinking. We now live in a time of deregulated (or partially deregulated) markets. The State of New Hampshire is part of the New England grid and, along with our neighbors, we generate, transmit, and use electricity. Largely due to the Seabrook Nuclear Plant in Portsmouth, we presently generate more than we use so other NE users benefit from NH generation capacity, but, should there be an interruption of supply from Seabrook, we will be very grateful that we are indeed part of the NE grid. Likewise, access to the NE markets allows us to participate in long-term planning and in large wholesale electricity markets whose structure and competitive nature work to keep wholesale electricity prices down.

There is, of course, a cost associated with a controlling body such as ISO-NE. The 2013 operating expense for ISO-NE was $157 million, which we as rate payers end up paying for. If we divide the costs of ISO by the electricity produced in 2013, this yields a figure of about 0.11 c/kWh. For an average household using 800 KWh per month, the ISO-related costs turn out to be about a dollar per month. From my perspective, that is cheap insurance for a reliable electrical supply and efficient markets.

Until next time, remember to turn off the lights when you leave the room—and when you do so, think about the extraordinary machine* that adjusts to that small reduction in electrical demand. It is indeed remarkable.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu
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(*Extraordinary Machine – A cool little old timey tune by the extraordinarily talented Fiona Apple. Here is a performance from the Today Show. Enjoy.)