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.)

Kerosene Hat* - Home Heating Oil in New Hampshire – Part 3

I have recently become intrigued with kerosene and its use in home heating. Part of this interest stems from the fact that one of my nephews dabbled for a while in the art of fire breathing which uses kerosene as well as my interest in the history of the oil industry which I share with students in the Energy and Sustainability  MBA program at Franklin Pierce University via Daniel Yergin’s book, “The Prize,” which is a well-written account of the oil industry.

Jeddon Mooiman showing off his fire breathing skills.

Kerosene (known in the UK and many of the old British colonies as “paraffin”) was the first crude oil distillate that made its way into common use. It came into commercial production in the 1850s and quickly displaced the whale oil that was used for lighting at that time. Kerosene has a long history of cooking and heating applications and is still extensively used in Africa and Asia as a cooking and lighting fuel. Today, the largest use of kerosene is as aviation fuel.

When I was growing up in Africa, a lot of cooking in rural areas was done on kerosene-fired Primus stoves, such as the one shown in the figure below. The basic design for this kerosene stove comes from 1892 and the and has not changed much since then. Many of these units, or similar ones, are still in service in Africa and Asia. In fact, these were the stoves of choice for many of the polar expeditions and when Hillary and Tenzing ascended Everest for the first time in 1953.

Vintage Primus Stove, circa 1911

When crude oil is distilled, the kerosene fraction boils off before the diesel/ home heating oil (HHO) fraction. As a result, kerosene is a little less viscous and slightly more volatile than diesel and the hydrocarbons in kerosene typically contain 9 to 16 carbons, whereas diesel contains hydrocarbons with 10 to 20 carbon atoms. (The exact blend of hydrocarbons depends on the source of the crude oil used in the refining process as well as the type of refining process used.) One of the best features of kerosene is that it stands up to colder temperatures much better than diesel. At very low winter temperatures diesel and HHO fuels can start to become slushy as the longer chain hydrocarbons begin to gel, forming waxes, which can plug up fuel lines and filters, causing heating furnaces to shut down. These waxes start to appear at temperatures known as the cloud point of the fuel. As temperatures continue to drop below the cloud point, more wax is formed and the fuel can become so slushy that it will not even flow. This is known as its gel point. Home heating oil has a cloud point of 9 to 10^oF but kerosene will only begin to cloud at -40^oF. With its lower cloud and gel point, kerosene is often blended into  transportation diesel in the winter months to ensure that the diesel does not gel in the  tanks of trucks and other heavy equipment. Aircraft flying at high elevations are subject to very low temperatures and the aviation fuel variant of kerosene, jet fuel, is therefore ideally suited to this low temperature environment and application.

It is the cold temperature stability of kerosene that accounts for its frequent use as a home heating fuel for mobile or manufactured homes. In mobile homes using oil heat, the fuel storage tanks have to be located outside of the residence where the fuel is subjected to the cold winter temperatures. Here in, New England, where temperatures regularly reach single digit temperatures, having typical #2 HHO in an outside storage tank could be problematic for heating units.

Oil Storage Tank Outside a Mobile Home

Many of us with typical stand-alone homes give little thought to mobile homes and their particular heating challenges.  It turns out that mobile housing units are a large part of the NH housing stock and it is estimated that there are ~30,000 units in NH (5.7% of the 519,000 residences). This means that there are many NH residents who are obliged to use kerosene due to the need to locate the storage tank outside of the home. The problem is that kerosene is the most expensive of the commonly used home heating fuels. As shown by the NH data in the figure below, kerosene is consistently more expensive than regular #2 HHO - typically costing about $0.50/gallon more. (As an aside, on an energy content basis, the most expensive way to heat is with electricity, then propane, and then kerosene, followed by regular HHO. See my Under Pressure and Closer to Home posts.) 

These higher fuel prices clearly impact those least able to afford it. Moreover, it has been reported that mobile homes built before 1980, which comprise a large part of NH mobile home stock, have, due to poor insulation, an energy consumption per square foot that is 53% higher than other types of homes. With the combination of higher energy consumption and higher fuel prices, it is clear that folks living in mobile homes are deeply impacted by cold weather and home heating expenses: lower income families who live in mobile homes therefore spend a larger portion of their income on heating expenses compared to families living in better insulated residences. For this reason, weatherization programs directed at improving the insulation of these mobile homes, such as was carried out recently in New Hampshire, should be encouraged.

Many of us are familiar with self-standing kerosene heaters such as those shown below. There is the torpedo type one often finds on construction sites or in warehouses or the stand-alone type one might find used for supplemental or backup heat in backwoods cabins, workshops or barns. The appeal of these types of kerosene heaters is that many designs do not require electricity to operate – some rely on wicks to draw kerosene to the combustion area and some, like the primus stove pictured above, require a manually pressurized fuel tank. Some modern stand-alone kerosene heaters have electrical fans to blow the warm air into the room but the main feature of these stand-alone heaters is that they aren’t vented. As such, the combustion products, largely water vapor and carbon dioxide, are released into the heating space. The danger is that improperly adjusted kerosene heaters can release the highly poisonous carbon monoxide, which could have deadly consequences. Any home or enclosure using a kerosene heater should, as a matter of course, be fitted with a carbon monoxide detector. Moreover, a window should be always opened a crack to allow some circulation and to prevent the buildup of carbon dioxide and other combustion products.

         Heat Stream 125,000 BTU Forced-Air Kerosene Heater                                  DuraHeat 23,000 BTU Kerosene Portable Heater

The kerosene-based home heating systems installed in mobile homes are not the unvented types shown above; modern units are fan-driven ducted systems which discharge combustion off gases directly outside. These are similar in design and configuration to home heating systems that use regular HHO.

Two grades of kerosene are available for sale. There is K-1 kerosene which low in sulfur (<0.05%) and higher sulfur K-2 kerosene (<0.5%). For unvented heaters, the K-1 grade is the recommended type. The K-2 grade is the type that is often used in mobile homes with vented heating systems. Like untaxed HHO, kerosene used for home heating purpose is dyed red to distinguish it from its taxed transportation equivalent

Data on kerosene sales for home heating applications is tracked by the Energy Information Agency (EIA) and historical data for NH is presented in the chart below. We noted in an earlier post that current HHO sales were off about 55% from their 2004 highs. We also see a decline for residential kerosene sales - but here the drop off is of the order of 90%!  NH kerosene sales continue to decrease – consumption  has decreased from 7 million to 2 million gallons per year just since 2010. (As a comparison, bear in mind that the HHO consumption in NH is of the order of 100 million gallons per year.) I am pretty confident that these numbers do not reflect a decrease in the number of mobile homes. Instead they indicate that folks living in mobile homes are making choices regarding their use of expensive kerosene.

Source: EIA, NH Residential Kerosene Sales

This is not just a NH phenomenon. Residential kerosene sales are down across the entire US. This decrease intrigued me and so I chatted to a number of folks involved in the NH kerosene business and asked them about the decrease in kerosene sales data. As is typical in a case like this, there does not appear to one single reason for the decrease in usage. Instead a number of factors are at play but they are largely price-driven. Here is what I have learned:

• Kerosene is more expensive than regular HHO so mobile home residents have sought alternatives. For a typical 180-gallon delivery, a resident can save $90 by getting HHO instead of kerosene. The low temperature clouding and gelling problems with outside storage tanks in winter can be combated by the addition of anti-gel additives that reduce the cloud point. These additives can cost $10 to $30 per tank and so there are savings for the resident. However, some oil suppliers have expressed concerns about poor mixing of the additive in a typical oil tank and question the effectiveness of these additives.
• Some oil dealers will supply a blend of expensive kerosene and lower cost HHO to lower the cost of a heating fuel delivery. In these circumstances, it likely that the kerosene content gets lumped in with the oil numbers when data is reported - which then artificially decreases the kerosene consumption numbers.
• Some kerosene users will switch back and forth between kerosene and HHO during the year to reduce their heating bills and will use kerosene only in the very cold winter months.
• Many mobile home owners have converted old kerosene-based heating systems to electrical space heaters or propane systems. Sometimes these changes are done based on the belief that propane systems are better and some are driven to do so because they live in a community that does not allow the installation or replacement of an outside kerosene storage tanks.
• The number of oil dealers supplying kerosene has declined. Fuel storage facilities, along with the associated tanks, pumps and piping are expensive, and many dealers have found maintaining kerosene inventories, along with the related storage and transportation logistics, unattractive in the face of declining sales.

In my last post, I noted that HHO is a dual purpose fuel. It is used as for home heating and, in its low sulfur diesel form, it is used for transportation: it is often the larger transportation market dynamics that ends up dictating the price for HHO. Kerosene is similarly a dual purpose fuel used for home heating and transportation. As noted earlier, in winter kerosene is added to diesel in order to extend the temperature range of the fuel. Far more significant, however, is its use as an aviation fuel. To give you a sense of the US market, in 2012 21 billion gallons of jet fuel were consumed, compared to 81 million gallons of kerosene consumed for home heating, commercial, industrial and farm use. The jet fuel market is 260 times larger.

In making inquiries about why kerosene is more expensive than regular HHO, it turns out to be more of a supply issue. Only about 10% of oil refinery production, see the table below, ends up as kerosene. This limits its availability and, on top of that, the strong demand for jet fuel  continues to increase.

Source: EIA

Kerosene, in its jet fuel formulation, has another important use: it is used to generate electricity. A few weeks ago, PSNH reported that they were requested to fire up their 20 MW jet fuel generators located at the Merrimack station in Bow, Groveton and Tamsworth. This is generally a rare event and was driven by the lack of natural gas availability for power generation.  The challenge with these oil-fired generators is that the jet fuel is expensive compared to natural gas and coal so that they are really only backup units used to meet high peak demand operations. Some operations have converted their oil-fired backup units to run on cheaper natural gas. High oil prices also led to some operators reducing the amount of oil in their storage tanks, which left the region short of oil-fired backup generating capacity during the 2012/2013 winter when it was needed.

This winter, ISO-NE, the regional body responsible for coordinating the entire New England electricity market, instituted a Winter Reliability Program in which ISO-NE procured additional generating capacity from oil-fired operations such as PSNH. ISO-NE paid participants in the program ~$0.60/gal to keep fuel oil in storage to be available when requested. This program has been effective this winter and oil-fired backup capability has been available when needed. The chart below shows the generation of electricity in New England from different sources during the month of January 2014. Natural gas and nuclear generate most of the electricity in the region but the early January cold snaps had oil-fired generators kicking in (shown by the light blue line) and during the very cold weather towards the end of January, oil-fired generators were producing a lot of the region’s electricity. In fact, on Jan 24, 2014, oil was supplying 14% of the region’s electricity, as measured on a daily basis.

Source: ISO-NE

We have covered a lot of ground on this post, ranging from Primus stoves to PSNH’s use of kerosene to generate electricity, but here are the main takeaways regarding kerosene usage in NH:

• Kerosene is a versatile fuel which is very useful in low temperature applications, such as blending with diesel in winter and for mobile homes with outside fuel tanks. However, its main use is as an aviation fuel.
• Kerosene is ~$0.50/gal more expensive than HHO as a home heating fuel in NH.
• Use of kerosene as a home heating fuel has plummeted over the past decade, driven largely by price.
• Kerosene is a useful back-up fuel that can be used to generate electricity when natural gas supplies are constrained or prices get too high.
• Finally, if you are planning a traverse of the South Pole or an ascent of Everest, you may want to start scouring yard sales for old Primus stoves.

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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(*Kerosene Hat – The title of Cracker’s breakthrough 1993 album. I always enjoyed this group as I found many of their songs clever, catchy and some quite dark. Even though this tune is from their previous album, this is my favorite Cracker tune, Teen Angst. As an old folkie I love the “what the world needs now is another folk singer like I need a hole in my head” sentiment.)

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 Source: US Department of Energy

 

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

 

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

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

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

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

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

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

 

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