Setting the stage for 2014 regional energy policy
Right now, it looks like a battle between gas and hydro
New domestic natural gas reserves and a dramatic drop in natural gas prices are transforming the regional energy market. This dynamic will guide energy policy in New England and New Hampshire in 2014.
Nearly 350 electric power plants in New England run on a combination of gas, oil, coal, nuclear and renewable fuels. The regional electric market requires that least-cost plants are called upon first, to ensure low prices. While newer and more efficient gas plants are dispatched more often than other plants, the region has a strong portfolio of installed generation.
ISO-New England predicts that a number of older coal and oil units are at risk of shutting down in five to seven years. The question is, who will step up to replace the estimated 8,000 megawatts?
• Hydro: The major player on this front is Hydro-Québec, with a long-term goal of exporting thousands of megawatts to U.S. markets, primarily New England and New York. But it is far away from load centers and requires massive transmission infrastructure to deliver the energy to market.
When regional wholesale prices were higher, the all-in costs of hydro production and transportation made for a better economic model. Canadian hydro is now attempting to create subsidies in the form of perceived low-carbon government-prescribed purchases, or modification of state Renewable Portfolio Standards (RPS). It is also increasingly hard to get industrial transmission facilities sited. The well-organized opposition to large overhead towers means processes will likely be delayed for years, and the risk of siting denials or abandonment of projects has become more substantial.
Some developers are responding by undergrounding lines, which may gain siting approval, but will also increase costs.
Source: Vice President System Planning Stephen Rourke, ISO-NE Update – Massachusetts Plant Revitalization Taskforce, December 19, 2013
• Natural gas: Efficient natural gas plants can be built close to load centers, thus avoiding the controversy and cost of large-scale transmission. But despite abundant, low-cost natural gas from Mid-Atlantic states, pipelines to deliver it to New England are not sufficient.
Financing projects is also difficult, as developers typically want electric generating plants and local gas utilities to commit to long-term supply contracts, and customers are leery of locking in for long periods of time. The current system means that local distribution companies must wait for market demand before they can invest in the type of supply contracts that pipeline developers want. The pipeline subscription and financing process is therefore moving slower than expected, but given market opportunities, many assume that at least two major pipeline projects into New England will be financed and started within two years.
• Renewables: Wind and solar projects tend to be smaller than gas or hydro transmission projects, ranging from 20 MW to 200 MW for wind; gas plants are typically 500 or 700 MW and hydro projects are 800 to 1,200 MW.
Capital costs for wind and solar projects are generally higher when viewed as cost per megawatt, meaning that the price a renewable project needs to get into the market is often not enough to compete with gas or hydro. However, there are programs to help these renewables succeed, including positive federal tax treatment , state renewable energy programs with a separate payment stream, and long-term contracts with utilities.
Still, it is unlikely that renewables will be able to capture the full 8,000-megawatt market opportunity that is emerging, and siting problems are beginning to mount, particularly for wind, which could slow development.
• Efficiency: The most cost-effective energy investment is using less energy. However, the current market is neither set up to fully reward electric efficiency as load resources, nor can efficiency be used in the same way as generation in support of the market and reliability.
The private market is developing financial instruments to help efficiency capture some portion of the emerging market, but not to the size and scope of hydro, gas and renewables.
A combination of market and public policy forces will determine which new resources will be developed in New England over the next three to seven years. Public policies are being developed that offer some solutions as well: Five of the six New England states have Renewable Portfolio Standards that require a portion of retail supply from renewables. Renewable Energy Certificates provide renewable power plants a revenue stream that allows them to be price competitive with non-renewable resources.
In the battle between gas and Canadian hydro, no subsidies exist to give one solution an advantage. As the hydro industry looks ahead to how its energy will price out over the long term, it sees it will end up being more expensive than gas and has begun to look for government-supported subsidies.
Support might take the form of an agreement among New England states that would offer hydro a long-term contract for power, thus locking in a deal before new gas resources get to market. In southern New England, there also has been talk about finding a way for ratepayers to pay some transmission costs rather than hydro developers.
By the end of 2014, this combination of market, regulatory and legislative policy moving parts may signal which resources will prevail. The risk is that policymakers might be asked to put a thumb on the scale to meet perceived short-term goals, but may make long-term mistakes in the process.
Jim Monahan is vice president of the Dupont Group, a lobbying firm whose clients include energy interests.