Is energy market volatility a sign of things to come?

How New England reacts to changing energy picture could have a significant impact on future prices and economic growth


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While New Hampshire’s Jeanne Shaheen and a group of fellow New England senators have called on federal regulators to investigate recent natural gas price spikes, the region could face a more substantial question – was the long and cold winter of 2013-2014 a prelude to even more difficult energy times to come?

The New England region’s reliance on natural gas – the result of a concerted, decades-long effort to cut the region’s dependence on coal and oil – has come with a price. The combination of peak demand due to the cold weather, a natural gas shortage due to limited pipeline capacity, and the phasing out and retirement of 10 percent of the region’s power-generating capacity – such as the Vermont Yankee nuclear power plant – in the next three years has created a potential canary in the coal mine scenario.

How New Hampshire and other states react in the next few years could have a significant impact on future energy prices and economic growth.

“The challenges to grid reliability are not a question of if they will arise, but when. And when is now,” said Gordon van Welie, president and CEO of ISO New England, operator of the New England power grid, in the organization’s 2014 regional electricity outlook report.

In their letter to the Federal Energy Regulatory Commission, Shaheen, along with Sens. Ed Markey, D-Mass., Jack Reed, D-R.I., Sheldon Whitehouse, D-R.I., Richard Blumenthal, D-Conn., and Angus King, an independent from Maine, called for a review of natural gas prices.

“Severe price increases like those we have seen in New England can hurt families and cripple businesses, especially manufacturers that rely on natural gas for power generation,” the senators wrote.

It’s not known what a FERC review may find, but the recent volatility of the New England electricity market is no accident. The region relies on natural gas for more than 46 percent of the fuel needed to generate electricity.

In an ISO-NE report released in March, it found that “natural gas pipeline constraints and higher demand in New England caused the average price of natural gas to rise 76 percent in 2013, which in turn pushed the wholesale electric energy price up by 55 percent over 2012’s record low price.”

Here are a few examples of what that has meant in practice:

 • Faced with skyrocketing natural gas prices, Gorham Paper and Tissue curtailed operations by more than 50 percent beginning in December. CEO Mike Cummings said in an email to employees that the move was taken “until natural gas prices come back down to their seasonal norms in the spring.”

 • In January, during a peak period when up to 75 percent of the region’s natural gas-generating capacity was offline due to price spikes, ISO-NE asked PSNH to take what the company said was “an historic measure” to fire up all its large power-generating capacity – including a couple of combustible so-called “jet” turbines that run on aviation fuel. “This is an extremely unusual situation,” said William Smagula, PSNH’s vice president-generation, at the time.

 • When ISO-NE completed its annual “forward capacity” auction for 2017-2018, it encountered a deficit of supply for the first time since the auctions began in 2006. “The region abruptly went from a capacity surplus and low prices in previous auctions to a capacity shortfall and relatively high prices,” van Welie said.

Taking notice

Even before the worst of the winter’s natural gas price spikes became apparent, New Hampshire Gov. Maggie Hassan and the five other New England governors asked ISO-NE to move forward with planning on increased natural gas pipeline capacity and to bolster transmission capacity in the region by “at least 1200 megawatts and as much as 3,600 megawatts” by 2017-2018.

In essence, this would replace the lost capacity from Vermont Yankee and other oil- and coal-burning power plants set to retire in the next three years. The urgency was such that the governors have also directed ISO-NE to gain tariff approval from FERC to have commercial and residential ratepayers help finance potentially billions of dollars in infrastructure additions.

Energy brokers and utilities have taken notice.

“You don’t want to count on jet turbines to keep the lights on,” said PSNH spokesman Martin Murray about the power-generating situation the past winter.

According to PSNH, the Lost Nation jet turbine in Groveton ran for 50 hours during 10 days in January. By comparison, the same generator was online for a total of eight hours in 2012.

Murray said the debate has shifted from whether the region needs more energy infrastructure to how it’s going to happen, thanks to market fundamentals.

In a pricing twist, PSNH estimates that from December to February, by having its entire system available – including typically more expensive oil- and coal-fired plants – electricity was produced at a cost of $115 million less than it was sold through the region’s wholesale energy marketplace during peak periods.

Murray said the debate has shifted from whether the region needs more energy infrastructure to how it’s going to happen, thanks to market fundamentals

Even if the controversial Northern Pass project – proposed by Northeast Utilities (parent company of PSNH) and Hydro-Quebec – come online, it will add an estimated 1,200 megawatts of power for New Hampshire and the region, far short of the 3,600 megawatts needed to meet expected demand.

But the 187-mile project has been opposed by environmentalists and property owners because of the construction of an estimated 40 new miles of transmission lines and debatable economic and energy reliability claims.

“The fundamentals are pointing towards higher electricity prices,” said Scott MacDonald, chief operating officer of Unitil Corp. subsidiary Usource, the Hampton-based energy broker, which has more than 1,200 industrial, commercial and institutional customers in deregulated markets throughout the country.

Unless infrastructure and transmission capacity hurdles are addressed in the next few years, MacDonald said higher prices could become a fact of life.

Not unprecedented

There may not be much debate about future capacity needs, but as the state has seen during the Northern Pass debate, how to solve the capacity and reliability issues will be hotly debated.

The Conservation Law Foundation has challenged the economic, environmental and energy-supply claims of Northern Pass advocates and believes there are a number of smaller, incremental steps that together can make a significant difference.

“No infrastructure project being proposed will solve any problems next winter,” said Christophe Courchesne, staff attorney for the CLF in New Hampshire. “It won't make any economic and environmental sense to overbuild and to focus on large, prejudged infrastructure projects that benefit a few companies.”

He added that it’s clear that increased capacity will be needed, and that could mean more natural gas-fueled generating plants, more pipeline capacity and transmission lines.

But, he said, it’s important not to overreact to spot market price spikes and future capacity issues and lose sight long-term of environmental goals to deal with global climate change.

“We can’t give in to the anxiety that we need to have some type of grand solution,” Courchesne said.

MacDonald of Usource said he isn’t sure if potential future electricity supply shortages will have much of a policy, political or public relations impact on whether Northern Pass is developed.

“Is this enough to change what’s happening with Northern Pass?” MacDonald said. “I would tend to doubt it. Unless you’ve seen enough pain, you won’t see a change in public opinion.”

While increased energy-efficiency efforts and additions of renewable energy sources like wind and solar can help close the supply gap some, MacDonald said they would not be enough. “This is of great interest to our customers who need to plan and budget,” he said.

Even if and when they are approved, large infrastructure projects won’t be happening anytime soon. A refurbished, 692-megawatt natural gas-fired plant in Salem, Mass., won’t be online until 2016. A proposed 250-mile Tennessee Gas Pipeline Co. natural gas pipeline through western Massachusetts is meeting similar landowner and environmental opposition as Northern Pass and wouldn’t be ready until 2018 – the same year Northern Pass could go live if it happens.

The debate over solutions to deal with the region’s energy quandary is not unprecedented.

“We have a long history of high energy prices,” said Dennis Delay, an economist with the New Hampshire Center for Public Policy Studies, pointing to the region’s geographic location and its history of having many energy-intensive manufacturing companies.

While the industrial face of the region has changed, volatile energy markets have not, and the region remains vulnerable to the possibility of the kind of crippling shortages and brownouts that occurred in California in the late 1990s. That was a case of deliberate economic sabotage set in motion by energy traders at the former Enron, but Delay said businesses and the New Hampshire economy could be impacted by energy uncertainty.

“Big swings in energy prices are a microcosm, and businesses with high energy costs have to do something about it,” he said.

Delay, who once worked once for PSNH, said the debate over Northern Pass and how to add energy infrastructure in the region is being replayed.

“We had this same debate in the 1970s,” Delay said about the impact of oil embargoes and shortages in 1973-74 and 1979. “The debate then was how to do we move away from foreign oil imports?”

Four decades ago, there were two planned reactors at the Seabrook nuclear power plant, but political and public opposition to nuclear power in general and the financing mechanism in particular led to only one reactor being built.

The result: PSNH went bankrupt, and Seabrook was eventually sold to a Florida power company.

“Remember CWIP (charges to ratepayers for construction work in progress)? Nobody wanted to pay the surcharge to build Seabrook,” said Delay. “It’s ironic that we may see the same thing with gas pipelines, transmission lines and natural gas plants.”


 

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