In 2008, average New York statewide DELIVERED electricity prices were close to 16.4 c/kw-hr - composed of 8.3 c/kw-hr for NYISO (generated) prices and 8.1 c/kw-hr for transmission and delivered (T&D), which has many components (connection fee, transmission, sales taxes, Systems Benefit Charge (NYSERDA funding), as well as demand charges). In general, T&D charges tend to be fixed, while the NYISO price can fluctuate wildly. The NYISO price is often a mix of the intersection of the demand for electricity (weather, day and time dependent) and price of fossil fuels, especially fuel oil and natural gas, and to some extent, how much electricity wind turbines are dumping into the system (can be up to 8% of NY's supply, but 20% in certain NYISO zones). And those fossil fuel prices tend to be priced based on factors that NY customers have little control of, either individually or collectively, though over time, the only way to keep prices of these fossil fuels (the US imports about 2/3 of its oil, 1/6 of its natural gas) reasonable is to not use them.
As a result of the collapse in 2008 of manufacturing in NY and in general, throughout the U.S. (partly a result of the high prices charged for oil and natural gas in the 2007 to 2008 time period), electricity demand has dropped to unexpectedly low levels. Demand for electricity nationwide has SHRUNK, not expanded at the average of 1 to 2% per year. This means that more electricity supply is chasing after fewer customers, and this small drop in demand has resulted in huge drops in price. For most of NY State, NYISO prices have been averaging less than 3 c/kw-hr, and in Western NY, (Zone A), prices have averaged less than 2.5 c/kw-hr. This is a regional phenomena - Ontario has even cheaper prices. One related factor is the collapse in natural gas (Ngas) prices to levels less than 50% of the price needed to justify new drilling, even in existing gas fields. Ngas is used to make 20% of the U.S. electricity (from about 28% of the US usage of 23 trillion cubic feet (tcf) per year), but in NY, that can be up to 60% of the electricity supply. However, in Western NY (and NYISO Zone A), most electricity is supplied by coal made in fully paid off/depreciated facilities.
But, prices are now far below the replacement costs. That is, no new power plants (wind, hydroelectric, run-of-river, tidal, Ngas, coal, Ngas, nuke or biomass) can be constructed and break even, let alone be profitable at current electricity prices. Thus, hopes to replace existing polluting facilities can never be realized until something changes - either a Feed-In Law, a decision by NY State to go into the electricity generating business (again), massively increased subsidies or higher prices.
Cheap electricity prices are supposed to be wonderful events. After all, the cost of living/everyday expenses are supposed to drop as NYSIO prices drop, right? Actually, this tends to happen to an insignificant extent for most customers. For example, last month, my electricity bill was 18% NYISO power and 82% other - a whole $9/month would have been saved if the generated electricity was too cheap to meter (a claim used by nuke proponents eons ago). And there is a downside - no new employment in the manufacture and installation of newer, less polluting power plants can take place. Thus, existing employment in many industries is actually threatened, making a dreadfully high real unemployment (and not just the phoney "official" value known as the U3 number) level even worse, and perhaps permanent unless some real changes in the rules takes place......
For example, lets take the wind industry. Let's say that the wind farm under consideration uses GE 1.5 MW turbines, and each turbine in this array makes about 4,000 MW-hr/yr. If the value of the fixed costs (land lease, PILOT fees, insurance, warranty, technicians wages, other business expenses - the O & M value) is about $80,000/yr, this amounts to about 2 c/kw-hr for the wind operation. That leaves a whole 0.5 c/kw-hr to retire the capital investment and pay the investors some return on their investment. The 0.5 c/kw-hr works out to $20,000 per year. Since one of these units costs about $3,000,000 installed, the net income would be 0.067% of the capital investment. However, at minimum, just to cover principal and interest, 8% per year of 70% of that $3 million investment (or $168,000/yr) would be needed - leaving the investors with zip. That trend is just not sustainable.
Well, lets make it a little less glum, and we'll stipulate that the windfarm owners won a portion of the RPS auction, at 1.5 c/kw-hr. This gives them another $60,000 in income (done in a Feed-In Law like manner by charging all customers in the state a smidgen based on the amount of electricity consumed). So, adding in the other $20K, they only lose $108,000 per year, in addition to getting a zero return for the investors. Obviously, those investors could not be deemed as happy campers about that situation. They put down $900,000 per turbine, and some of that money could have been borrowed or otherwise leveraged. And they are not likely to repeat such an investment given that experience. Odds are, they were promised between 10% to 15% returns, or up to $150,000/yr, and that does not appear to be happening.
Of course, in the U.S. arrangement, there are subsidies offered to try and equalize the subsidies offered traditional electricity generation (military protection to foreign oil suppliers, free CO2 pollution service to fossil fuel combustors, free catastrophic insurance to nuke owners, and essentially a pass on nuke rad-waste disposal - especially the spent fuel rods). The U.S. subsidies range from the NYS Renewable Portfolio incentive (RPS via NYSERDA auction, last worth about 1.5 c/kw-hr) to the federal incentives of rapid depreciation (MACRS), worth about 3 c/kw-hr for the initial 10 years), and the Production Tax Credit (PTC), now worth 2.1 c/kw-hr. These last two incentives assume that the wind turbine owners or "psuedo-owners" - owners for a ten year period of time - have other income sources, whether active or passive income. The incentives are based on allowing the wind turbine owners to rack up huge paper losses or credits, and then the losses/credits are redeemed in the form of less taxes paid on those other income streams. In effect, if done correctly, the Federal government will "buy" about 2/3 of the wind turbine in the form of tax deductions (MACRS) and tax credits (PTC) over the initial decade of operation in the form of taxes on other income not paid.
However, the "Black Swan" question is whether or not that external income exists. After all, wind turbine project owners have to anticipate things up to a decade in advance. And stuff happens, like recessions and psuedo-depressions. So one way around that problem is to hedge that future income stream, but that also comes at a price (as in yearly "insurance" payments to the "hedgee" from the hedger). When times are good, and the possibility of financial calamity is deemed small, hedge payments will be chump change. However, hedge contracts in 2007 versus hedge contracts in 2009 are like a tale of two different worlds. It may not even be economically possible to hedge future income streams at affordable prices any more.
Hedging future taxable income is not the only possibility - hedging future electricity prices also used to be possible. This would be a bet between the wind farm operator and the bookie (such as Goldman Sachs or JP Morgan, two major investment banks/gambling houses). In this way, the wind farm operator pays a small annual fee to assure an adequate income stream, and the bookie stands to gain big if electricity prices rise, or lose money if electricity prices fall below a set agreed upon price. For the late 2008 to 2010 period, it looks like some of these "bookies" are going to be major money losers, unless they too hedged their bets. Ad infinitum...and each hedge takes another bit of money from someone to pay the fees to set up such contracts, as well as to pay the financial insurance. And then there are the bets taken out as to whether the hedge deal will fail....also more "golden crumbs" for someone (a "Bonfire of the Vanities" reference), which will eventiually translate into higher electricity prices for customers, or bankruptcies and/or government bailouts for others.
Let's say that all of NY's wind farms used such hedges, set at 6 c/kw-hr (this is just an example, and the extent of these/value of these may be impossible to find out, as they are private deals, and often unregulated). With current prices averaging 3 c/kw-hr, that means a net loss of 3 c/kw-hr. There is about 1290 MW of wind turbines operating in NY, and on average, they should produce about 30% of their rated capacity, which translates into an average of 387 MW, or 3,392,442 MW-hr/yr. The 3 c/kw-hr is the same as $30/MW-hr, so the loss to SOMEONE is about $101 million/yr. Just how long can the $2.5 billion of wind turbine investments in NY lose at least $101 million per year before Wall St renders a "no dice" verdict on further wind turbine investments in NY State?
Not long. After all, it's a short term view that tends to rule Wall Street, especially among the gambling class who rule such Gaming Houses such as Goldman and JP Morgan. Those firms do not exist to lose money, and they are very clever at not losing money/extracting money from others so that they do not lose money. A great example of this is how the CEO of Chesapeake Gas lost $2.1 billion in some hedge bets on Ngas in the summer of 2008 with JP Morgan when Ngas prices collapsed. Oops.
As for now, try and hedge future income streams (the ones needed to make the MACRS/PTC work) these days. Or hedge future electricity prices at 6 c/kw-hr set prices. No way is that going to happen except at prohibitive fees, which would render such investments meaningless. Thus, the NY State electricity Market Casino (NYISO spot price) has spoken. No more wind turbine projects for some time. And that translates into no Green Jobs in manufacturing these systems, components for these systems, or installation jobs. As for those who don't have the income streams any more (for example, the landlords of the Bear Stearns and Lehman Brothers office buildings in NY City, of former big time stock owners/bond holders of General Motors....GM will always pay dividends, right....?), and who were counting on offsetting the taxes paid on those income streams to pay off the wind turbine investments....oops, too. Some appreciable fraction of the 5 c/kw-hr of MACRS + PTC subsidy is at stake, worth up to $160 million/yr.
In retrospect, basing wind turbine financing on such a house of cards/sand castle on the beach arrangements seems quite foolish. Who could foresee such a confluence of events similar to the sub-prime mortgages? Actually, a lot of progressive economists (Paul Krugman, Joseph Stiglitz for starts) and bloggers who comment on Peak Oil and/or economics/class warfare/income disparities did. But, getting the attention of "The Village" (idiots?) - another term for the Main Stream Media, alias MSM - requires something like compromising pictures of the corporate leaders of the companies that own "The Village" with, say, cuddly farm animals. Not all of them are that dumb or wretched, and the rulers of the Village have, up till now, made a lot of money for now, so there is that explanation for their control of much of what we see, hear and read. And even the nefarious Rupert Murdoch is now losing money, though that still pales as a punishment for "all the wrong that he done". But while times were good, lots of wealthy people were making lots of money setting up the ultra-complicated business structures and financing arrangements for such deals, and this was deemed good, as it kept the prices of wind derived electricity lower to the tune of 5 c/kw-hr for a while. It was like "money for nothing", in this case, "energy for nothing", as it was based on the "kindness" of some of those in the top marginal income tax brackets. But, just like in Thermodynamics, there is no free lunch (in Thermo, it's referred to as "no such thing as perpetual motion devices").
Now, wind turbines are not the only form of energy production affected by the currently depressed prices. In fact, no new electricity manufacturing facility is profitable at a selling price for the product - electricity - at 2.5 to 3 c/kw-hr. For example, the favorite of financeers until recently, combined cycle Ngas burning plants, are also in the same boat, even with Ngas prices in the septic tank (alias "honey pit" for those in the hauling business). The cost to make electricity at such a facility in cents per kw-hr is about 1.5 c/kw-hr plus 0.68 times the price of Ngas in $/MBtu. The Ngas price is roughly equal to the Henry Hub price (select the Ngas option) plus $1.30/MBtu (that is the pipeline transport cost). So, if Ngas is listed as $2.70/MBtu, the delivered price would be about $4/MBtu. The cost to make electricity would be about 4.2 c/kw-hr, and that just avoids LOSING money, not making a profit. Who would invest $80 million to $800 million just to NOT make money? Anyway, no financeer/banker is going to loan money for that kind of stupid. And then there is the replacement cost for that Ngas....currently about $8.20/MBtu, unless expensive gas shale operations are considered, where it is even higher. New gas based electricity costs at the Ngas replacement price would now be 8.3 c/kw-hr, and more like 10 c/kw-hr once a profit and Ngas price buffer/hedge is added in. That's a far cry from 2.5 c/kw-hr....
As for nukes, the going capital cost for a pair of 1 GW ones in Ontario this year was $10.8 billion each, which translates into $12 billion per delivered GW operating 90% of the time at full rated capacity. Offshore wind is a better investment than that.....electricity prices greater than 20 c/kw-hr would be needed to justify such investments. Even coal burners, which now average around $3 billion/GW for the plant, are bad investments. Then, add in the cost of stashing the CO2 trash, or the so-far miniscule CO2 pollution fees (cap and trade, RGGI), and the uncertain nature of coal prices ($40/ton or $160/ton? who knows...). At least 11 c/kw-hr would be needed.
In fact, any kind of capital outlay renders a new electricity generating facility as overpriced in NY's NYISO Casino, at present. Only those facilities with essentially no capital costs (either they get paid off by governments, or else they are so old the capital has been at least paid off - often paid off several times) can hope to remain economically viable with collapsed electricity prices. And it will take a considerable bit of time at high electricity prices before such investments are considered low enough risk to even be considered for financing. That means those whose jobs are based or hoped on new power plant installations or manufacturing of such components will have to look elsewhere for a while, or until NY develops a price stable electricity market. The NYISO system - a Milton Friedman "free market" intellectual wet dream if there ever was one - has killed the goose that lays the golden eggs. So, installers and manufacturers will need to look to Ontario and Quebec for a while, until the wreckage of variable pricing is cleared away. Variable electricity pricing is made for variable fossil fuel (which makes the electricity) prices/fossil fuel based electricity production. If we move to a system where such obsolete and climatologically ruinous approaches are no longer used, we won't need the variable pricing to any significant extent. One advantage of going to renewable sources is that we can get away from such undependable prices. And Peak Oil virtually guarantees significant variability in fossil fuel prices as we near or stay atop the maximum production rate of oil - in fact, increasingly variable pricing - peaks and crashes, and not much in between. Once the inevitable production rate declines set in, we really won't have to worry much about variability in oil prices - only whether we can afford the stuff.
One of the hoped for situations among environmentalists was that non-polluting electricity production could be installed at a decent pace to replace the old polluting sources - coal, oil and natural gas in particular. Or, if electricity demands kept increasing, that all the newly installed capacity was renewable - gradually increasing the percentage of renewables. In NY, the NYISO pricing system was thought to be capable of sustaining this transition. It was a nice wish, only possible during an economic expansion. And so painless - all subsidized by letting some rich people avoid paying some of their taxes, so long as they invested in renewable energy projects.
But, not so fast, Bunky. We've had a reality intervention, since the NY State economy was based on the Wall Street Casino, which was basically screwing lower and middle class homeowners, as well as investors from around the world with unsustainable debt, bogus financial instruments based on that debt and then more hedging on whether those debts could be paid (that cost AIG --> U.S. taxpayers $180 billion just for AIG), with fees used to pay those humongous Wall St bonuses ($33 billion in 2009 alone.....!!!). As a result of this, and even dumber things like the IraqNam war of choice, there is no money available to subsidize electricity prices for renewable energy investments, now that economic collapse has led to electricity demand drops and electricity price collapses.
A Green Energy strategy to re-power NY, and to stimulate manufacturing in the state IS possible, but will not happen by accident. It must be deliberately crafted, and the money for the renewable investments must come from electricity users, amortized over an extended period of time, not the less than broke state and federal governments. But such investments can only be affordable if the financial risk is minimal (it never goes away, but it can be minimized), as otherwise the loan payments on such investments become so onerous that the investments just won't happen. There is over $130 billion of investments needed to replace the Ngas, oil, coal and nuke based electricity generation in NY alone, and that translates into hundreds of thousands of direct and indirect jobs. Or zero jobs if we just float along with NYISO variable prices, just constantly spinning that roulette wheel hoping Red 19 comes up.....
So, it's not just the economics that look ugly. All that CO2 pollution that could have been prevented by installing wind turbines and shutting down Ngas, coal and oil burners will also not happen. A two-fer of tragedy, so to speak. And something that needs to be rectified.
Top News of the Week, 28 Nov – 04 Dec 2016
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