Monday, January 14, 2013

Electricity Pricing in WNY: Gentleman, Place Your Bets

So who would design a pricing system for electricity that is best described by that roulette wheel? Well, there was a guy named Ken Lay (alias "Kenny Boy" Lay) who eventually owned a major gas pipeline company that evolved into a major perpetrator of fraud (Kenny Boy got convicted but died before doing time) and he helped design such variable pricing "competitive" systems. But NY State (and lots of other states like California (Enron robbed California and California businesses/residents something silly)) also went for the idea, which is embodied in the NYISO "marginal based pricing system" where hourly bids set the price of electricity... It turns out that such pricing schemes can be easily scammed in numerous ways (one of the reasons Kenny Boy was pushing so hard for their adoption as an electricity pricing system), especially in conjunction with natural gas suppliers and pipleline owners, as well as willing and able (to commit widespread fraud) accounting firms and big banks. SO, no wonder Kenny Boy was such a champion of "competitive pricing systems". His fraudulent scheming - which also made him very, very rich - helped send California (and the US) into a major recession in the 2000-2001 time period...

If you know where to look, there is a lot of useful data to be obtained about all kinds of subjects, and this definitely holds for WNY's electricity pricing and consumption. One example of these free data sources is the NYISO website (, where many of NY's electricity statistics (price, usage and much more) can be found. If you want to find out what the average price was for electricity in terms of what was paid to those who made it, NYISO is where you will find that answer, though it may not be prominently displayed. It turns out that we paid a relative pittance to those who make our electricity in 2012 - an average of 3.1 c/kw-hr. That is, for a dollar, you could heat ONE TON of water 54 F, or pump 32 TONS of water (7674 gallons, or a 10 foot cube of water) upwards 1060 ft, at least if you could access the prices paid to those who make electricity. However, by the time most people get their electricity, it costs around 15 c/kw-hr, so to pump that much water that far up to the top of a big hill might cost you 5 bucks… Anyway, that's a lot of work which could be done for you for a very low cost….

But, much like the NY Lottery, when it comes to picking the right numbers (as in, what will the average price for electricity be next year or 20 years from now on any given day), well, the operational line is "Ya never know" for NY State. Right now, electricity is amazingly inexpensive, at least with respect to how much is paid to those who make it. Especially compared to gasoline; the energy in one gallon of gasoline (118,000 Btu or 34.6 kw-hr) costs about $3/gal in bulk ($3.75/gal retail, for now), but that is only one dollar in bulk electricity prices, though to power a motor, a dollar's worth of this cheap electricity is equal to about $12 worth of gasoline at $3/gallon (100,000 gallon quantities)…

However, getting such a windfall of energy for such a low price also comes at a cost. For WNY, there is only one way that such low priced electricity can be made at anything close to that price, and that is by burning low cost coal in fully depreciated equipment while paying nothing for the proper disposal associated CO2 pollution trash. Quite frankly, natural gas is just TOO expensive a fuel to compete with  coal under current pricing arrangements. Delivered coal prices, when expressed as dollars per unit thermal energy potential, are around $2.40/MBtu (million British Thermal Units), while delivered natural gas has been priced at around $4.50/MBtu, despite the fact that a price of close to $10/MBtu (delivered) would be needed to allow most fracking based natural gas wells to be modestly profitable (and the industry likes and is used to profit levels well past "modestly profitable", so "barley profitable" just doesn't cut it). And while hydroelectricity made at the Niagara Power Project (NPP) is much cheaper to make than that from either coal or natural gas (NPP electricity costs something like 0.2 cents/kw-hr to make, or around 6% of the bulk price for coal based electricity), the cost to make NPP electricity is essentially irrelevant to what sets the price of electricity in WNY.

In the eight counties that make up NYISO Zone A (West Zone) - all of Niagara, Erie, Chautauqua, Wyoming as well as most of Orleans, Genesee, Livingston and Cattaraugus - electricity consumption averaged 1777 MW in 2012. The price paid to generation owners averaged $486 million for the year, though afterwords, some financial machinations happen to make that even lower. For example, all of the municipal electric utilities (like Jamestown and Arcade) get much cheaper electricity (from Niagara Falls via the Niagara Power Act of 1957) than most WNY customers get - one of the benefits of municipal ownership of the electricity distribution monopoly. But for the roughly 1 GW of WNY coal based electricity, the 80 MW of natural gas/trash/landfill gas based and 85 MW of wind turbine sourced electricity, 3.1 c/kw-hr is all they get… In some cases, the generation owners get extra money via what are known as "bilateral agreements", and there are tax avoidance based subsidies as well as tax based transfer payments (the NY Renewable Portfolio operates in such a manner), so these owners are somewhat shielded from the dire predicament of collapsed electricity pricing. Meanwhile, the coal, trash and gas burners get special payments known as ICAP and UCAP.

If previous years are any indication, we exported around $180 million/yr to import coal and natural gas that is subsequently converted into electricity worth $486 million/yr and about 8 megatons of CO2 pollutant (but hey, CO2 pollution only costs electricity consumers (via the RGGI psuedo-tax) $1.80/ton of CO2 pollutant, so it is barely noticeable). Even Alberta, the most pollution intensive province in Canada, puts a cost of$15/ton for CO2 pollution for bulk emmanators of this pollution.

So what could be obtained with payments of about $180 million/yr, plus the multiplier effects that happen when the $180 million/yr stays local? An interesting question, but one that few in this region ask; mostly we hear about complaints of the ~ $14 million/yr that is paid out for the RGGI psuedo-tax (and a lot of that from coal using companies). The RGGI might add 0.2 c/kw-hr onto consumer electricity bills, but since these fees tend to get passed along to the electricity consumers, it does not affect the two major coal users in the region, NRG and AES. Oh well, most of the RGGI income stream is supposed to go for worthwhile energy conservation or efficiency improvements…..

So what would it cost to replace the coal sourced electricity with either wind turbines or photovoltaic generation sources? It turns out that PV is absurdly expensive compared to the breakeven prices for coal OR natural gas sourced electricity, and wind is not much more that what the historical average (~ 5.5 c/kw-hr) paid to generation owners in WNY has been. However, what was paid for electricity in 2012 was the lowest recorded in the 12 years in which NYISO system has been operating. For the last four years, we have been experiencing the results of the collapse in economic demand that caused as well as resulted from the Great Recession in 2007, and which lingers on in WNY to this very day. Electricity demand functions as a pretty good indicator of regional economic output (= heavily impacted by industrial output, which is where almost all real wealth created in WNY comes from). Last year, electricity demand was essentially unchanged from 2010 and 2011, so economic recovery really has not visited WNY much (though things could be worse), and especially to the extent needed. 

To make 1080 MW on an average basis (that made by coal and natural gas), about 2700 MW of Low Wind Speed Turbine (LWST) capacity, costing around $6.75 billion, would need to be installed. Since this is a long term investment, this should be done like a typical person who buys a house - mostly with loans and equity (stashed cash) suitable for a minimal risk of repayment default. With low risk financing (= minimal probability on non-payment on loans), about 8% of the investment would need to be paid out each year to the lenders/investors for each of the next 20 years. Thus, electricity customers would be paying around $634 million/yr for this wind power (versus $295 million/yr for coal based electricity for 2012). For a more typical year where electricity was priced at 5.5 c/kw-hr, this is close to (but a bit more than) the same yearly cost ($521 million/yr)…. oh well, these are very large numbers, formed by relatively small changes in price multiplied by even bigger power consumptions…

To make 1080 MW for PV, a PV capacity of 10,200 MW would be needed; a lot more electrical energy storage than with wind also would be required (wind generally blows at all hours, while PV is generally only useful for about 8 hours per day). While installed prices for PV systems have dropped in many parts of the world, installed rates in the US have not dropped as much; this may be due to the way the subsidies for PV are arranged (based on the price of the system and not the annual energy output). Last year the average installed cost in the US was ~$5 million/MW of capacity in much of the US, though in NY State the official number is $7.53 million/MW (see The $51 billion needed to install so much PV capacity (a variety of sizes, places) is probably more than most are willing to pay; even half of that (super cheap PV installs) probably sets off alarm bells of panic for many electricity customers. Payments on a $51 billion PV investment to make the coal portion of our electricity would be 4.08 billion/yr (almost 14 times the present amounts paid for 1080 MW of electricity), and at a mere $25.5 billion investment, well, that's still $2.04 billion/yr (~ 7 times what is now paid for that electricity). And while such price increases would need to be phased in, there is no cure for the CO2 pollution "disease" if the transition from pollution based to renewables is not done in an expeditious manner....

Anyway, despite the massive cost differences, neither kind of renewable energy development can occur unless low cost financing is possible, where both the short term and the long term pricing insecurity is "made secure". This "casino pricing" for 2012 is shown below:

In all likelihood, no one will be loaning or investing $6.75 billion or $25.5 billion of $51 billion for a project involving renewable energy unless the prices to be paid on the projects to provide that energy are defined and agreed upon. There may be a minute fraction of "gamblers" who might take on some of the risk, though these would be heavily subsidized risks. A better way to destroy potential renewable energy development whilst having the plausible deniability of being "pro-green energy" may never be invented - all that needs to be done is to keep the future price of electricity "insecure"and renewables get blocked from the NY electricity grid. And since renewables can't provide the needed electricity for WNY, looks like we either stay hooked on coal based or else we migrate to fracking based natural gas as the source of our electricity (gas based generation accommodates variable pricing better than most other kinds of electricity generation).  Some choice, eh?

While present-day prices for generated electricity are absurdly low, what are they likely to be? "Ya Never know" as a pricing philosophy adds several percentage points onto loans for wind turbines in NY State, and this adds several cents/kw-hr onto needed prices for wind turbine projects, assuming that they even can be financed. And for what? This question turns out to be a very important one with respect to the future viability of renewable energy in NY State. Wind turbine owners need a long term stable price (in effect, a straight fat line on the graph) - after all, the cost to make this wind based electricity does not change over the next 20 years or so, and thus the price for that electricity does not need to change, either. This is a complete contrast to fossil fuel prices; since 2000, natural gas prices (and thus coal, because coal prices are affected by gas prices) are anything but stable. And for the last four years, natural gas has been selling below the cost to extract this from most fracking based gas projects.

Of course, there always is the biomass option. $180 million/yr would buy around 3 million tons/yr of biomass, which could be burned in the present coal burners after they get slight upgrades to burn biomass. But the longer term future for biomass is probably as a substrate for liquid fuels and chemicals, or to provide large scale industrial heating once natural gas once again gets priced in a way that couples methane to crude oil. But it's an option that could also benefit from fixed prices for electricity - long term power purchase agreements also rule for biomass, both in terms of the biomass price and the price for energy derived from that biomass.

So in the meantime, what of all the economic prospects for money making on $6.75 billion or so worth of new capital investments in WNY, or of some fraction of the 100,000 job-years of direct employment that goes into making commercial scale wind turbines? What about all the jobs that are "spin-offs" on the direct jobs. Well, what about them? If you want them, you'll have to vote for them by electing leaders who will get rid of casino pricing for renewable energy projects. It does not matter that casino pricing for renewable energy is illogical, counter-productive and that it actually RAISES the cost to make renewable energy - in fact, that is what the fossil fuel proponents consider a virtue. Actual political, cultural and social work is required to get rid of the pestilence of casino pricing for renewable electricity; without this work, the variable pricing where it does not belong will remain in effect. Without sensible pricing systems for renewables, WNY really won't ever be all renewably powered, at least in the electricity sense, until the fossil fuels get tapped out and they become so obscenely expensive that few can afford to use them. And we in WNY will continue to bleed money for imports into our region for fossil fuels to make electricity.

And we will continue to pollute our atmosphere with greenhouse gases, because maybe our climate just has not been whacked out of kilter enough.....? Although if you ask the people in the NY City metro region these days, after Frankenstorm Sandy came breezing through town maybe they are ready to deal with Global Climate Change, and that which is mostly responsible for those changes - CO2 pollution from burning fossil fuels. Of course, no one in control of mass media is likely to grant access to those pointing to the damage that casino electricity pricing does the prospects of significant renewable energy installations that could "put to bed" all those natural gas and coal burners in the near future, but that just makes it more of a challenge. Consider it the legislative and ecological equivalent of climbing Mount Marcy - the tallest mountain in NY State. Life was just too easy here in WNY, with our outrageously cheap electricity and outrageously high real unemployment rates, anyway... BTW, while this is only ~ 5200 feet above sealevel, climbing this mountain is a lot of work and probably beyond the capability of most people now living in NY State.....

Of course, if we all collectively sit on our laurels, for several years we'll probably have mighty cheap prices for electricity (that is, the generated part of the electricity, as delivery is still apt to be quite pricey). And of course, that really does not do much for job creation in the real economy; those much desired new jobs come from increases regional and national macroeconomic demand, and mostly what we are seeing in that area is shrinkage these days. But our leaders have decided that cheap electricity is better than jobs involved in manufacturing renewable energy systems. Changing that situation means changing the casino pricing system for renewables, as well as the idea that the price of renewables gets set by the prices of pollution based energy (coal, nukes and natural gas). Heck, this may even require going back another step and changing some and/or most the politicians who make these rules, and/or who appoint people who set these rules. Ugh… But, ya gotta do what ya gotta do….

Roulette Wheel image:
Mount Marcy picture:

1 comment:

Joel Huberman said...

Good article, David. I hadn't previously thought about all the negative consequences of our electricity auction system. By the way, I, for one, have climbed Mt. Marcy.


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