Battle Brewing Over Renewable Energy & Natural Gas Subsidies
Thursday, February 05, 2015 4:40 AM
Just three months ago, state energy officials were warning that rising electricity prices would reach a crisis point this winter. With price shocks on the horizon due to higher natural gas usage for heating and electricity this winter, Massachusetts had already locked in a 37-percent increase in wholesale electricity prices. However, Maine fortuitously timed its solicitation for pricing bids just as oil prices began precipitously dropping. Last month, the Maine Office of the Public Advocate announced that standard offer electric bills will drop 13 percent in March. In December, New England's power prices were about half of what they were the year before, according to regional grid operator ISO New England.
One projection of natural gas price spikes during peak winter demand by engineering consultant Black & Veatch (Image from Governor’s Energy Office)
But according to Governor's Energy Office Director Patrick Woodcock, that doesn't mean we're out of the woods.
"With this decline in the price of oil, it has masked the problem," said Woodcock at a recent forum in Hallowell sponsored by E2Tech. "We can continue to use oil in New England, but the underlying challenges remain, and I think if there's one thing to impart: we are extremely susceptible to the pricing of oil with our electrical market. And that is a risky policy."
Although Maine has the lowest electricity costs in New England, like much of the Northeast, it suffers from higher-than-average energy costs. With no domestic fossil fuel resources - like coal, oil and natural gas - the region relies heavily on imports. Just 15 years ago, only 15 percent of the region's electricity generation relied on natural gas, but we have since transitioned nearly half of our generation to that fuel. And with the retirement of oil, coal and nuclear plants, ISO New England estimates that another 8,300 megawatts of generation capacity will be lost by 2020, which it says would require another 6,300 megawatts of gas-fired capacity to replace them. At the same time, according to Maine Public Utilities Commission (PUC) Chairman Mark Vannoy, new EPA carbon pollution standards will require the region to transition to cleaner power generation.
"The fundamental generating unit that the plan works around is a combined cycle gas turbine," said Vannoy. "So we will see further pressure to move generation away from coal and oil to gas-fired combined cycles."
But while the recent natural gas boom has led to record low prices at the wellhead in the past few years, the LePage administration maintains that New England does not have enough pipeline capacity to take full advantage of the low costs. During peak demand times in the winter, as gas flows into New England for heat and electrical generation, congestion occurs. That allows pipeline owners to charge a premium for pipeline usage, which causes our electricity prices to spike.
If this cost difference, known as the "basis differential," could be reduced by 75 percent it would save Maine electricity customers more than $120 million a year, according to a study conducted for the PUC by Sussex Economic Advisors. And one way to do that, according to the LePage administration, is to charge electric ratepayers up to $75 million a year to subsidize construction of new natural gas pipeline. The PUC has been considering a proposal that would authorize the commission to buy up to 200 million cubic feet per day of pipeline. However, in order to alleviate the burden on Maine ratepayers, state energy officials would prefer to spread that cost throughout the other states in the region with an initiative being considered by the New England States Committee on Electricity (NESCOE).
Through NESCOE, the six New England governors have outlined two energy objectives: Maine wants natural gas, and Connecticut, Rhode Island and Massachusetts want renewable energy in order to meet strict carbon reduction targets. In addition to subsidizing the proposed natural gas pipeline, a regional multi-state plan would also help finance the transmission of power from local wind projects and large Canadian hydro plants. One proposal, the Maine Green Line, developed by Massachusetts-based Anbaric Transmission and utility giant National Grid, would move up to 2,800 megawatts of power from Maine to Massachusetts through buried land lines and undersea cables.
Lower Prices Put Pipeline Proposal in Doubt
However, plans for a subsidized pipeline have been widely criticized by environmental groups who argue that Maine should not invest so much of its resources in a volatile commodity that could put ratepayers at risk of much higher costs down the road.
Maine Conservation Law Foundation says that there's no need to build out a massive pipeline infrastructure that will be here for several decades when technical fixes appear to already be solving some of the pipeline problems.
"We've been told that, until that billions of new infrastructure comes online, households and businesses would pay devastatingly high electric bills," wrote CLF Senior Attorney Christophe Courchesne on the organization's website. "So far, this winter has shown that the payoff on this multi-billion- dollar bet is far from assured, and likely to be much less than assumed from last winter's experience, as it's not clear how much new infrastructure we really need and the region is already saving a great deal without new mega-projects."
Courchesne argues that the real issue last winter was not inadequate pipeline capacity, but rather a failure to properly coordinate fuel supplies, find efficiencies and implement market reforms to lower natural gas costs. He said that LNG imports through existing terminals have likely helped offset higher pipeline costs as global LNG prices have dropped to compete with oil prices. In addition, critics point out that increased LNG imports can hold down prices until additional privately financed pipeline can be built without subsidies. Spectra Energy has already planned to begin construction in 2016 on its existing Martimes & Northeast pipeline to bring in an additional 342 million cubic feet a day, which could relieve some constraints.
Vannoy acknowledged that recent regulatory changes had improved the situation, but said that there is still a "fundamental imbalance" between gas that is available and the gas needs of the region. He said during cold spells, a lot of oil and coal plants are still being ramped up to offset peak demand.Janet Gail Besser of the New England Clean Energy Council maintains that while any proposed subsidized pipeline project likely wouldn't begin for another four to five years, deploying energy-efficiency measures in homes and businesses along with locally distributed renewable energy like rooftop solar could be much more effective at reducing demand for natural gas now and in the future.
"Customers can't wait four to five years for a solution to high electricity and volatile prices," said Besser. "Clean energy is an essential component of any way in which you want to address high electricity prices, and it's the only long-term, sustainable solution."
She said that the most expensive generators are kept running for just a few hundred hours a year at peak times, but the prices set for those hours are often expanded to all generators, which leads to much higher costs. She said Maine should be looking at incentives for customers through "demand-response" systems to reduce energy use at peak times. Besser said Maine could also follow states like New Hampshire, which provides thermal energy credits for customers using renewable heating options like wood pellet boilers, solar water-heating panels and geothermal heating and cooling systems.
Renewable Energy Standards Under Assault
While NESCOE continues energy talks, it's unlikely Maine will go it alone on natural gas pipeline expansion, but the LePage administration and its allies have promised to make energy policy a centerpiece in a series of other initiatives this session. Specifically, the governor will likely back measures sponsored by Senate President Mike Thibodeau (Waldo County) to weaken clean power incentives that are already in place, such as Maine's Renewable Portfolio Standards (RPS).
Maine's RPS law requires that utilities purchase at least 30 percent of the state's energy from renewable sources, including wind, solar, biomass and hydro. In 2013, over half of the state's net electricity generation came from renewable energy resources - with 29 percent from hydro, 25 percent from biomass, and 7 percent from wind, according to the U.S. Energy Information Administration. However, the LePage administration has challenged a provision in the law that requires that renewable generation facilities contributing to the mix, with the exception of wind power plants, must be under 100 megawatts. Woodcock argues that the playing field should be leveled for all renewable power to take advantage of the RPS and that the current law is preventing the state from procuring cheaper, subsidized hydro from Canada. He added that Maine's RPS is not a driver for renewable energy growth in the region because wind power developers are more enticed by federal tax credits and RPS laws in other states.
"I have not spoken to one developer for the last two years that had said that they count on the Maine Renewable Portfolio pricing for investment in the state of Maine. Not one," said Woodcock. "Every single one of them have obtained contracts through Massachusetts and Connecticut."
He said that the total cost of Maine's RPS is about $12.4 million, or about 50-55 cents on the average monthly electricity bill. Schneider, the Public Advocate, acknowledged that the costs are "not huge," but said they are "real."
Last session, Gov. LePage pushed hard for a bill to lift the 100-megawatt cap in the RPS, but faced stiff opposition from the state's paper mills that have invested heavily in biomass plants, which benefit under the RPS. The mills, along with renewable energy companies, argued that the measure would change the rules of the game after they had invested millions. They said large Canadian hydro plants could crowd out the smaller players. They also pointed out that Hydro-Quebec operates several hydro plants smaller than 100 mega-watts that can already sell hydro to Maine if they want to.
At the E2Tech forum, Jeremy Payne of the Maine Renewable Energy Association added that Maine's RPS has very little impact on electricity costs.
"Let's be blunt. If we have a high RPS, we have the 12th highest electricity costs in the nation," said Payne. "If we do not have an RPS, we have the 12th highest costs in the nation. Anybody who tells you that this is a significant cost driver, I believe, is misleading you."
He said renewable energy could provide a valuable hedge against the volatility of fossil fuel prices, as the prices of wind and solar don't spike and are actually trending downward.
"The cost of a wind farm is the same on day 1 as it is on day 20," said Payne. "That is a good resource that we ought to be promoting, because it's pricing certainty."
He pointed to a 2011 London Economics LLC study, commissioned by the PUC, which concluded that "New England's RPS policies and Maine's significant resource potential have led to a large amount of renewable power development in Maine." Another study released in September by the Maine Technology Institute found that Maine's alternative energy industry is one of the fastest growing sectors of the local economy, with job gains of nearly 12 percent from 2007 to 2012. The MTI report predicted the sector would grow by 4.7 percent through 2022, outpacing national growth rates by 2.3 percent. The report also noted that alternative energy has the highest average wages of all of the technology economy clusters it studied, with an average of $74,091 per year.
Payne also highlighted a recent study conducted by economist Charlie Colgan and the Maine Center for Business & Economic Research at the University of Maine, which found that wind companies will have invested nearly $1.3 billion in Maine between 2006 and 2018. The report stated that by the end of 2015, wind power will have created 4,200 jobs, with over $1.14 billion in wages paid to employees.
"Clearly we have already gone down the path of natural gas, but basically all of our clean energy investments have happened in rural Maine," said Payne. "These are areas that are starving for investment and starved for employment. This is a billion-dollar industry that is here today, and if we're not careful, it may not be here tomorrow."