Deregulated Electricity Market in Massachusetts is in Danger

Gov. Baker recently filed a bill in the MA Senate that would mandate Massachusetts (MA) Investor Owned Utilities (IOUs) to purchase nearly 40% of their supply via Long Term Contracts (LTCs) with hydropower generators (aka Hydro Quebec and/or Nalcor). Although the bill does have some provisions for participation of traditional renewable energy resources, this bill is primarily designed to favor large hydropower (and provide statutory authority for MA to participate in the multi-state Clean Energy RFP  - learn more at DPU 15-84). This bill should be extremely worrisome for any large energy consumer in MA as it will have the side effect, intentional or not, of destroying the deregulated retail electricity market in the State.

Although the bill was filed with the ostensible objective of helping MA comply with the Global Warming Solutions Act (GWSA), its important to note that the ISO-NE deregulated power market has become much cleaner over the past several years through market forces acting to close older coal and oil fired units. In essence, the market has pushed out many carbon intensive generation facilities and will likely continue to do so. As a result, State intervention isn't required to de-carbonize the ISO-NE grid as market forces, RGGI, and Renewable Portfolio Standards (RPS) have been doing the job and will continue to do so. If MA was really serious about enforcing the GWSA, they'd take a hard look at transportation policy, infrastructure, properly fund public transit, and raise the gasoline tax...........but that would require political courage and its much easier to mess with the power market b/c almost no one understands it.

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This bill and the push for large hydropower mandates in general rests on the fallacy that large scale conventional hydropower is cheap. While hydro generation from fully amortized legacy facilities during off-peak periods may be inexpensive, firm power from new build hydro generation is actually quite expensive. Luckily, there are currently four major Canadian hydropower projects under construction that offer insightful data points as to what firm power from a new facility might cost. The table to the right shows several key data points from these four projects ($ CAD).

One thing that should be immediately clear is the big difference in capital costs between large hydro and a natural gas combined cycle generator. Intuitively, this make sense as low capital costs equate to higher operating costs and vice versa. While large hydro does have Operations and Maintenance (O&M) costs (typically several $/MWh), the amortization of capital costs are what drives the energy cost.

In 2013, ratepayers in Nova Scotia were very irate to learn about the true cost of the Muskrat Falls project which included a firm block of power and a nebulous commitment to blend in market rate power. In the provincial election in the fall of 2013, the Liberals defeated the NDP in part by tapping into voter anger and frustration with the way the Muskrat Falls Power Purchase Agreement (PPA) was handled. The Muskrat Falls project is the beneficiary of a loan guarantee by the Canadian Federal Gov't. so its clear that even with very cheap financing (backed by the Canadian taxpayer), large dam projects yield very expensive power.

Hydro Quebec is actively marketing the power from its Romaine Project, which is currently under construction, and they have been actively lobbying state legislatures in New England for inclusion of hydropower in state RPS programs. This author is old enough to remember when hydropower drew the ire of environmentalists due to the impact to salmon spawning habitat, flooding boreal forests, and displacement of First Nations people (all issues for Romaine Project BTW), but since we only focus on costs here at ETE we'll leave those issues alone. The stated capital costs for the Romaine Project appear low on a $/MW basis relative to other large hydro construction projects in Canada. While Hydro Quebec is awesome at building dams, the publicly stated capital costs may not fully capture actual costs, especially in light of the findings of the Charbonneau Commission that exposed corruption in the construction industry in Quebec including the FTQ workers (make sure to click on this one) on the Romaine Project. Its important to note that none of this corruption is the fault of Hydro Quebec and that they were a victim of the environment that forced them to buy labor peace.

Back to the electricity consumer in MA who, if Gov. Baker gets his way, will be compelled to buy massive amounts of hydropower in the name of the GWSA. The table to the right shows the results of a simple amortization model based on Hydro Quebec's stated capital costs for the Romaine Project, Hydro Quebec transmission to the US border, and the Northern Pass transmission project proposed by Eversource which will convey power from the US Border to southern New Hampshire. The table shows potential rates (in $ USD/MWh) for a PPA for firm power based on different term lengths and utilization levels of the 1,200 MW Northern Pass Transmission line. Even under very optimistic assumptions (top right), the premium to ISO-NE market priced power is substantial. As a result, its disingenuous for MA political leadership to claim that a firm LTC for new build hydro power would lower costs or even be competitive with market priced power. 

There are hidden costs to Gov. Baker's proposal since large power lines carrying electricity from far off sources are treated as important contingencies in the ISO-NE planning process. In short, ISO-NE needs to ensure that if a major leg of the system were to fail (e.g., big power plant or transmission line goes down) that it won't bring down the entire system. To mitigate this risk, ISO-NE deploys what are called spinning reserves (aka idling nat gas plants) that can ramp up and pick up load in a hurry in the event of a failure of a resource in the system. A 1,200 MW power line would be one of the biggest contingencies in the ISO-NE system and would necessitate increased natural gas burn to ensure sufficient reserves for reliability. This scenario reflects the challenges in operating Phase II, the existing major transmission line between Hydro Quebec and ISO-NE. Although its 2,000 MW, it is rarely fully loaded due to concern regarding system impacts if it went down during full utilization. The Conservation Law Foundation has written extensively on the Phase II line recently. Another hidden cost of Gov. Baker's proposal is that consumers will not reap the full capacity benefit of a LTC w/ Canadian hydro power. Quebec is a strongly winter peaking system and they've had trouble maintaining exports and serving internal load in recent years on very cold days. ISO-NE desperately needs resources that can perform in winter and ISO-NE CEO Gordon van Weile has been very clear that imported Canadian hydro power doesn't address ISO-NE's acute winter reliability needs. Hydro Quebec has made plans to bolster its system with LNG at the Becanour natural gas plant which could help firm exports (great practical idea, but carbon emissions?).

In short, Gov. Baker's hydro power proposal does not help address the needs of the ISO-NE system and will likely have the effect of further complicating it. The ISO-NE marketplace has done a great job handling the winter issues through the Winter Reliability Program which will be in place until Pay for Performance rules enter implementation in 2018. As a result, many stakeholders feels that the imminent reliability concerns have been addressed for the time being.

Gov. Baker's bill to procure up to 18,900,000 MWh of hydro power, almost 40% of the retail load served by IOUs in MA, will effectively kill the deregulated retail power market. This will take away an important hedging tool for large commercial customers and impede innovation in retail energy markets, products, and smart grid strategies (e.g., price response, etc.). If enacted, the costs for this hydro mandate will most likely be borne by a non-bypassable line item charge on the customer's bill. A quick back of the envelope indicates that the costs won't be pretty. 

Right now, wholesale power in ISO-NE is running around $50/MWh on an annualized basis. Power is cheap in summer, but expensive during peak winter months. If a firm LTC for hydro power runs $85/MWh, then that premium of $35/MWh x 18,900,000 MWh = $661,500,000. In a state of approximately 6.7M people, that cost premium comes out to about $100 per person per year. This is a significant cost premium to pay for a non-local and non-zero carbon resource. Are we comfortable making this expenditure and the trade offs against local renewables and energy efficiency that it entails? Are we comfortable with more energy intensive manufacturers (e.g., ETE's clients) leaving MA and taking their jobs with them due to high energy costs? Can't we buy more Quebec hydro power on a spot basis without a LTC? Is elimination of the retail power market in MA a sound policy choice?

If this legislation is enacted as proposed, the MA retail electricity market will look very much like the dystopian nightmare that the Ontario electricity market has become. Wholesale electricity prices in Ontario are very low, but retail prices to consumers are very high. This is the result of layers upon layers of out of market PPAs and mandates that has rendered the Ontario wholesale price to be meaningless from the perspective of the retail customer. Wholesale power costs in Ontario typically comprise less than a third of the total bill and most third party energy suppliers have abandoned the Ontario electricity marketplace since hedging wholesale market exposure has become pointless. This legislation will push MA in that direction.

In summary, its terribly frustrating to see a Republican Governor, who should support markets, propose legislation that will effectively repeal electric industry restructuring and take away an important cost management tool for retail electric consumers. As the electric industry is on the precipice of a massive transformation, retail markets are critically important and deliver significant benefits to commercial consumers.