For now, PSNH’s Bow plant saves ratepayers millions

Charlie Arlinghaus

April 2, 2014

As originally published in the New Hampshire Union Leader

When it costs more to heat your house, your electricity is cheaper. Actually there isn’t a direct correlation between the two but cold weather – and we’ve had plenty of it – drives both dynamics. One utility-owned power plant in New Hampshire is something of a political football but is currently saving ratepayers well over $100 million this year.

The electric market in New England is all about gas. The electric market is not state specific but regional and our region comprises the six New England states. Whether a power plant is in New Hampshire or Rhode Island is immaterial. Power is sold into a regional market which doesn’t care which state the plant is in.

The lion’s share of electricity in New England comes from natural gas so gas is said to set the price. Every resource bids into the market a price at which they are willing to supply a set amount of power. The sources are then “stacked” from least to highest bid until the power need is reached. All accepted providers then get that “clearing price” regardless of what their individual bids were. Gas generally sets the price as the last accepted bid.

As gas prices declined dramatically from 2008 through 2012, this was generally good for power purchasers and prices improved. It also helped that 2012 was a mild winter with few price spikes.

That’s because winter heating also affects electricity prices. Gas plants rely, to a large extent, on gas being shipped here through a pipeline that has limited capacity. But in the winter that gas is also used for home heating. The colder the winter, the more gas is used. Home heating use generally has first priority so if heating usage is high there is little gas left for electricity and its price is high.

Last winter, wholesale electric prices tended to be $40 or $50/MWh with occasional price spikes. This winter prices are generally over $100/MWh and topped out at $260 one week in January.

That price pressure has severely hurt many smaller independent energy suppliers and forced most of us to pay a lot more this winter. The one exception is for the approximately two-thirds of the state that has PSNH as their utility. PSNH is the only utility that still owns some of their own power plants – think of them as half-deregulated.

Why does that matter? Much of their capacity, about two-thirds,  comes from one coal plant in Bow. That plant doesn’t sell to the open market. Instead it runs when it’s cheaper and doesn’t run when the outside market is cheaper. When the market is $40/MWh it doesn’t run. But this winter it has run almost non-stop.

This means that this plant and others owned by PSNH  have saved their customers $115 million so far this winter. How? When it’s cheaper to run the utility-owned plant, customers save the difference between cost to run and the amount it would have cost to buy the power. The week when power was $260, customers saved the difference between that price and the roughly $45/MWh to generate their own power.

In addition, those customers save some additional money because PSNH receives what are called forward capacity payments – payments made to generators throughout the region to try and assure plants stay open so the region has enough power. The payments from the most recent auction will probably generate ratepayers about $50 million.

A bill before the legislature would require PSNH to sell all its power plants. Divestiture, as this plan is called, would cost not save ratepayers. The $115 million in operating savings, the $50 million in forward capital payments would go away with little in return. Some would hope to avoid pollution control payments for the Bow plant but that hope is forlorn.

The legislature mandated the new equipment under the rules that the utility pay up front and then receive a guaranteed return on that capital investment. Whether that was a good deal or bad, it can hardly be cancelled after the fact. Government may not and should not deal with businesses that way.

The electricity market is different today than it was five years ago and will be different again in five years – almost certainly in ways the government isn’t good at predicting. Right now the market struggles in the winter because of too much reliance on a limited supply of gas and not enough diversity of fuel supplies.

Whether the half-deregulated structure is where we would start or where we will end up, it’s savings ratepayers close to $200 million right now.  Right now, that’s sensible.