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Charles Arlinghaus: For now, PSNH's Bow plant saves ratepayers millions

April 01. 2014 4:20PM

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 has become something of a political football, but it is saving ratepayers more than $100 million this year.

The electricity market in New England is all about gas. That market is not state specific, it is regional. 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.

The lion's share of electricity in New England comes from natural gas, so gas is said to set the price. Every producer bids power into the market at a price at which the producer is willing to supply a set amount of its power. The sources are then "stacked" from the lowest to highest bid until the power need is reached. All accepted providers then get the "clearing price" regardless of what their individual bids were. As the last accepted bid, gas generally sets the price.

As gas prices declined dramatically from 2008 through 2012, this was generally good for power purchasers because prices improved. It also helped that 2012 was a mild winter with few price spikes. 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, gas is used for home heating as well as for electricity. The colder the winter, the more gas is burned for heat. Home heating use generally has first priority, so if heating usage is high there is little gas left for electricity, which raises its price.

Last winter, wholesale electric prices tended to be $40 or $50 per megawatt-hour (mwh), with occasional price spikes. Prices this winter are generally more than $100/mwh. They topped out at $260 one week in January.

That price pressure has severely hurt many smaller independent energy suppliers and forced many of us to pay a lot more this winter. The one exception is for the approximately 2/3 of the state that has PSNH as its utility. PSNH is the only utility that still owns some of its own power plants. Think of them as half-deregulated.

Why does that matter? Much of PSNH's capacity, about two-thirds, comes from one coal plant in Bow. That plant doesn't sell to the open market. It runs when it can supply power at a lower price than the market price. 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/mwh, 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. Those are payments made to generators throughout the region to try to make sure 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 and the $50 million in forward capacity payments would go away and little would come in return. Some would hope to avoid pollution control payments for the Bow plant, but that hope is forlorn.

The Legislature mandated the Bow plant's pollution control 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 it 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.

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

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

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