Just as leaders in many European countries are pushing for financial stimulus to restart their economies, they think green energy investments should play a key role. Similar moves are underway in New England. A recent article discussed how the Attorney General of Massachusetts has asked the state’s Department of Public Utilities (DPU) to investigate the plans of utility companies to transition away from the use of natural gas to power and heat the homes in the state in a decarbonized world. This shift is envisioned by the state’s commitment to net zero carbon emissions by 2050, which became policy last January. The new policy was immediately criticized by environmentalists, who judged it to be inadequate for solving the state’s climate change problem.

According to 2016 data from the Massachusetts Comprehensive Energy Plan (CEP), prepared by the state’s Department of Energy Resources (DOER), natural gas plays an important role in Massachusetts’ fuel mix for home heating, transportation and electricity markets. Natural gas supplies 68% of heating and 41% of electric generation. Fuel oil (24%) is also important for home heating, but clearly much more significant in the transportation sector. Nuclear power (26%) and net imports (17%), which is hydroelectric power coming from Canada, are key power market components.

Natural Gas is Important in Massachusetts

Important in the debate over clean energy is Massachusetts’ carbon emissions and their source. As the CEP shows, between 1990 and 2015, emissions from the power generation sector have declined noticeably, while there has been only a modest reduction in the heating sector. Both reductions came from increased use of natural gas to displace fuel oil for heating and residual oil in power generation.

Carbon Emissions Are Falling In Power Sector

The author of the article suggests the shift away from natural gas will undercut the business models of regulated gas distribution companies. Could this cause gas distribution companies to have stranded assets? That possibility assumes that natural gas use ends completely, and that distributors are unable to replace gas with another fuel, such as hydrogen, or to add other fuel distribution services to their portfolios.

A problem the state has in meeting its net zero emissions goal is the cancellation of many clean energy projects. A plan to import significant hydroelectric power from Canada has been rejected by New Hampshire, forcing Massachusetts to turn to Maine, but it is having problems negotiating a deal. Another issue is that many clean energy projects are being cancelled due to the regulatory process and/or poor economics.

It is interesting to see the projected New England power market at the end of this decade. Exhibit 3 (next page) shows the latest supply report from ISO-New England, the operator of the region’s power grid. Despite the focus on ending natural gas use in the region, the fuel is projected to decline by only 0.6 megawatts (MW) of generating capacity, a 3.8% reduction. At the same point, wind generating capacity is projected to slightly exceed that of natural gas in 2029. We caution making too much of this outcome, since the forecast is based on nameplate generating capacity of the fuels and not their actual output. Wind turbines are usually assumed to deliver 40% of nameplate capacity in output over time. Usually, the output performance falls below that target, and there is always the issue of when the energy will arrive.

A Brighter Natural Gas Future Than Imagined

The article makes the point that the future of Massachusetts power, in order to achieve net zero emissions, will require moving as much demand as possible to electricity, which is assumed to be generated all from renewables. However, there are no reliable studies showing how a state economy, let alone the entire U.S. economy, can be powered exclusively with renewables. The various studies, attempting to demonstrate 100% renewable power, also show that reaching that elusive goal will be hugely expensive and runs the risk of creating a less stable electricity grid, i.e., more frequent brownouts and blackouts.

As part of its plan to grow renewables use in the Massachusetts power market, the state has established a Clean Peak Standard, which creates credits for clean energy delivered during time windows identified as peak hours for a given season. Utilities in the state must obtain clean peak credits equal to a percentage of total electricity delivered in each year, starting at 1.5% in 2020 and growing annually. The goal is to create a price signal to shift clean power supply to those hours it's most valuable for the grid. Since renewables are not dispatchable, this creates an opportunity for energy storage technologies, such as batteries, to deliver power during these windows of greatest value. According to DOER Commissioner Patrick Woodcock stated, “This is a core centerpiece of our efforts to incorporate storage into our clean energy policies. It provides that signal to chase that real-time peak and chase the seasonal peaks that really contribute to high costs for ratepayers.”

After incurring short-term costs to get the program up and running, the state expects the Clean Peak policy will save $400 million over the coming decade. The law requires ratepayer costs to be capped at $0.005 per kilowatt-hour (kWh). National Grid filed comments with DOER, arguing that while the cap "may appear to be a small amount, in fact, it could be quite substantial." The company foresees the cost ramping up over the decade to adding an additional $40 per year to consumer average bills.

It is interesting to note where New England utilities are relative to clean energy. We have reproduced the power mix data from National Grid for its standard offer contract for customers in Massachusetts and Rhode Island. In Massachusetts, solar and wind account for 15.0% of the power, about half the amount that comes from natural gas, and four percentage points below nuclear energy. In Rhode Island, the two renewable power sources total 8.5% of National Grid’s power supply, but only a quarter of the power that comes from natural gas and one-third from nuclear.

Renewables Trail Fossil Fuels By Wide Margin

The greatest challenge for New England power markets is the winter when cold weather increases the demand for natural gas for home heating. Due to cold weather, renewables are of little value during the night when the coldest temperatures are experienced. Gas is diverted from electric generators, or utilities must pay very high prices for imported LNG or switch to fuel oil and standby coal plants. That impact is noted in the amount of coal and oil use in National Grid’s fuel supply data.

The Massachusetts CEP showed data from ISO-New England about daily fuel supply during the severe winter of 2017-2018. As seen, during the coldest days, oil became a significant fuel source when natural gas supply was limited. The yellow line shows how the daily average real-time price for power spiked at the same time low-cost natural gas supply shrank and more expensive fuel sources were needed. This is a structural issue for the region, created primarily by the failure to expand natural gas pipelines to deliver more supply. This restriction has been caused primarily by the objections of liberal governors in New York, New Jersey and Connecticut who have blocked pipeline expansions and new pipeline projects.

Oil Becomes Big Factor In Cold Weather

Two charts from the CEP report show the fate of residential electricity consumers in Massachusetts. First, we see that Massachusetts’ electricity price relative to the other U.S. states and the national average in 2017 is at the upper end of the price range. Massachusetts ranks slightly higher than New York, and on a par with California. Amazingly, New Hampshire, Rhode Island and Connecticut have more expensive electricity. The most expensive power in America is found in Alaska and Hawaii.

Massachusetts Has Expensive Electricity

The second chart shows DOER’s modeling of the cost of electricity under various scenarios, and compared them to the forecast for cost of all New England power, as well as for the entire United States. What the results show is how the cost for Massachusetts power declines slightly from 2021 to 2024, but then begins climbing regardless of the scenario. The pitch DOER makes is that by 2030, the state’s power prices will be below the New England estimate power price. The politicians in most New England states are committed to promoting clean energy, almost at any cost. That commitment will keep Massachusetts and New England power prices well above those of the United States.

Massachusetts Power Cost Is Heading Higher

A quick update on the electricity market in Rhode Island shows what happens to renewables when subsidies decline. We have discussed our decision to install solar power on the roof of our summer home. We estimated we could achieve a 6-year after-tax, cash flow return of our investment, with the remaining nine years of our power contract providing profits. Based on the performance of the solar panels, we are now on a 5.5-year payback rate. Our installation was done as part of a plan to promote solar sponsored by our town. It struck a deal with an installer to offer homeowners a discount on the solar panel installation cost depending upon the number of projects completed. We were fortunate the number of projects exceeded the top end of the discount range, so we receive a 20% installation cost discount. We also were eligible for the 30% renewable energy investment tax credit.

Then there was the power contract with National Grid. When it began the solar plan in 2015, the company offered to buy residential solar electricity at $0.41/kWh. The next year, the offered price declined to $0.37/kWh. In 2017, the year of our installation, National Grid offered to buy solar power for $0.3475/kWh for 15 years with guaranteed renewal, although the price will be determined at the time of renewal. We are currently paying $0.196/kWh for our National Grid power. Rhode Island doesn’t allow net metering - using the solar power ourselves while remaining eligible to draw power from National Grid. The payment arrangements call for National Grid to credit us for the power we sell against the power we purchase, other than for select administrative fees, meaning our monthly electric bills run between $11-$23 per month. The balance of our sale revenues is paid to us monthly.

Recently, we talked with the chief electrician for our solar installer. He told us that this year, National Grid is only offering to buy power at $0.20/kWh, making it virtually worthless to install new solar projects. We asked what had happened to their business? He said they are very busy! While not installing many solar projects, they continue installing backup generators, another line of business they entered last year. Now they are extremely busy installing batteries, a new service line (more on that in a minute). He also told us they are performing maintenance work on systems they had not installed. At the height of the solar euphoria, when we installed our system, there were well over 100 installers operating in Rhode Island. With the collapse of the solar power price, there are now only six installers left in the state! There go some of those green energy jobs lost in the pandemic, but they are gone due to the decline in the value of the subsidy, i.e., the price National Grid was willing to pay to meet its clean energy requirement to operate in the state.

After hearing more about batteries, we are examining whether to install one. These batteries are contracted to National Grid, who can draw power from it whenever it believes its system will reach a critical point during heat waves. For that right, the company pays a flat rate, which we understand repays the investment in five years. For us, though, there are additional benefits with economic rewards. With a battery, we can continue operating our solar system whenever we lose power to the house and our backup generator powers up, enabling us to continue selling solar power to National Grid. Currently, when we lose power, the generator’s power does not allow us to continue to sell our solar power to National Grid. As we understand it, (and we haven’t met with the company about the details), this will further reduce the payback time for our solar system, as we will generate incremental revenue during power outages. Or that extra revenue could be seen as a reduction in the cost of the battery. If all of this is correct, in a few years, our house could actually be earning a profit from our utilities.

The Massachusetts and Rhode Island developments point to the impact that government policy has on utility markets. We have no idea how all these various governmental actions will work out. At the moment, there have been profit opportunities. We don’t put much faith in 2050 aspirational goals.

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Energy Musings

The Volatile Renewables Energy Market Of New England