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My Turn: The problem with utility projects? Fixed costs



For the Monitor
Thursday, January 05, 2017

Governor-elect Chris Sununu, Eversource N.H. President Bill Quinlan and Business and Industry Association President Jim Roche all propose lowering electricity prices with more transmission and natural gas pipeline projects. Yet capital expenditures on more utility infrastructure will add to the already sky-high fixed costs of our electricity rates. So any discussion of energy needs requires a sober, first-things-first approach to their costs.

In 2015, the Southern Environmental Law Center published, “A Troubling Trend in Rate Design: Proposed Rate Design Alternatives to Harmful Fixed Charges.” The authors put the problem of high fixed charges squarely on the utilities, telling us they have failed to employ “a range of smart rate design opportunities that better respond to the changing nature of the grid.” This means increasing energy efficiency and expanding distributed energy resources, not infrastructure.

Fixed charges in electricity rates carry serious short- and long-term downsides.

Capital expenditures – fixed costs – on utility infrastructure: a) disproportionately impact low-use and low-income customers; b) undermine investments in energy efficiency; c) encourage utilities to overbuild new capacity even as electricity demands decline; and d) discourage customer investment in distributed energy resources and prevent the benefits that flow to the grid from that investment.

Mike Mooiman, Franklin Pierce University professor of energy and sustainability studies, tells us, “If we do not want to invest in energy efficiency, we as energy consumers will end up paying in one of two ways: We will pay for infrastructure investments through costs and direct impacts on our property, our environment and way of life, or we suffer the consequences of not investing in infrastructure and creating unreliable supply conditions.”

Last April, the owners of the Pilgrim nuclear power station in Massachusetts announced they would close in 2019. Given the number of years left on the plant’s useful life, this came as unexpected news. But its high fixed operating costs proved too great a financial drain. Like Vermont Yankee, the Pilgrim station couldn’t compete.

How did this happen? Low natural gas prices played a major role. So, too, did the Massachusetts distributed energy resources boon and the Commonwealth’s initiatives to reduced electricity demand.

Two years ago, the Globe and Mail of Toronto published a piece titled, “Big Hydro’s big days are behind it.” The piece cited average export electricity prices in 2008 at 6.5 cents per kWh. By 2012, they were running at 3.1 cents per kWh, “far below the production costs of any new hydro projects being built now.” High fixed costs are probably why last October the Hydro Quebec and Northern Pass projects lost out on energy supply contracts with Massachusetts, Connecticut and Rhode Island. They were instead awarded to competing wind and solar projects with lower fixed costs.

Most New England states have significant room for improvement to reach proportionate levels of efficiency and savings like the Massachusetts model. In New Hampshire, advanced metering infrastructure with time of use pricing would minimize peak demand. Then we could export even more electricity into the New England grid than we do now.

So before considering any new utility projects, we must first invest in more distributed energy resources and new demand-response programs. These will mitigate the unpredictable harm from fickle fuel prices and the predictable burden of high fixed costs from massive utility undertakings while delivering the diversity and cost-effectiveness required of a modern electric grid. Moreover, this will create far more local jobs than the wildest hope for any utility infrastructure project and keep our investments where we live.

Decoupling utility rates from electricity sales, as in the rest of New England, will help the Granite State to greater energy efficiency. It will tamp down the utilities’ incentive for expending capital on self-serving projects with high fixed costs. Then the state needs only to pursue its own 2014 New Hampshire State Energy Strategy with resolve and vigor.

(Terry Cronin lives in Hopkinton.)