THE CURRENT BALANCE. The Role of Cost, Reliability, and Environmental Impact in the Massachusetts Electricity Market

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1 THE CURRENT BALANCE The Role of Cost, Reliability, and Environmental Impact in the Massachusetts Electricity Market POLICY BRIEF MAY 2016

2 LETTER FROM THE PRESIDENT & CEO The Greater Boston Chamber of Commerce Board of Directors has made energy prices and supply a key 2016 public policy issue for the Chamber. Energy is one of the most important factors in our regional economic growth and in making Massachusetts more competitive. Businesses depend on electricity for their operations to varying degrees, but they are all subject to rates that are set by a combination of market dynamics and public policy choices. The rates for electricity in the Commonwealth are among the highest in the nation, a fact which has a significant impact on businesses and residents. To inform the Chamber s approach to public policy on energy, and to better inform our members, we conducted extensive research on the current issues related to energy costs and supply as well as solutions being offered in Massachusetts, which are reflected in this policy brief. To continue our economic growth and remain competitive, Massachusetts must create and implement updated energy policies that strike the right balance between cost, reliability, and environmental impact. As this report clearly identifies, there are compromises among these priorities. Achieving a balance will require a look at how we integrate natural gas, solar, hydropower, and other sources to ensure that we have a more cost-effective, reliable, and environmentally sound energy future for Massachusetts. James E. Rooney President & CEO Greater Boston Chamber of Commerce POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 2 OF 10

3 EXECUTIVE SUMMARY This Greater Boston Chamber of Commerce policy brief describes the current situation regarding electricity costs for businesses in Massachusetts and why there is an increased interest in hydropower such as Governor Baker s legislation. Electric costs and reliability affect the Commonwealth s ability to compete on the national and global stages. At the same time, the state is committed to limiting its environmental impact by meeting the demands of the Global Warming Solutions Act (GWSA). The state is at a juncture: efficiency has helped to steady electricity consumption overall in the last decade but it remains markedly greater than it was before those efforts began (Fig. 1); key power plants are slated to come offline in the coming years, and the first key deadline of the GWSA is approaching. A GREATER BOSTON CHAMBER OF COMMERCE POLICY BRIEF THE CURRENT BALANCE The Role of Cost, Reliability, and Environmental Impact in the Massachusetts Electricity Market 60 FIGURE 1: RETAIL SALES TO MA CUSTOMERS, MILLIONS OF MWH, Total megawatt hours, in millions Source: U.S. Energy Information Administration, Sales to Ultimate Customers (Megawatthours) by State by Sector by Provider, To address these challenges, encourage more economic growth, and make Massachusetts more competitive, the state must look at the available solutions achieved through legislation or otherwise that balance cost, reliability, and environmental impact. This brief considers the balance between cost, reliability, and environmental impact and examines key drivers of the high electricity prices in Massachusetts. In addition, it analyzes the two proposals under consideration that could dramatically change the state s electricity supply: Governor Baker s legislation to bring hydropower into Massachusetts and the Clean Energy RFP. POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 3 OF 10

4 THE TOP LINE Massachusetts has some of the highest electricity rates in the country with commercial ratepayers, which account for about one-third of total electricity consumption, paying bills that are nearly 20 percent higher than the national average. High prices deter industries from locating in Massachusetts and producing more jobs, and are burdensome to residents who make up the state s workforce. MASSACHUSETTS ELECTRIC COSTS COMPARED TO 48 CONTIGUOUS STATES, 2014 Industrial Commercial Residential Massachusetts cents/kwh Rate and Ranking rd highest th highest th highest Highest Ranking State & cents/kwh Rate Connecticut New York New York Source: U.S. Energy Information Administration, 2014 Total Electric Industry - Average Retail Price Massachusetts has increasingly become dependent on natural gas as the fuel source to generate electricity, which contributes to unstable costs and reliability concerns. The increased reliance is largely due to oil, nuclear, and coal plant closings resulting from environmental policy. Reliability will become an issue with natural gas during peak periods because the demand outpaces supply. The GWSA requires Massachusetts to reduce emissions of greenhouse gases (GHG) by There are a number of ways the state may meet its reduction goals, however, cost is a crucial factor. Many see hydropower as the best option for addressing the concerns around cost, reliability, and environmental impact. However, current infrastructure is inadequate to transmit power from existing facilities. Legislation proposed by Governor Baker mitigates the financial risk for building new infrastructure to transmit electricity into the Commonwealth that is generated by hydropower and/or wind and solar power that is supported by hydropower. It is likely that the procurement of any clean energy resource to meet the GWSA goals will result in increased prices compared to today. The cost reduction cited by the Administration is relative to the alternative options for meeting the GWSA goals and not relative to today s prices. BALANCING COST, RELIABILITY, & ENVIRONMENTAL IMPACT Electricity policy is a balance between three important factors: cost, reliability, and environmental impact. Placing a greater emphasis on one factor can affect another. For example, a policy that is fully focused on renewable resources to reduce negative environmental impacts would result in comparatively high costs and be less reliable than a system that uses traditional fuel sources which may negatively impact the environment. Alternatively, if cost is the only concern, the grid s reliability and use of cleaner energy sources would be limited. At times, state policy shifts the balance of these three elements to focus on a particular area that is viewed as being out-of-line. For example, restructuring in the late 1990s was aimed at containing costs and ratepayer protection. In recent years, there has been a heavy emphasis both on improving the transmission system s reliability and reducing the environmental impact by encouraging renewable energy development, particularly solar. The electricity market is again under scrutiny in Massachusetts, with a particular emphasis on hydropower and the potential of large-scale renewable sources like wind. To evaluate this option, it is helpful to understand the current state of electricity prices in Massachusetts, what drives those prices, and the interplay of the three key factors cost, reliability, and environmental impact. POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 4 OF 10

5 MASSACHUSETTS HAS MUCH HIGHER RATES THAN THE NATIONAL AVERAGE The average retail electricity price-per-hour rates in Massachusetts exceed the national average for all types of ratepayers and rank among the highest nationally, as Figure 2 shows. Several factors drive these comparatively high rates, including the region s demand for natural gas during peak periods, regional transmission costs, and state policies. DEMAND FOR NATURAL GAS AFFECTS OUR COSTS In Massachusetts, like other New England states, there is an especially high demand for natural gas for two reasons. First, many in the state rely on natural gas for heat, which increases the overall demand in the winter. 1 Second, state and federal policies to address environmental concerns have driven the market towards natural gas because it is cleaner than other options, like coal and oil, and less expensive and more reliable than many renewables. As a result, natural gas now fuels more than half of all electricity generation in Massachusetts (Figure 3). On the other hand, there is a finite supply of natural gas that makes its way into New England through pipelines or Liquified Natural Gas terminals. During winter months, because of heating needs, less natural gas is available to generate electricity and it must be generated by other, higher-priced sources in order to meet demand. The result: the demand for natural gas in Massachusetts and New England is greater than the supply during peak periods, and prices in the region adjust higher. As Figure 4 (page 6) shows, the price of natural gas in the New England region (Algonquin Citygate, in light blue) is higher than in other regions of the country particularly in winter months. 1 Heating uses have priority for the use of natural gas. As a result, during winter months less natural gas is available to generate electricity and suppliers must buy electricity from other, higher-priced generation sources in order to meet demand. The Federal Energy Regulatory Commission (FERC) is reviewing proposals for additional natural gas pipelines to address these supply issues. In late April 2016, one of the two major proposals was voluntarily removed from consideration. The Commonwealth s Supreme Judicial Court is also reviewing whether the Electric Distribution Companies (EDCs) would be permitted to charge electric ratepayers for gas infrastructure upgrades. 2 REGIONAL TRANSMISSION COSTS Since 2008, transmission costs have doubled for Massachusetts and other New England electricity ratepayers, climbing from 0.7 cents per kwh to 1.5 cents per kwh in A region s transmission system is a critical factor in supporting grid reliability: maintenance, upgrading, and expansion of the regional grid helps to create a system that operates without interruption. One tradeoff for this reliable system is higher cost. In addition to the investments driving the rising transmission costs since 2008, ISO New England estimates there will be more than $4 billion in additional investments by Some of this investment is necessary because the existing transmission infrastructure in New England is older and requires much maintenance. Furthermore, when a new power source is built it may also require building new transmission lines. These costs are passed to ratepayers and charges include a return on equity, or a guaranteed rate of return on investment in transmission infrastructure. This guaranteed rate of return is often as high as 10 percent; sometimes greater. The return on equity rate in New England was the subject of recent investigation by FERC, which believed the rate was too high and reduced it modestly. 2 The Massachusetts Executive Office of Energy and Environmental Affairs defines a distribution company as: formerly known as an electric utility company, [a distribution company] is the local company that delivers electricity to your home or business. Your distribution company will continue to read your meter, maintain local wires and poles, and restore your power in the event of an outage. 3 ISO New England, Consumer Liaison Group Meeting presentation, March ISO New England, 2015 Regional System Plan, November 5, FIGURE 2: AVERAGE RETAIL ELECTRICITY PRICE, 2014 U.S. VS. MASSACHUSETTS 80% 70% 60% 50% 40% 30% 20% 10% 0 FIGURE 3: SHARE OF ELECTRICITY GENERATED BY NATURAL GAS IN MASSACHUSETTS, % % Source: U.S. Energy Information Administration, 2014 Total Electric Industry- Average Retail Price Source: U.S. Energy Information Administration, Net Generation by State by Type of Producer by Energy Source, POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 5 OF 10

6 STATE POLICIES THAT AFFECT ELECTRICITY COSTS Massachusetts also has state policies that result in additional tariffs (i.e. fees) and other costs added to retail electricity rates. These include a range of items like residential heating assistance; a reserve fund for storm damage repairs; funding for the energy efficiency program, which adds about a penny per kilowatt hour to rates; and costs associated with the state s renewable energy incentive programs, including both reimbursable credits and net metering for solar. Some ratepayers argue that the state s current balance is not appropriate and that more weight must be placed on addressing the state s very high costs. At the same time, the state has environmental goals for emission reductions by 2020 that were set by the GWSA (see appendix for more information on the GWSA). However, based on current technology, reducing emissions by using wind and solar power is largely incompatible with lowering costs from where they are today and ensuring reliability. This tension points the discussion to hydropower, which many see as the best option to balance reliability, cost, and environmental impact. There is a significant hurdle to bringing hydropower to the Commonwealth, though: the infrastructure is inadequate to transmit power from existing hydropower facilities. Importantly, nothing officially prohibits the state from procuring hydropower; rather, the costs of constructing transmission presents a barrier to project development in the state. THE BAKER ADMINISTRATION S PROPOSAL FOR HYDROPOWER In 2015, Governor Baker proposed legislation that would mitigate the financial risk to develop clean energy transmission infrastructure by guaranteeing a minimum amount of power is purchased over a period of 15 to 25 years. 5 The legislation ensures this by allowing for long-term contracts for hydropower or other renewable resources such as solar and wind. Since solar and wind sources are intermittent and therefore less reliable, the legislation requires they be backed up or firmed by hydropower. At a minimum, through the contracts, the state would guarantee the purchase of 9,450,000 MWh of hydroelectric power per year for one project, which is equal to approximately 20 percent of total electricity consumption in Massachusetts in At a maximum, the legislation allows the state to guarantee twice that amount divided between two projects. While the legislation does not specifically require the contracts to set prices for the length of the agreements, the nature of a long-term contract is to guarantee variables. Therefore, it is reasonable to expect that the contracts will address the price of the energy being supplied. FIGURE 4: MONTHLY AVERAGE NATURAL GAS SPOT PRICES AT KEY TRADING HUBS, Dollars per million British Thermal Unit Source: U.S. Energy Information Administration, based on Natural Gas Intelligence 5 Baker s proposal follows one filed by Governor Patrick in 2014 that stemmed from the 2010 GWSA Implementation Plan. 6 U.S. Energy Information Administration, Sales to Ultimate Customers (Megawatthours) by State by Sector by Provider, POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 6 OF 10

7 Similarly, the legislation does not explicitly require the EDCs to enter into long-term contracts once proposals are solicited, but that is likely to be the result. The legislation requires the EDCs and Massachusetts Department of Energy Resources (DOER) to jointly and competitively solicit bids for clean energy. Provided that DOER determines that reasonable proposals have been received, the legislation requires the EDCs to enter into cost-effective long-term contracts for an annual amount of electricity as described above. Neither reasonable nor cost-effective are defined in the legislation. If DOER determines at least one proposal is reasonable, the EDCs will be required to contract for the electricity. If DOER determines that no proposals are reasonable, it may end the solicitation or proceed with a second solicitation. Finally, any long-term contracts entered into by EDCs will be subject to the approval of the Massachusetts Department of Public Utilities (DPU), which must verify that it is a cost-effective means for procuring clean energy on a long-term basis. THE CLEAN ENERGY RFP, A NON-LEGISLATIVE APPROACH As noted, legislation is not required to bring hydropower or other types of clean energy to market. To that end, an alternative process is underway to incentivize the procurement of clean energy in the Commonwealth. In 2015, Massachusetts joined with Connecticut and Rhode Island to leverage economies of scale and issue a Request for Proposals for Renewable Electricity Generation and Transmission, known as the Clean Energy RFP (RFP). 7 The RFP allows Massachusetts to comply with existing statutory requirements (referred to as 83A), 8 as well as consider new ways to procure other clean energy resources, including hydropower. Through the RFP, each state will independently review and determine which project it prefers; for Massachusetts, the EDCs will represent the Commonwealth and select the winning projects, while DOER will serve as an advisor. 9 One risk in this process is that when collaborating with the other two states to select a final project, Massachusetts may not get its priority project selected. It is also possible that the states will not come to an agreement and no project will move forward. The RFP allows for the procurement of clean energy, including hydropower, through traditional Power Purchase Agreements and a newly devised Delivery Commitment Model (DCM). 10 The DCM was created to secure a commitment for the delivery of energy without requiring a longterm price for the supply of energy. Specifically, the EDCs will contract with either a transmission developer or energy supplier for delivery of a minimum number of MWh per year (or other defined period). The price of the energy would be determined by the daily spot price on the open market at the time of purchase. Under the solicitation, EDCs would be responsible for all or part of the new transmission development costs that are necessary to facilitate the delivery of clean energy. EDCs will then recover costs from ratepayers in participating states, but the amount recovered will be in proportion to the fulfillment of the delivery commitment such that payments will be reduced for failure to meet the commitment. The DCM is a new concept, so there may be unanticipated consequences or other challenges to implementation, including legal ones. DCMs are not authorized under Governor Baker s legislation. 7 The Massachusetts Electric Distribution Companies ( EDCs ) provided the RFP regarding the acceptance of proposals from developers pursuant to Section 83A of the Green Communities Act (chapter 209 of the Acts of 2012, An Act relative to competitively priced electricity in the Commonwealth). The RFP sought bids on new Class I renewable energy projects (including wind, solar, small hydro, biomass and fuel cells) of at least 20 MW and large-scale hydropower projects constructed after January 1, Referring to St. 2012, c. 209, An Act Relative to Competitively Priced Electricity in the Commonwealth, Sections 35 and 36, which amended Section 83 and inserted Section 83A in An Act Relative to Green Communities. 9 To ensure a fair process, employees drafting a bid and employees involved in the selection are not permitted to communicate. The Massachusetts DOER will be permitted to monitor contract negotiations between the EDCs and selected bidders. 10 Due to state law, Massachusetts may only procure hydropower through the DCM and not through a Power Purchase Agreement. POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 7 OF 10

8 HYDROPOWER AND THE COST, RELIABILITY, AND ENVIRONMENTAL IMPACT BALANCE Hydropower clearly has strengths in both reliability and environmental impact. However, the impact on costs and ratepayers is less clear. An important component of the ultimate cost to ratepayers under almost any method whether through the solicitation required by legislation or the RFP process is the cost to build transmission infrastructure because existing large-scale suppliers are located outside of the state, including in New York and Canada. Depending on how the contracts are designed under each proposal, ratepayers could bear the risk of cost overruns on transmission projects. And, as with any long-term contract, there are inherent risks that unanticipated events or technological advances could dramatically change the market. On the other hand, proponents of the legislation for the procurement of hydropower argue that the financial investment in transmission construction is only appealing if there is guaranteed revenue through a long-term contract. Without such contracts, proponents argue, the hurdles to bringing hydropower to Massachusetts are too high. Hydropower is a key component of the state s plan to meet its GWSA goals, accounting for 1/6th of the total reduction in emissions. However, if the state does not move forward with hydropower, it may still meet GWSA goals. This is possible either by using other no-/low-emission, but costlier, fuel sources to generate electricity or by requiring greater emission reductions from sectors other than electricity generation, such as transportation. It is likely that the procurement of any clean energy resource to meet the GWSA goals will result in increased prices compared to today. The reductions in costs represent cost avoidance and are relative to the alternative options for meeting the GWSA goals and not relative to today s prices. For example, the Administration states that using hydropower to meet the goals will cost ratepayers $1 billion less compared with other low-emission alternatives. WHAT THE NEAR FUTURE HOLDS FOR ELECTRICITY IN MASSACHUSETTS The Governor s legislation is being reviewed by the House, which is expected to release its own legislation in the coming months. The House s legislation will likely focus on the environmental impacts of energy sources. Once the House takes action, the legislation will then move to the Senate for consideration. Since formal sessions conclude on July 31st, a compromised bill must be passed by both branches and sent to Governor Baker by this date. The Chamber will update this brief with legislative developments. The RFP continues through the prescribed process, with an expectation that the EDCs enter into contracts between June 23 and September 22, Contracts will then need to receive regulatory approval to move forward. POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 8 OF 10

9 APPENDIX: THE GLOBAL WARMING SOLUTIONS ACT The Global Warming Solutions Act (GWSA) of 2008 sets forth standards for the state to reduce its emissions of greenhouse gases, 11 which are emitted by a number of different sources, including electricity generation. The state was charged with setting its own goal to reduce, by the year 2020, the total emissions of residents to between 10 percent and 25 percent below 1990 levels; the Patrick Administration opted for a 25 percent reduction by In addition, the GWSA requires that greenhouse gas emissions be reduced to 80 percent below the 1990 level by Since the standards were imposed on the state by itself, there are no financial, regulatory, or other penalties on businesses for missing the reduction goals. Importantly, the total level of greenhouse gas emissions can vary from year-to-year and be affected by factors largely out of the state s control. For example, during periods in which oil prices are high and therefore gas prices are high transportation emissions may decrease as residents drive less. During cold winters, residents use more natural gas for heating, so electricity generators must rely more on high-emissions producing fuel sources like coal or oil. This increases the state s total emissions. Alternatively, during warm winters, they can rely less on those sources and drive down the state s total emissions. Additionally, as nuclear plants close, emissions will likely rise. The Massachusetts Department of Environmental Protection estimates that as of 2012, the Commonwealth s total greenhouse gas emissions were approximately 24 percent below 1990 levels; the 2013 data that is available to date shows a less significant reduction, likely driven by the state s comparatively colder winter during that year. The state issued a plan in 2010 under the Patrick Administration to achieve the GWSA goal that was updated by the Baker Administration in late 2015, which relies on the introduction of large-scale hydropower electricity to account for about 1/6th of the total 25 percent reduction goal. 11 The GWSA defines a greenhouse gas as: any chemical or physical substance that is emitted into the air and that the department may reasonably anticipate will cause or contribute to climate change including, but not limited to, carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride. APPENDIX: WHAT DOES RELIABILITY MEAN? For electricity, reliability can be affected by the generation source and the transmission process. Some sources of electricity generation are more reliable than others. For example, solar and wind power are variable power technologies because each depends on intermittent sources for generation it can be cloudy or not windy enough. Reliable sources are dispatchable meaning that they can be dispatched at any time and include natural gas, oil, coal, and hydropower. Once the power is generated, it has to travel to end users, so transmission also plays a key role in reliability. Even if a source is generating power, a breakdown in the transmission process can affect reliability. The grid must be maintained and updated to avoid these breakdowns, and maintenance may be necessary to relieve congestion or adapt to new types of generators. POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 9 OF 10

10 ABOUT THE GREATER BOSTON CHAMBER The Greater Boston Chamber of Commerce is the region s leading business association connecting 1,500 businesses of all sizes from virtually every industry and profession. We help Greater Boston-area businesses grow and succeed through strategic networking events, influential business advocacy, exclusive leadership development programs, and initiatives that foster the region s innovation economy. For more information, visit The Greater Boston Chamber of Commerce 265 Franklin St #1200, Boston, MA (617) info@bostonchamber.com POLICY BRIEF GREATER BOSTON CHAMBER OF COMMERCE PAGE 10 OF 10