Desperate Buyers in a Sellers Market Lessons For Vermont in a Carbon Constrained World

Desperate Buyers in a Sellers Market Lessons For Vermont in a Carbon

Constrained World

Michael Dworkin, Professor of Law & Director,

Institute for Energy and the Environment

Vermont Law School

802 831 1319 mdworkin @vermontlaw.edu

10 February 2009

Here are the 02- 05 prices for wholesale electric power (not including delivery!)

ISO-NE Locational Marginal PriceJan 2002 - Oct 2005

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Vermont’s Energy Future VT DPS (2008) at 14

Why Care About World Energy Trends ?* Because the World Prices Affect You

• World Energy Demand Sets World Natural Gas Price.• World Natural Gas Price Sets Wholesale New England

Electricity Price• New England Wholesale Electricity Price Sets one-sixth of

Vermont power costs now• Those are the prices Vermont faces already• -----------------------------------------------------• Climate Change is an environmental tragedy• Carbon is global, and lasts a hundred years

Future Fossil Power Prices Look Higher

World economic down trend has slowed, but not eliminated price rises and price expectations.

Current futures prices are ca. 30% higher than predictions of two years ago --- and almost three times the price of five years’ back

How Much Time Would ANWR Buy?

ANWR: 6-7 billion barrels economically recoverable (even at ‘off the chart price”) are a 10-month U.S. supply, or about 16 months of imports. If opened this summer, they would be gone by 2010 election.

(EIA cut this chart off at $40/barrel in 2003)

* Energy policy is our world’s most important environmental issue.

* Environmental issues are the energy sector’s most important challenge.

Putting Things in Perspective, or Why Fuel Will Rise:

6.1 Billion People in the late 1990s world0.6 Billion averaging 10,000 kWh/household (US level ca. 12,000)2.0 Billion averaging 5,000 kWh/household (Latin/Eastern Eur)2.0 Billion averaging 1,000 kWh/household (Asia, Africa)1.5 Billion Without electricity

Q: What happens if China and India and Indonesia try to buy fuel and resources to provide even half the electricity that we used ten years ago ?

A: We will see a doubling in bids for electricity fuels & resources.

What Does This Mean in Practice?

* Power costs will be high for a long time

* Relying on gas and oil will be a costly bid against the developing world

* Shifting to efficiency, renewables and co-generation will save money over the next decade.

* Why not just buy some power from coal-fired U.S. utilities? Because relying on coal to be cheap will hit its limits very soon (Mercury control, rail capacity limits,coal price rises, capital costs, and carbon control)

US Energy Law Basics 1) wholesale electric sales and

2) use of transmission lines and 3) use of gas pipelines

are regulated by the national government through the FERC (like China’s SERC) Federal Power Act of 1927 Major Amendments 1978, 1984, 1992, 2005 Can set price, usually uses ‘regulated-market’ as tool.

Retail electric and natural gas prices are set by State (provincial) governments.

Price of petroleum is unregulated (set by market)

Prices of other energy are largely unregulated

Environmental effects of energy mining, transport, and generation, are regulated by national (EPA) standards; usually states (provinces) administer those nationally set standards

US Energy Use Basics

Half of energy is used to make electricity for: 1- homes, 2- business, 3- industry

One third of energy is petroleum and diesel for cars and trucks.

One sixth of energy is for all other uses.

Current Vermont Electric Supply Simplified

30% Hydro-Quebec 30% Vermont Yankee 15% small hydro 15% wood 10% End-use Efficiency

Each kWh saved can be sold to New England grid.

Vermont’s Electric Needs 1,100 MW peak demand now

Growth2-10 MW/yr from 1984-2004 550 MW will need to be replaced in 2012 - 2015 timeframe!!

Current Sources Vermont Yankee: about 30% of VT demand and 36% energy

• Contract Expires 2012 Hydro Quebec: about 30% of demand and 32% energy

• Most of Contract expires 2012 to 2015 Independent Power Producers:

about 10% of demand and 5% energy (all renewable) • Contracts expire 2008 to 2020

New England Market and utility-owned sites: • about 30% of VT demand and 27% of VT energy

Vermont could be VERY vulnerable to the market

A Few Major Options: Some Pros and Cons

Efficiency and Conservation

VT Yankee Shift to Fossil Plants New Cogen in VT Spot Market Net Metered Small

Projects

Major In-State Renewables

Hydro Quebec Connecticut River

Dams Small Distributed

Generation Creative Imports Blended Balance

Can Energy Efficiency Really Help ? Between 1999 and 2005 Vermont doubled its commitment to strong

energy efficiency programs. The result?

Lowering electric costs for Vermont residents and businesses: In 1999, Vermont and NY had highest electric rates of seven north-

eastern states; by 2005 we had the lowest such rates. More importantly than rates, the burden went down.

Commercial & Industrial electric costs dropped from 1.9% of Gross State Product to less than 1.6%.

Residential electric bills dropped from 3.9% of disposable personal income to 3.3%.

Residential Electricity Use kWh per customer per year, 1940-2001

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USA New England Vermont

Wholesale Power Costs vs. Efficiency Vermont Costs, 2002 - 2005

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EfficiencySavings:

Low .9 cent/kWh

(Jan 2002),High >than

9 cents/kWh(Oct 2005).

2005 efficiency data is Q3 est.

Cost of Wholesale Electric Energy including ancillary and bulk transmission costs ISO NE Monthly Average Wholesale Market Price Efficiency Vermont, Contract Price per levelized kWh, stacked below customer-cost

Efficiency and Conservation Highly cost-effective; but requires $ upfront

Excellent climate-change effects

Keeps jobs and $ in VT

Probably can meet all new demand Especially if term and scope extended.

Probably can’t replace all ‘disappearing’ supply

resources.

Major Options: Some Pros and Cons


VT Yankee Shift to Fossil Plants New Cogen in VT Spot Market


HQ Connecticut River


Generation Blended Balance

Vermont Yankee VY license extension still unresolved Assumes new VY contract acceptable Waste storage/disposal issues still unresolved Effect of NRC safety rulings still unknown Price expensive if at full market rate with risk of outage-coverage built

into price! Less climate change effect, compared to others than fossil generation

(which is New England market at margin) Transportation of fuel and waste unresolved Some jobs and $ in VT; but more jobs and dollars out Revenue-sharing subject to market fluctuations, but most value in high

markets.



VT Yankee Shift to Fossil

Plants New Cogen in VT Spot Market





Out-of-State Fossil Plants Price likely to be high and volatile Very poor climate-change and health effects Jobs and dollars leave Vermont Transmission constraints ? Rail capacity? Announced coal plants, will double capital cost

for construction (e.g., VELCO-NWRP); exceed rail capacity; require mercury control, should require gasification and GHG control

‘old’ 5 cent price prediction will be closer to 10 cents for capital, Hg, transmission and rail14 cents per kWh if carbon controls kick in





HydroQuebec Connecticut River



VT Cogen Plants

Siting means finding the right spots Requires fuel delivery capacity Price depends on installation and fuel Keeps some jobs and $ in VT Environmental impact must be built in Could have high efficiency, if part of right site…

e.g., Rock Tenn, Ethan Allen, Fletcher Allen?








Spot Market Purchases

High price risk (both core price risk and highly volatile; hedge costs expensive)

Climate problems since fossil is on New England’s margin 85 % of hours.

Exports jobs and $ (most large scale supply out-of-state)

Ancillary charges, LICAP, Transmission collection for NE, ISO costs all rising








Large VT Renewable: Wind, Biomass, Wood & Solar

High installation costs, low future fuel costs Low exposure to market and fossil price changes Sustainable forestry key for VT, NY, NH, Quebec Keeps jobs and some $ in VT (help stimulate VT

renewable businesses) Excellent re climate effects

Large VT Renewable: Wind, Biomass, Wood & Solar (2)

Demonstrated and growing, despite Governor’s opposition (Old WEC landfill gas, Searsburg wind McNeil wood, New Coventry II, Sheffield, Wood)

Limited hydro site options; some retrofit potential Siting needs care and sensitivity: site-specific Supreme Court’s UPC wind decision makes PSB

authority clear.








HQ System Power HQ’s path to expansion is unclear, given internal

Quebec issues Price likely to be high-market Relatively low carbon emissions Jobs and dollars leave Vermont HQ commitment of $1 billion+ to efficiency may

free up kWh for our purchase HQ’s wind from Gaspe may not be an option given

Canada’s Kyoto commitments





HQ Connecticut

River Dams Small Distributed


Connecticut River Dams

Stable price might be negotiated. Environmentally neutral, assuming someone would operate them

Dollars leave Vermont Known technology; limited cost risk VT missed chance to purchase; long term

contracts might still be an option



VT Yankee

Shift to Fossil Plants

New Cogen in VT

Spot Market


HQ


Small Distributed Generation

Blended Balance

Small-Scale Distributed Generation / Micro Turbines

Cost may be issue Probably won’t meet all new demand Will siting issues limit deployment?? Air Permit issues need attention Micro Hydro needs rules changes Interconnect rules relatively good in VT Good to excellent climate impacts Good for jobs and $ in VT



VT Yankee

Shift to Fossil Plants

New Cogen in VT

Spot Market


HQ


Small Distributed Generation

Blended Balance

Documents

Desperate Buyers in a Sellers Market Lessons For Vermont in a Carbon Constrained World