New England electricity woes

New England weathered its first heat wave of the summer and so did the region’s power system. The lights stayed on, people stayed cool and businesses continued to operate.

The future may not be so sanguine.

While electricity use continues to climb – recently in mid-June we came within a whisker of setting an all-time record – supply has stopped growing. In two to four years, we will not have enough electricity to keep the lights on in the summer. Without new investment, New England could face an energy future much like California’s recent past – including frequent power emergencies and possible rolling blackouts.

This ominous forecast doesn’t have to come to fruition, if we continue to make improvements to the region’s deregulated electricity markets. The 27-year-old competitive electricity markets have resulted in a more reliable, economical, and environmentally friendly power system. Billions of dollars in private investment have financed new, cleaner, more efficient power plants. Four major transmission system upgrades have been approved and two others are underway. Participation in various conservation programs has more than doubled in the past three years.

This investment has resulted in measurable benefits for consumers. Wholesale electricity prices, after adjusting for fuel costs, have declined by 5.7 percent since the first full year of market operation (2000) and 11 percent since 2001. Through reduced costs and other market efficiencies such as increased power plant availability, consumers have saved $700 million annually. Cleaner plants have led to a reduction in annual carbon dioxide emissions by 6 percent, nitrogen oxide emissions by 32 percent, and sulfur oxide emissions by 48 percent.

But as New England’s economy continues to grow, so does its need for electricity. Demand for electricity will grow by 1.5 percent a year – equivalent to the power produced by one new power plant. Unfortunately, the pipeline for new plants is empty. Moreover, there is a potential for several existing plants to be deactivated, some of which are located in heavy demand areas, such as Greater Boston.

Since electricity cannot be stored in large quantities, it is consumed as fast as it’s produced. We need to have enough resources in place to meet the real time needs of the power system on any given day.

There are three routes we can take from here.

We can hope the problems work themselves out, but this approach will not attract new investment and it means a slow deterioration of the system. The end result would be a more expensive and less reliable power system.

We can retreat to a regulated market, but a return to the “good old days” is likely the most expensive option for consumers. In the “good old days,” consumers were responsible for the full investment risk without the benefits of market efficiencies as described above. In many cases, unwise investments were made and consumers were responsible for the so-called “stranded assets.”

Since then, new power plants have been privately financed, taking the risk of bad decisions and poor management off of the backs of consumers. How to sort out who would “own” those plants and whether they would have to be “bought back” would create a legal and regulatory quagmire with little upside for consumers. Investment in new plants by unregulated companies would evaporate, leaving consumers on the hook again to finance new investment.

The third option would make changes to the competitive markets to compensate existing resources region-wide, while attracting private investment in additional resources to meet the growing energy needs across the region, including areas such as Greater Boston and southwest Connecticut. These changes also include enhancements to our conservation program that rewards consumers for using less electricity during peak use periods.

Option 3 has been criticized as too costly. But, in reality, the short run costs of all three options are similar. The question is which option provides the most benefit in the long term. If the first results in little improvement to the system, and the second amounts to a step backward, then consumers gain little for their money.

Option 3 will create a market that will compensate existing resources and attract needed investment, making the regional system much stronger and providing a more reliable supply of power to serve consumers and support the economy for years to come. This is the only option which harnesses the power of the marketplace to generate efficiencies and, hence, lowers overall costs in the long term.

Without adequate compensation for existing resources and future investment in new resources, the system will collapse.

The market enhancements that are planned will ensure the long-term reliability of the region’s electricity system, so it can continue to meet the needs of New England consumers and support economic growth.

Gordon van Welie is president and CEO of ISO New England, the operator of the regional electricity system and wholesale power markets.