How this state’s electricity pricing system is hamstringing investment and renewables and stifling job growth

It turns out that for the last three years, the prices paid to producers of electricity in New York and Western New York in particular are among the lowest in the nation. For Western New York, these prices have averaged around 3.5 cents per kilowatt-hour, (3.189, 3.922, and 3.698 cents/kWh for 2009, 2010, and 2011, respectively) but for the last six months, prices have collapsed to historically low levels, averaging around the 2.5 c/kWh. This is why there is talk of AES Somerset going belly up, and the mothballing NRG Dunkirk is under discussion. The price paid to electricity producers is now so low that even historically low (and also collapsed) natural gas prices cannot explain these minimal Western New York electricity prices. And while this temporary bargain for consumers may seem like a good deal, odds are, you as a consumer are mostly unaware of it.

But it cannot last—the generators of electricity are not charity organizations. The price they get eventually has to equal the cost to generate it plus some minimal profit. Otherwise these facilities will shut down, as the money bleed is, like the proverbial rent in New York City, just too darn high.

Of course, most people have no idea what generated electricity prices actually go for these days; it’s only one part of the electric bill—the other parts are (generally) the transmission and connection fee. So here’s how to find out what are the prices paid to owners of generation facilities for electricity on the spot market. That price can vary wildly over the course of a day or year or several years. In New York State, the record hourly price is 99.5 c/kWh (in 2006, Long Island), but these days, prices statewide are averaging 3 c/kWh. Not all electricity is sold at spot market rates, but a lot of it is, and the spot price helps set the long range trend for future prices, too.

Prices for electricity across New York are set on an hourly basis in 11 different geographic zones via auctions held by the New York Independent System Operator (NYISO) on a “day ahead” basis (DAM); those prices are corrected later once the numbers are actually in, but these tend to be only minor corrections. To find these spot prices, you need access to the web – and you need to head over to http://www.nyiso.com/public/markets_operations/index.jsp, then click down to “Pricing Data” and then click on “Day Ahead Market LBMP – Zonal.” For a recent day (such as April 30, 2012), select the html file format option and then, presto, you have a list of several sub-markets and 24 hours worth of prices. For April 30, 2012, the West Zone averaged $25.76/MW-hr (2.576 c/kWh). A typical Western New York household that uses 550 kWh/month would have racked up a generated electricity bill of $14.80/month in April for the equivalent of about one horsepower continuously used, 24/7, for 30 days. However, for someone who only used 166 kw-hr/month, that would have been $4.47 for a month’s worth of electricity, at least for the actual energy generation part. In this case, being efficient—LEDs and compact fluorescent bulbs, iPads and a new fridge—is worth a whole $10/month.

We have heard the religious mantra ad infinitum that cheap electricity prices will bring us lots of different jobs, and perhaps decent economic growth. Well, prices are now so low that existing generators are going down the tubes, and yet, still no jobs. It turns out that the only jobs created or maintained via the super-cheap electricity prices are those where there is lots of electrical energy use per job, such as at Globe Specialty Metals silicon plant in Niagara Falls, which uses a pair of 25 MW (50 MW total) furnaces to make elemental silicon from sand and a carbon source with about 100 workers. In this case, electricity is a raw material, and obviously an important production cost parameter. But most businesses use considerably less electricity per worker, and nowadays the cost of transmission is likely to exceed the cost of the produced electricity. The combined electricity usage may often be less than one percent of the total cost of production, and management expenses are likely to be larger than the generation part of the electricity bill. And, of course, it is really hard to encourage conservation and efficiency when electricity is dirt cheap; for example, 233 kWh (for April 30, 2012) is price equivalent to a six-pack of fine brews costing $6, or the energy equivalent of seven gallons of gasoline costing $28. For many people, ultra-low electricity prices do not provide any motivation for getting efficient, which is sad but nevertheless true.

It turns out, by various quirks of fate, that replacing the pollution-based energy generation is now a major growth industry in many parts of the world, and has led to significant job growth in some regions of the world (Europe, Ontario, China, India, etc.). But the unsubsidized cost to generate that non-polluting electricity is not 3 c/kWh or less—though in some cases, close to that. By pricing electricity as the weighted average of the needed price to cover the production cost and some minimal profit instead of via the NYISO system’s ever-changing “Uniform Clearing Price,” the need for any subsidies would be eliminated. In Ontario, this is now the equivalent of one Tim Horton’s donut per month, but it has also produced (since October 2009) 20,000 jobs and garnered $27 billion in new investment in clean energy systems in the province. So, slightly higher prices for the generated portion of the electricity bill also can lead to actual job growth, and lots of investment.

These days in New York State, the last wind farms for awhile are being installed (such as Marble River), and that will be it after the end of 2012 for some time. Over an eight-year period, roughly $3.5 billion will have been invested and only a few hundred permanent jobs have been developed in New York State (but 70,000 nationwide in the US), as well as the equivalent of about 1,000 construction jobs in some years—jobs which go away when construction of wind farms stops. Somehow, we missed the memo that says that renewable energy installations are supposed to be connected to new job creation. Instead, we focused on subsidizing renewables to match the low and highly variable price of electricity as set via the NYISO spot market. We rarely ever did the one thing that is known to work with respect to job creation (Quebec and Ontario are great examples of this), which is to provide stable, long-term (20 years, at least) prices that cover the cost of making electricity and some nominal profit. The same holds for biomass, biogas, tidal, and run-of-river, as well as solar PV.

New York State’s present policy seems to be to maximize unemployment, minimize employment in actual wealth-producing activities via maintaining a gambling-casino-type electricity pricing system. For now, we have electricity prices that tend to be below the average cost to produce this electricity, which is unusual; often this casino pricing system results in higher electricity prices than under “cost plus a reasonable profit” systems, as well as extraordinary profits for owners of old, pollution-based generation facilities. And if we want a piece of the “clean-tech” market—which for New York State alone will eventually be much more than $100 billion of products in the next 10 to 40 years (how much more depends on which renewable approaches are used to make this electricity, as some are more costly than others, and how fast is a whole other thing)—then we need to change the way that renewable energy is priced. Pollution-based approaches (nukes, natural gas) can continue to use the auction arrangement until they become obsolete or just shut down as the potential disasters that they are, but hopefully before an “oops” happens. Setting renewable electricity prices to whatever the NYISO prices happen to be at any given moment (largely set by coal, nukes, and natural gas), subsidizing renewable prices to those levels via sales taxes on electricity, and regressive avoided taxes on the really, really rich does not appear to be a cost-effective job creation strategy for New York State.

Instead, we get zip for manufacturing jobs, temporarily depressed prices that will rebound whenever fossil fuel price spike and not much energy conservation, either. Besides, last I heard, the natural gas and coal consumed by an operating wind turbine to make electricity (and associated air and water pollution) is also zero. So why should wind-turbine-sourced electricity prices be set by the prices of nukes, coal and/or natural gas, when there is zero coal, natural gas or nuke cost input for wind turbine operations? As Dr. Spock would say, “That is highly illogical.”

Dave Bradley is a member of Wind Action Group.