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Why 7 Years Of Low Natural Gas Prices Haven't Brought Down Electricity Prices

LOW NATURAL GAS PRICES WOULD BE COMPARABLE TO THE 2ND BIGGEST STIMULUS PACKAGE EVER, HAD THEY BENEFITED ELECTRIC RATEPAYERS

After peaking in 2008, the collapse of natural gas prices theoretically saved Americans nearly $250 billion over 3 years. Had the net savings been a stimulus package, the first year alone would have been the 2nd biggest in history. Seven years of low natural gas prices have resulted in plummeting wholesale power prices (what the utility pays), but few Americans feel like they’ve seen any benefit, especially on their electric bills.

benefit of low natural gas prices

Although natural gas prices, which are the biggest input into the electric system, have declined by 39% over the last decade, electricity prices have risen by 40%. As the industry saved around $30 billion a year, consumer rates still rose faster than inflation.

electricity prices rising 40 percent

This is perhaps the most clear example of the fundamental problem with how electric utilities are paid. Regulated electric utilities make money by building infrastructure and recovering the cost, with interest, through monthly electric bills. The more they build, the more they make. Most are public companies, making them responsible to their investors to build as much transmission and distribution infrastructure as they can get away with. To avoid unnecessary investments, public utilities commissions (PUCs) are supposed to represent the public interest in approving utility investments.

Electric utilities are under a lot of pressure not to raise rates but there’s almost no pressure to lower rates when commodity prices decline -David Crane

ABSORBING THE BENEFITS

But electric utilities have successfully funneled the benefits of cheap gas into new projects.  They are absorbing the benefit of low commodity prices by using the avoided expense to get projects approved by Public Utility Commissions without raising rates.

Electric utilities have been on a spending spree. The Edison Electric Institute reported an a 151% rise in capital expenditures over the past decade, while electricity prices increased by 39%.  Few are arguing that electric utilities don’t need to upgrade their infrastructure, it’s that there may be better ways to achieve desired outcomes.

After Superstorm Sandy, PSEG announced a plan to mitigate the impacts of future storms by spending $3.9 billion, primarily for hardening substations.  From the companies own data, the money spent would result in “a modest improvement in our ability to weather these storms,” according to Stefanie Brand, director of the New Jersey Division of Rate Counsel.

Electric utilities were given monopolies because a natural monopoly does exists in transmission and distribution. The consumer would not benefit from multiple companies providing power grids.  But if you empower people to provide their own electricity, it’s beyond the scope of both the utility and state regulator. Competition is entering the market like never before leveraging rooftop solar, demand response, and energy storage.

Aside from the lack of competition, the centralized energy system itself is full of inefficiencies, with room for disruptive competition. Most potential energy fed to the electric system is lost either as waste heat at the generation facility or line loss from transmission.

As complicated as it sounds to coordinate a power network of distributed energy resources, it’s already been demonstrated in the real world by CleanSpark and LichtBlickSmart microgrids can balance themselves, while improving national security and resilience.

Former CEO and current thought leader David Crane sees energy following a similar path of computers. In the 70s and 80s there were just a few massive, centralized supercomputers. Computers were a bulky, centralized systems.  Then people found a way to string distributed PCs together, and the supercomputers weren’t necessary anymore.  The computing power of distributed computers in the cloud surpassed all expectations.

Microgrids, ultimately, will not come from top down but the bottom up, owners of distributed energy resources like solar PV and batteries will realize they have spare capacity, says Crane in an interview with Columbia University’s Center For Global Energy Policy. “Whenever there’s spare capacity going forward, society is going to find a way to use that spare capacity.”

Though Crane admits getting in trouble at NRG for being ahead of the curve, the sharing economy for energy could be closer than we think.

Images: [1.] By Ryan Lackey CC2.0 via Stockergy.com
Benjamin Burger's picture

Thank Benjamin for the Post!

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Bob Meinetz's picture
Bob Meinetz on February 13, 2016

Benjamin, the reason electricity prices are multiples of what they were one decade ago has nothing to do with microgrids, inefficiencies, or distributed generation.

It is entirely the result of the 2005 repeal of FDR’s Public Utility Holding Company Act (PUHCA). PUHCA’s repeal, with one stroke of George W. Bush’s fossil-fuel-powered pen, legalized:

  • Campaign contributions from utilities to political candidates. In California, in the last five years alone, utilities have found it in their hearts to donate $110 million to their most powerful friends in Sacramento. Utility contributions have surpassed those of healthcare to make it the most powerful special interest bloc in the state. Before 2005, campaign contributions by utilities were prohibited.
  • Lobbying. Before 2005, utilities were prohibited from not only lobbying, but even testifying on their own behalf before filing with the SEC.
  • Holding companies. If you were a utility, and could force the public to buy your own natural gas at a markup, would you: a) leave efficient nuclear plants providing carbon-free generation online, or b) shut them down, and burn as much natural gas as possible?
  • Un-reviewed business relationships between utilities and their suppliers. Before 2005, all business relationships were reviewed on an annual basis by the Securities and Exchange Commission for conflicts “not in the public interest”.

It was an exemption from PUHCA which made the Enron fiasco not only possible, but legal. Its repeal is the energy equivalent of the end of Glass-Steagall, which enabled the 2007 derivatives meltdown and ensuing recession. Until hippy-dippy renewables advocates realize they’ve become marketing tools of Big Energy, electricity prices will continue to skyrocket, exactly as they did in the 1920s under utility monopolists like Samuel Insull.

There’s nothing wrong with the regulated utility model, the problem is it doesn’t exist anymore. Deregulation – The Gift That Keeps On Giving.

Mark Heslep's picture
Mark Heslep on February 15, 2016

“Regulated electric utilities make money by building infrastructure and recovering the cost, with interest, through monthly electric bills. The more they build, the more they make. “

This assertion applies to well to manufacturing and banking perhaps, but is fundamentally wrong about US power utilities across the board, which has run a different business model for decades.   Even superficial attention to their behaviour and statements will show they are loath to build any new infrastructure, which always entails new risk in a business that otherwise has almost no risk if they simply run the fleet they have.  

Even in the best of times for utilities. new capacity creates under utilization for period, and this is not the best of times as power demand has been flat for a decade.   Utility executives for decades have chanted the same mantra:  built nothing new until absolutely necessary, run the existing fleet as hard as possible for as long as possible, slowly raise rates, pay the dividend every quarter.

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