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Column: Vermont’s Surplus of Power Uncertainty

Sunday, December 16, 2012

Nuclear power isn’t enjoying much political favor in Vermont these days, but hard-pressed ratepayers may soon find themselves thankful for the role the maligned industry plays in moderating what they pay for electricity.

Vermont now has a 30 percent gap between committed electricity supplies and projected electricity needs; state utilities will have to bridge the gap by buying power on the short-term market. Meanwhile, Vermont’s recent Hydro-Quebec contracts (34 percent of the power) are “market follow” contracts, where the price utilities pay for power depends on the price of power on the spot market. In other words, the cost of 64 percent of Vermont’s power supply is dependent on the whatever the going price of grid electricity will be at the time it is purchased — and therefore the price of natural gas, which is the primary determinant of that price. That creates the strong possibility that the price of power could rise significantly in the near future.

At a recent meeting about Vermont’s energy future, Robert Dostis, director of government affairs at Green Mountain Power, showed charts of electricity under contract to his utility. Electricity under contract is called “committed power.” The uncommitted portion of Green Mountain Power’s power mix was 6 percent of the total in 2011, and it has risen to 30 percent in 2013. (Charts are available on the “fuel mix” page of the Green Mountain Power website.) This 30 percent supply gap is around the amount of power the Vermont Yankee nuclear power plant used to sell to Vermont utilities. In other words, the Vermont utilities have not actually negotiated a substitute for the Vermont Yankee power they used to buy.

The uncommitted and Hydro-Quebec portions of power mix are subject to the price rises and volatility of the short-term electricity market, where prices follow the cost of natural gas. In the past 10 years, gas prices have been between $2 and $12 per thousand cubic feet. Short-term electricity prices have tracked this, varying between 3 and 10 cents per kwh (wholesale prices on the grid). Residential prices are higher than grid prices. For example, with grid prices of 4 to 6 cents in the last three years, residential prices have been around 14 cents.

At the meeting, Dostis suggested that short-term purchases are good for the state, because it gives Green Mountain Power the flexibility to buy low-priced electricity. In other words, Green Mountain Power is betting that the price of natural gas (and electricity) will remain low.

However, there’s substantial evidence that the price won’t remain low. Gas companies are currently selling shale gas below the price of production. Fracked shale gas wells are more expensive to drill than regular wells, and each well produces less gas. In a recent article in The New York Times about the gas glut, T. Boone Pickens gave the gas industry some simple advice: “Quit drilling. Shut her down.” Indeed, the industry has stopped most drilling. The drill rig count is near a 12-year low, and most analysts expect the drill count to stay low until the natural gas price rises.

How high will natural gas prices rise? Nobody knows. They have climbed from around $2 to around $3.50 in the past six months. Some experts think the prices will stay around $4, but others think that $8 is more likely. The fact that Hydro-Quebec has chosen to write market-follow contracts for exports shows that they think the price will rise. If Hydro-Quebec thought otherwise, it would try to lock in current prices. The hoopla about Vermont signing the Hydro-Quebec contracts was a more of a political statement about “not needing” Vermont Yankee power than a genuine celebration of a good deal for Vermont.

Is there any hope for Vermont electricity prices staying relatively low? If prices remain low, it will not be due to renewables. While electricity from conventional sources varies from 3 to 10 cents per kwh on the grid, renewable grid prices start at 10 cents per kwh and go up to 27 cents.

No, the only hope for decent electricity prices comes from nuclear power plants.

Seabrook wrote a fixed price contract with GMP. It wasn’t for much electricity, but it was a good price (less than 5 cents/kwh) and it was fixed. Vermont Yankee offered a similar deal to Vermont Electric Cooperative, but the cooperative’s directors nixed it for ideological and political reasons. However, these nuclear deals were for small amounts of power compared with the 65 percent of Vermont power that is following the market.

There’s another way the nuclear plants are helping the price, however. Most people think that Vermont utilities have severed their relationship with Vermont Yankee. Indeed, they did not negotiate a new electricity deal in the recent past. However, the old deal with Vermont Yankee is still in place. This is the deal made in 2002, when Entergy bought the plant from a consortium of local utilities. The old deal is very good for Vermont utilities if there is a price rise on the grid. It has “revenue sharing”: No matter where Vermont Yankee sells its power, if it sells power at a price above 6.1 cents per kwh, it must split the price over 6.1 cents with the Vermont utilities. So if Yankee sells power at 8.1 cents (2 cents above 6.1 cents) then Vermont Yankee pays 1 cent to the Vermont utilities. Estimates for this revenue sharing vary, but it could be hundreds of millions of dollars in the 10 years that remain in the revenue-share portion of the agreement. Vermont Yankee revenue sharing backstops the Vermont utilities against high prices on the grid.

In short, Seabrook and Vermont Yankee are providing some financial relief from the coming high prices of natural gas and the current high prices of renewables. Vermont consumers don’t like to give nuclear plants any credit for this, but it remains true anyway.

Meredith Angwin is a physical chemist who worked for electric utilities for more than 25 years and now heads the Energy Education Project of the Ethan Allen Institute.

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