Long-term energy contracts make sense
Locking in prices better than relying on spot market
The headline of a recent CommonWealth magazine story states, “Clean power will cost more.” Although presented as simple fact, the headline actually begs a more complicated question: “More than what?” The story endorses the notion that ratepayers are more exposed to higher costs through long-term contracts rather than short-term energy transactions. But given the volatility of the energy markets and the manifest destiny of clean power, long-term contracts likely will end up being a good bargain.
Some New England power consumers have power suppliers that engage in long-term transactions; others have suppliers that do not. In the world of power generation, it’s a similar dynamic consumers face in their housing decisions. In that market, it’s considered prudent for consumers to lock in long-term interest rates rather than risk financial exposure in the variable or “spot” mortgage market.
Those who contracted for spot power prices are enjoying it right now because natural gas — from which most of our power is made — is cheap. Similarly, those who locked in power prices, including from renewable energy providers, may be regretting their decision at present because renewable power today is generally more expensive than spot gas-based power prices. But that’s only true right now. In the recent past, natural gas prices have been much higher.
Given that history of volatility, natural gas producers, unlike clean energy producers, are unwilling to guarantee their prices over the long term. Ask a wind generator how much it would charge for in a 20-year contract, and it would likely give you a concrete answer. Ask a gas generator how much it would charge for long-term power, and it would likely refuse to name a price. Price volatility is the nature of the fossil fuel market: They produce it today at low prices wishing every second of the day for higher prices in the future.
Ed Krapels is CEO of Anbaric, a clean power infrastructure development firm.