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.

Thus, in 2022, or 2030, or 2040, the CommonWealth headline may read “Dirty power will cost more” because the price of natural gas has taken off on one of its random excursions. The story cites a study conducted by the Brattle Group and funded by the Barr Foundation that said “the state [of Massachusetts] is caught in a bind: It needs clean power to meet legally mandated greenhouse gas emission targets but that power will be more costly… The studies reviewed above have included clean energy resource cost assumptions that are more expensive than current and projected market price.” But how can anyone make safe assumptions about the price of natural gas 5, 10, or 20 years from now? Juxtapose that volatility against fixed prices from reliable, clean energy sources, including onshore wind and hydropower combinations. They are ready to offer competitive pricing, and they promise to look like a very good deal over the long term.

Meet the Author
Choosing fixed pricing in an environment of volatility is a highly rational decision. So why shouldn’t Massachusetts, which is now almost 100 percent exposed to spot power prices, lock in the price of 20 percent of its energy costs? It would be imprudent to rely on the spot market in the face of our energy challenges.

Ed Krapels is CEO of Anbaric, a clean power infrastructure development firm.