Price shouldn’t be sole focus of clean energy buys

Procurements are about reducing greenhouse gas emissions

NEWS ITEM: Large-scale hydro-electricity from Hydro-Quebec may cost more than the average wholesale price of energy.  Should we be alarmed by this?  Not quite. But why not?

First, some background.  Unless you have been living in Antarctica watching melting ice during the last year, you probably already know that the Massachusetts Legislature passed important energy legislation that was signed into law by Gov. Charlie Baker last year.  The law required the procurement of large amounts of electricity with low or zero greenhouse gas emissions, including large-scale hydro, offshore wind, and other eligible clean technologies.  With respect to large-scale hydro, bids have been submitted for the so-called clean energy request for proposals. While the bids themselves were confidential, we did learn that Hydro-Quebec actually participated in three different project bids with three different transmission partners, offering the same price to include in the package of each competing proposal.  Hydro-Quebec’s approach has created competition among the transmission projects, at least one of which would be needed to bring additional large-scale hydro into Massachusetts.  Moreover, there were bids submitted by other projects that did not even involve large-scale hydro from Hydro-Quebec.

Last week, however, there was a news report that Hydro Quebec also was offering power to the province of Ontario at a price in Canadian dollars of 6.12 cents per kilowatt-hour (which apparently equates to 4.8 cents in US dollars).  Commonwealth magazine posted a short story on this news.  In the story (and elsewhere on Twitter), the New England Power Generators Association (NEPGA) criticized the price, observing that it would be as much as double the price of energy seen in the market in New England over the last year if that is the price bid in Massachusetts.  Certainly, if the goal of purchasing large-scale hydro and other clean energy was to reduce energy costs for consumers in Massachusetts, the price would not be attractive and NEPGA would have a point.  But comparing the current, historically low energy market prices to the possible energy price that could be offered in the clean energy procurement is an apples-to-oranges comparison that misses the mark.  While this comparison is relevant to measure what the above-market cost could be for a large-scale purchase, it is not related to the core purpose of the procurement.

Specifically, these clean energy procurements are not procurements made to beat the energy price being offered through wholesale markets, the price of which is largely driven by the cost of natural gas fueling regional generation.  Rather, they are explicitly intended to bring low carbon energy into the region to meet the requirements of the Global Warming Solutions Act to reduce greenhouse gas emissions.  In fact, two gubernatorial administrations have concluded that without large-scale hydro or its equivalent, the requirements of the Global Warming Solutions Act cannot be met.  The Clean Energy and Climate Plan of 2010 under the Patrick Administration drew this conclusion. Then the Clean Energy and Climate Plan of 2015 under the Baker Administration confirmed it.

The price of clean energy, however, is typically higher than the energy market price.  It has been this way since the implementation of Renewable Portfolio Standards in the early 2000s and will continue to be so as long as natural gas prices remain low and there is no further action taken to reflect the true price of carbon in some form in the price of wholesale energy. It is a fact.  It needs to be recognized.  Denying it is as unfounded as denying climate change itself.  It’s just the cost of being responsible stewards of our environment.  It is the cost of helping to protect the future of our planet.

To be sure, we need to be smart about the clean energy initiatives we choose.  We should not blindly pay any price for any technology that reduces emissions.  This is where the rubber legitimately hits the road in energy policy debates.  Making the hard choices among various clean energy initiatives to achieve a clean energy future in a prudent way is a considerable challenge.  But this is where criticism of large-scale hydroelectricity pricing is upside down.  Ironically, one of the main reasons large-scale hydro has been targeted legislatively is because it has the potential to be one of the lower-cost options for reducing greenhouse gas emissions.  Will the price be higher than the market price of electricity in the near and midterm?  Probably, especially when the cost of transmission is added.  But it also could be the least cost of many of the other environmentally friendly alternatives and could become competitive over the long term.  For that reason, setting the bar of acceptability for a clean energy procurement at existing wholesale energy market prices is a false measuring stick. This is true not only for large-scale hydro, but also for other projects that may combine wind, solar, hydro, or other technologies.

Even when the price of clean energy is significantly higher than the forecasted wholesale price of energy, the higher unit price – by itself – is not enough reason to say no.  Advancing clean energy policy requires a very long view.  And a long view requires policymakers to take into account a multitude of benefits that weigh heavily against higher prices, including the benefits of energy diversity and lower greenhouse gas emissions.

Of course, the main reason why many wholesale generators oppose long-term contracts like the ones being sought in the clean energy procurements does not relate to the generators caring so much about the price consumers have to pay. Rather, it has to do with energy markets being distorted and otherwise messed up by clean generation projects that are mandated and supported by state programs.  I wrote about this last year in Commonwealth magazine.  As that commentary pointed out, the New England Power Generators Association has a legitimate point to make about energy market rules.  Changes are needed to assure that generators needed to keep the lights on are supported financially through the market rules, while we transition to a more environmentally benign energy future.

Eventually, federal policy that drives the market rules at ISO New England, the regional power grid operator, will have to accommodate the increase in renewable generation while at the same time assuring that generators needed to maintain reliability during the transition are fairly compensated.  In fact, the ISO has recently published a draft report on this subject, suggesting that more revenues likely will be needed to attract new generation resources needed for reliability.  Addressing this issue may increase electric bills for consumers, but if we want the benefits of a secure and reliable electric system, while placing ourselves on a viable zero-carbon trajectory, it may be unavoidable.

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It is certainly legitimate to debate the means of procuring clean energy and evaluate whether any particular proposal, initiative, or technology is the most efficient way to achieve the long-term objectives. One may even argue for alternatives to some of the programs now in place. Whatever means we choose, however, there will be a cost.  In the meantime, the bidding process is designed to create competition to drive the above-market cost down. The more the gap closes between the price of clean energy and the market price of energy in the ISO wholesale market, the better for consumers and the environment.  But the ultimate measure for approval of a long-term contract for clean energy cannot be that the bid price is lower than or equal to prevailing energy market prices.  That standard would be a nonsense riddle in today’s markets, moving us nowhere on the road to a low carbon future.

Ron Gerwatowski served as assistant secretary for energy during the first year of the Baker-Polito administration. After his stint in state government, he returned to the private sector as an energy and regulatory policy consultant. He was formerly senior vice president for regulation and pricing at National Grid before retiring from the company in early 2014.