Sorting out the cost of green energy
Policies designed to fight climate change come with real costs
In early August, CommonWealth magazine published a short article regarding the costs of renewable energy mandates in Massachusetts. In essence, the article stated that the Massachusetts Renewable Portfolio Standard (RPS) and other related policies are causing increases in the monthly electricity bills of residential electric ratepayers. Although the article was very general in its numbers and assumptions, the basic premise was correct. The reaction to this article by local renewable energy activists was one of rage and hysteria and it resulted in National Grid issuing a clarifying statement to the article in which they apologized for telling the truth in their quotes to Commonwealth.
The current RPS mandates a rapid build-out of renewable electric generating infrastructure in Massachusetts, the ISO-NE electric grid, and adjacent control areas. This build-out requires significant capital spending. In any electricity market environment (cost of service vs. deregulated), new infrastructure build-outs increase prices to consumers. Many regulated cost-of-service utilities in the US West and South have surcharges and riders on customer bills to pay for new fossil power plants currently under construction. The utilities allocate these charges to customers because the capital to fund plant construction has to come from somewhere. In deregulated market environments, investors (not ratepayers) assume the risk in investing capital to build new infrastructure. This is generally seen as beneficial for ratepayers since investors, not ratepayers, are the ones responsible for cost overruns and mishaps. In the Massachusetts deregulated energy market, renewable energy infrastructure investors recover their capital investment through sales of commodity electricity and Renewable Energy Credits (RECs). Although the fuel for renewable energy generating infrastructure is free (e.g., solar, wind), the projects still require large capital investments to build.
When Massachusetts deregulated its electric market in the late 1990s, part of the deal was to create the RPS, which was designed to serve as a funding mechanism for renewable energy infrastructure build-out. The RPS has been subsequently expanded and modified over the years, but it essentially mandates that all energy suppliers obtain a certain percentage of their energy supply from an increasing amount of renewable energy each year. Municipal utilities are exempt from the RPS. The table below provides a breakdown of the 2013 RPS mandate. Below, we list the types of renewable energy resources that fall into each class. You can learn more about the Massachusetts RPS at DSIRE.org, the MA DOER website, or read one of the MA DOER RPS Summary Reports from prior compliance years.
Class 1 – solar PV; wind; ocean thermal or hydrokinetic energy; fuel cells utilizing renewable fuels; landfill gas; low-impact hydroelectric; advanced biomass; combustion of select energy crops like algae or biogas; and geothermal.
Solar Carve-Out – Special carve-out within the Class I mandate specifically for solar PV built after 2008.
Class 2 – mostly the same stuff as Class I, but from pre-1997 facilities
Class 2 WTE – Electricity generated from the combustion of municipal solid waste.
Alternative Energy Portfolio Standard – combined heat and power (CHP); Carbon Capture and Sequestration (CCS); flywheel energy storage, paper-derived fuel sources, and energy efficient steam technology.
Calculating the cost to ratepayers associated with the Massachusetts RPS is actually pretty straightforward. Power supply provided to the consumer will be based off of ISO-NE market prices for commodity supply. The table above indicates the relative percentage of RECs (as a percentage of total load) that must be acquired to ensure compliance with the Massachusetts RPS. REC prices are quoted through brokers and are easily obtainable for those in the industry. Additional charges associated with renewable energy and energy efficiency programs that are billed on the distribution portion of the utility invoice can be found in the utility tariffs and/or rate-case proceedings on file with the MA DPU.
The table below provides an approximation of the additional costs, on a $/kWh basis, to a typical small commercial Massachusetts consumer served by National Grid to pay for the RPS and associated renewable, alternative energy, and efficiency policies. The total cost per kilowatt hour (kWh) is approximately 1.5 cents and this cost is likely to increase in the near term due to the accelerating RPS requirements. For a consumer using 1,000 kWhs per month, this translates to an additional monthly charge of $15 (1.5 cents per kWh x 1,000 kWhs = $15). In the NGrid service area, the additional charges for residential consumers are slightly higher on a unit cost basis ($/kWh) due to a higher value in the “Energy Efficiency Charge” line item applied to residential billings. For reference purposes, a residential apartment averages 500/kWh/month, a suburban house averages 1,000 kWhs/month, and a small retail store might average 2,500 kWh/month. Other Massachusetts utilities such as NStar, Unitil, and WMECO will have similar costs associated with these programs. Municipal utilities are exempt from most of these cost mandates, except for the Regional Greenhouse Gas Initiative (RGGI), but they may have their own efficiency or renewable energy programs with costs recovered from consumers.
The problem as Energy Tariff Experts sees it isn’t the costs associated with renewable/efficiency policies, it’s the way the costs of these policies have been communicated to the public. Politicians everywhere have told the public that renewable energy lowers utility costs to all consumers. Unfortunately, statements to that effect are completely untrue at the present time (although we think that will change). Climate change is a real problem with major associated societal costs. Fossil fuel power plants, especially coal-fired, have serious externalities and social costs that are not factored into the cost of their energy output. Voters have elected politicians in Massachusetts and other states who have promised a policy response to climate change. RGGI, the RPS, and the various energy efficiency programs are a logical policy response to climate change and reflect the will of consumers and voters. When Gov. Deval Patrick ran for office, he pledged a major commitment to building renewable energy infrastructure. Once elected, he did exactly what he promised and created some very aggressive policies to advance renewables and energy efficiency.These policies aren’t free and consumers need to understand that a better energy future costs money. At Energy Tariff Experts, we believe that renewable energy makes a lot of sense and energy efficiency is always a good investment. The current policy regime is what consumers and voters say they want and dealing with climate change now is probably less expensive than dealing with it later.
James Bride is president of Energy Tariff Experts of Cambridge.