Power Pains: One Year Anniversary of the Polar Vortex

New York AREA Issue Brief
January 6, 2015

Power Pains: One Year Anniversary of the Polar Vortex
By: Richard Thomas, Executive Director

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The polar vortex revealed vulnerabilities in our energy system that will take years to rectify, longer if policymakers continue to fail to take action. One year after temperatures hit record lows, ratepayers remain exposed to the prospect of wild weather causing energy prices to spike. Improving the odds of avoiding another “pocket book punch” is slim at best given system constraints, high government taxes, and declining fuel diversity. These issues were woefully underestimated prior to the polar vortex and have gotten worse since. The matter is of urgency and the below practical solutions, if adopted, can begin the process to reverse the trend.

Background

The polar vortex caused America to shiver like never before. Temperatures from Chicago to Buffalo were lower than the South Pole, leading to unprecedented health and safety risks and shutting down transit operations and schools across the northeast. While it was cold outside, energy markets heated up as demand skyrocketed, pushing some electric systems to their limit.

“As much as 22% of the Midcontinent Independent System Operator market’s installed generation capacity was in forced outage status during the January 6-7 cold snap that resulted in real-time prices topping $2,500/MWh,” Platts reported.[1] This was preceded with nearly 200,000 people being left without power in Quebec, Canada, due to transmission failures on Hydro Quebec’s system.[2] According to the Montreal Gazette, the government owned utility was nearly unable to meet its demand in January 2014 and required some New York-generated electricity to rescue it from rolling blackouts during the deep freeze.[3] At the same time, the New York Independent System Operator (NYISO), New York’s non-profit, federally regulated grid operator, reported that New York set a new winter electric demand record of 25,738 megawatts (MW) of electricity on January 7, 2014, eclipsing the 2004 record of 25,541 MW.[4]

The Arctic temperatures were followed by a nasty set of sudden snow storms. These weather events complicated travel, diminished regional economic activity, and strained our energy infrastructure. The combination of the cold snap and snow storms caused an unusual price spike in ratepayer bills that prompted the New York State Public Service Commission to freeze National Grid’s rates in upstate New York. Con Edison estimated that the average residential customer downstate witnessed a $55 increase (16.5 percent) in their gas heating bill and a $27 increase (21.8 percent) in their electric bill for January and February.[5] [6] Con Ed also reminded customers that they can spread the increased costs over a 12 month period.

Although numerous public policy efforts seek to permanently freeze the cost of electricity, the costs of producing it–as with any other item—are largely variable and often result in a price increase. Further, while utility companies allow ratepayers to defer costs, doing so can still hurt consumers and the economy. Moreover, our energy system cannot operate without making upgrades or conducting maintenance.[7] That is why, especially in light of the polar vortex one year anniversary, New York AREA has reviewed threats and challenges in addressing the system reliability and economics of future severe cold spells, concluding with the following points of information and recommendations.

Thaw Energy Taxes

A study by New York AREA determined that the cost of electric generation in New York has plunged 29 percent since 2008, while transmission costs statewide are up 36 percent and explicit state taxes have skyrocketed by 136 percent.[8] For the gas system, the overall gas supply charge fell 39 percent for the typical residential user, while gas delivery charges rose by 34 percent between 2008 and 2013.[9] Ratepayers realized the full effects of these steep increases during the polar vortex in 2014. At the time, New York’s residential electricity costs averaged 21.75 cents per kilowatt hour, 83 percent above the national average of 11.88 cents/kwh and 62 percent higher than the average rate of 13.43 cents/kwh in neighboring Pennsylvania.[10]

As New York State anticipates a budget surplus in the coming years, it should endeavor to eliminate needless energy taxes that make up 26.7 percent of New Yorkers’ utility bills.[11] In a November 2013 news story, City & State NY estimated that New York electric customers pay 31 percent in government taxes plus 33 percent in “delivery costs” or extra government regulated expenses, which weigh down the state’s economic recovery. [12] [13]

Maintain Fuel Diversity

The frigid conditions revealed the urgent need to maintain a balance of fuel sources to ensure that the electric system can address price volatility, fuel availability and fulfill the requirements of public policy.

Fortunately New York has a diverse electric power portfolio of nuclear, hydro, natural gas, oil, and coal amounting to 37,978 MW of total generation that withstood the temperature plunge.[14] It is noteworthy that New York also has the cleanest electric generation footprint in the nation, producing over 30 percent of its electricity from nuclear power, and 23 percent from hydro. Renewable energy sources represent 6,242 MW of resource capacity, with existing wind generation at 1,730 MW or 4 percent of total generation. This translates into annual carbon emissions per capita at 8.97 metric tons versus the national average of 22.10.

NYISO contends that, “at the regional level, however, the supply mix is less diverse.”[15] The grid operator found that power demands downstate are primarily met by natural gas, especially in New York City and Long Island. Power generation of approximately 79 percent in New York City and 68 percent in Long Island has dual fuel capabilities, a feature that came in handy during the deep freeze of the polar vortex. Whereas, gas-sourced electric generation produces 16 percent and 4 percent respectively and oil-sourced electric generation produces 5 percent and 25 percent respectively in New York City and Long Island.

Figure 1 – Generating Capability in New York City by Fuel Source

Figure 1Source: NYISO “Power Trends 2014” Report, page 32

Power plants using these inputs require an instantaneous uninterruptible flow of gas to keep the system reliable. The polar vortex disrupted natural gas supplies and deliveries, threatening both electric reliability and heating needs. Market data reflect power costs spiking, but also led NYISO to conclude that downstate prices will “be increasingly subject to volatility associated with natural gas.”[16]

In June 2012, Con Edison warned that the lack of fuel diversity would cause significant price volatility for ratepayers, especially with respect to the exposure to swings in natural gas prices.[17]Today our energy system has grown even more reliant on natural gas. Along with system constraints, the Con Edison forecast has come to fruition.

The U.S. Energy Information Administration (EIA) indicated that the Northeast experienced record withdrawals from the Northeast’s natural gas reserves last winter.[18] These increases are especially hard on those with fixed incomes and the poor.[19] Data show that New England alone spent $5.1 billion on energy for the first few months of 2014, just shy of their total energy consumption of $5.2 billion in 2012.[20] ICF International found that the cost of natural gas in early January 2014 caused power prices to spike above $600 MWh, and then to nearly $400 MWh two weeks thereafter in New York and New Jersey. [21] SNL Energy found that volatility in natural gas prices across the PJM (a regional grid operator in Pennsylvania) and NYISO systems cost ratepayers up to $622 million extra per day.[22]

During 2014’s record low temperatures, the electric system experienced extreme challenges with equipment failures including “reduced pressure in high voltage circuit breakers, icing in rivers serving hydroelectric plants, frozen pipes and valves associated with outdoor fuel and auxiliary systems, and oil systems becoming more difficult to operate.”[23] The Nuclear Energy Institute (NEI) found that America’s nuclear fleet maintained more than 97 percent operating capacity at the height of the polar vortex from January 4-6, 2014. On the state level, New York was able to maintain reliability due to plants fuel switching to oil and the vital role of the base load nuclear power from the Indian Point Energy Center in upper Westchester County, New York.

As the Empire State plans its energy future and its policy response to the polar vortex, it will be critical for reasons of cost and reliability to keep safe, well-functioning components of our electricity infrastructure online. This includes Indian Point. Further, New York AREA encourages that policy makers maintain a level playing field when it comes to determining public policy priorities so as to not compromise long term energy needs for short term political objectives.

Expand Access to Natural Gas

New York Natural Gas System Constraints

While natural gas supplies are at an all-time high, transportation constraints limit access, making the abundant fuel source scarce and expensive during periods of high demand.

During the height of the polar vortex, New York City natural gas prices for heating in January 2014 to rise to $27.43 / MMBtu, up 394% from $5.55 /MMBtu in December 2013. EIA data shows electric prices for natural gas in January 2014 was $233.59 / MWh which is 252% higher than $66.39/MWh in December 2013 and 192% higher than 79.77/MWh in January 2013.

The U.S. EIA attributes natural gas price volatility in the northeast to pipeline constraints heading into New York and New England from the west and south. On January 8, 2014, the EIA noted that that liquefied natural gas (LNG) and natural gas imports into the northeast United States from eastern Canada “are expected to decline 49%.” This was largely due to Canada’s need for gas supply to fuel its power plants and heating for Canadian ratepayers. It is important to emphasize that the drastic reduction in Canadian imports occurred during “critical notices” for the Algonquin and Tetco pipelines that serve the New York City and Boston markets.

The pipeline constraints will persist for the foreseeable future as the system is designed to fulfill contractual arrangements. This means that if demand exceeds pipeline supply, the demand will likely not be met unless the contracts allow gas service to be interrupted. Without such firm commitments and arrangements, pipeline projects cannot proceed given the required capital investments and operating costs.

Gas Constraint Impact on Ratepayers

Given the supply shortage and steep rise in demand for heating and electric generation needs, Long Island ratepayers paid a $17 surcharge for natural gas beginning on January 1, 2014 and have been subject to at least six (6) subsequent rate increases by the Long Island Power Authority, whose system is now managed by PSEG.[24] A Newsday article quoted a ratepayer as saying, “‘This bill just killed me,’ said William Jones of Wading River, referring to [his] bill that jumped to $435 from $179 last month.”[25]

Upgrading Access to Natural Gas will Lower Electric and Heating Bills

One solution is the deepwater port project called “Port Ambrose,” proposed by Liberty Natural Gas, a New York AREA member, and under regulatory review. The proposed site, which is located approximately 18.5 miles off the coast of New York and 28.7 miles off the coast of New Jersey, will be used to import liquefied natural gas (LNG). The project is a mobile natural gas delivery system, designed to import natural gas to the New York area during peak demand in the winter and summer months. The facility will utilize submersible buoys that will tie into the existing pipeline infrastructure on the ocean floor. This structure will withstand hurricane conditions, meet all safety requirements, and not be visible from the shore.

The Port Ambrose project will provide significant economic benefits to the region. ICF International estimates that Port Ambrose will reduce the average annual price of natural gas across the New York metropolitan area, creating up to $325 million per year in direct savings to natural gas customers. The project will bring hundreds of union jobs and $90 million in direct investments in local goods and services. More importantly, no taxpayer, utility rate increases, or public money of any kind will be used to pay for the project.

Conclusion

The polar vortex anniversary is a reminder about the importance of consistently putting in policies which will ensure affordable and reliable electricity. By cutting unnecessary energy taxes, maintaining a diverse fuel supply, and having more natural gas available, particularly during peak periods, New York will be better able to avoid crises and have a strong energy infrastructure, which is also essential for economic growth and an excellent quality of life.

 

Appendix A: New York Natural Gas Charge Snapshot Comparison between January 2008 and 2013

Utilizing information from New York States Public Service Commission records, New York AREA compared residential winter natural gas rate charges of New York’s top five natural gas utility suppliers between 2008 and 2013. For this report, the top five were selected based on size of service population and territory which include the following:

1. Brookly Union Gas Company

2. Central Hudson Gas & Electric

3. Con Edison

4. Keyspan Brooklyn & Long Island (aka National Grid)

5. New York State Electric & Gas Combined Districts

The standard formula for calculating percentage change was applied to each utility and presented on an aggregate average basis. The overall percentage growth formula is:

2013 NatGas Price – 2008 NatGas Price / 2008 NatGas Price.

Residential natural gas pricing information from the NYS PSC can be accessed under the following links:

January 2013 New York Winter Residential Natural Gas Rates:
http://www3.dps.ny.gov/W/PSCWeb.nsf/ca7cd46b41e6d01f0525685800545955/c56a606db183531f852576a50069a75d/$FILE/Residentiall-%20Gas-%20Winter%202013-9-11-13.pdf

January 2008 New York Winter Residential Natural Gas Rates:
http://www.dps.ny.gov/typical_bills/util_gas_res_bills_Jan_1998.pdf

 

Editor’s Note: Richard Thomas is Executive Director with the New York Affordable Reliable Electricity Alliance. Founded in November 2003, New York AREA is a diverse group of more than 150 business, labor, and community groups, individuals and energy companies including Entergy (the owner of Indian Point) and Liberty Natural Gas (developer of the Port Ambrose project). New York AREA’s mission and purpose is to ensure that New York has an ample and reliable electricity supply and economic prosperity for years to come by educating policy makers, businesses, and the general public regarding the necessity and importance of safe, low-cost, reliable, clean electricity.

 

[1]     “MISO forced outages peaked at 22% of generation during polar vortex: RTO,” Platts, January 15, 2014 Link: http://www.platts.com/latest-news/electric-power/houston/miso-forced-outages-peaked-at-22-of-generation-21084199

[2]     “Quebecers asked to reduce power consumption after nearly 200,000 left without power,” Global News, December 5, 2013 Link: http://globalnews.ca/news/1710253/quebecers-asked-to-reduce-power-consumption-after-nearly-200000-left-without-electricity/

[3]     “Hydro Quebec network pushed to its limit,” Montreal Gazette, January 7, 2014

[4]     “Frigid Temperatures from Polar Vortex Drive Record Winter Demand,” NYISO, January 9, 2014 Link: http://readme.readmedia.com/Frigid-Temperatures-from-Polar-Vortex-Drive-Record-Winter-Demand/7659202

[5]     “PSC freezes National Grid electric rates Upstate because of ‘unusual’ price spikes,” Syracuse Post-Standard, January 29, 2014 Link: http://www.syracuse.com/news/index.ssf/2014/01/psc_freezes_national_grid_electric_rates_upstate_because_of_unusual_price_spikes.html

[6]     Officials in the neighboring PJM market expressed similar cost recovery concerns given the high price placed on natural gas due to delivery constraints. See PJM’s entire statement under this link http://bit.ly/1xVkMDZ

[7]     “PSEG Customers facing rising electric bills,” Newsday, January 30, 2014, Link: http://www.newsday.com/long-island/pseg-customers-facing-rising-electric-bills-1.6913689

[8]     “How to Really Reduce New York’s Electric Costs,” Richard Thomas, New York AREA, May 27, 2014, Link: http://area-alliance.org/index.php/resources/issue-briefs/how-to-really-reduce-new-yorks-electricity-costs-politicians-should-aim-high-and-focus-on-the-real-cost-drivers-of-new-york-electric-costs-and-its-not-the-lower-hudson-valley-cap/

[9]     See “Appendix A” for more information.

[10]    U.S. Energy Information Administration, Electric Power Monthly, February 2014, http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a

[11]    “Short-Circuiting New York’s Recovery,” Public Policy Institute, March 2010, Link: http://www.ppinys.org/reports/2010/ShortCircuitingNewYorksRecovery.pdf

[12]    “Taxing times storm battered utilities already facing rising taxes and fees” City & State Magazine, November 2013

[13]    “Con Ed customers, including those on Staten Island, pay more than double the U.S. city average, AARP says,” Staten Island Advance, May 21, 2013, Link: http://www.silive.com/news/index.ssf/2013/05/con_ed_customers_including_tho.html

[14]    “Power Trends 2014,” NYISO, pg. 5, June 2014, Link: http://www.nyiso.com/public/webdocs/media_room/publications_presentations/Power_Trends/Power_Trends/ptrends_2014_final_jun2014_final.pdf

[15]    Ibid., pg. 31

[16]    Ibid., pg. 35

[17]    “VIDEO – This Generation Is 24/7, Real-Time, All The Time, Everything From Electricity – Meeting Demand Energy Forum,” New York AREA, June 2012, Link: http://area-alliance.org/index.php/2012/07/meeting-demand-energy-forum-video/

[18]    “Cold weather led to record-high natural gas storage withdrawals,” U.S. EIA, January 17, 2014, Link: http://www.eia.gov/todayinenergy/detail.cfm?id=14651

[19]    “Northeastern Winter Natural Gas and Electricity Issues,” U.S. EIA, January 7, 2014, Link: http://www.eia.gov/special/alert/east_coast/pdf/energy_market_alert_Jan_7_2014.pdf

[20]   “Get Ready for the New England Power Shortage,” The American Spectator, July 18, 2014, Link: http://spectator.org/articles/60007/get-ready-new-england-power-shortage

[21]    “The Adequacy and Cost of Natural Gas Capacity Serving the New York and New Jersey Energy Market,” ICF International, July 2014, pg. 8, Link: http://portambrose.com/wp-content/uploads/2014/07/ICF-NY-NY-Polar-Vortex-Gas-Market-White-Paper-July-17-2014-Final.pdf

[22]    Ibid., pg. 9

[23]    “Power Trends 2014,” NYISO, pg. 19, June 2014, Link: http://www.nyiso.com/public/webdocs/media_room/publications_presentations/Power_Trends/Power_Trends/ptrends_2014_final_jun2014_final.pdf

[24]    “LI Utility Bills to Spike by Nearly $17 in January, ” Newsday, December 31, 2013, Link: http://www.newsday.com/long-island/li-utility-bills-to-spike-by-nearly-17-in-january-1.6695801

[25]    “PSEG customers facing rising electric bills,” Newsday, January 30, 2014, Link: http://www.newsday.com/long-island/pseg-customers-facing-rising-electric-bills-1.6913689