- Last winter’s extreme cold weather, coupled with flaws in the power markets, drove power prices higher earlier this year.
- Regulators and others are now taking steps to prevent similar price spikes.
- Prices have returned to near-normal this summer.
- More wind, solar, and energy efficiency will lower prices in the long run because they have zero fuel cost, which accounts for most of the price of electricity.
The federal government has confirmed what many consumers already know – their electricity costs rose in the first six months of this year compared to last year. But the report left unsaid what was the primary reason for the price spike: the Polar Vortex and an otherwise harsh winter, which caught utilities and grid planners off guard. They are now working to avoid similar challenges and price spikes in time for the coming winter.
Although the data reported by the U.S. Energy Information Administration (EIA), the government’s energy statistics agency, received wide news coverage this week, unusually high January and February power prices have now settled back to near-normal levels this summer. And electric transmission grid operators are taking actions in the short term to keep consumer power costs in check while strengthening reliability no matter what the weather. Longer term, more investments in renewable energy and energy efficiency will reduce both wholesale and retail energy prices while bringing their own reliability benefits.
The Polar Vortex was…well…unusually cold
The first three months of 2014 were among the coldest in recent years across much of America, with two weeks in January proving especially unrelenting. Despite record electricity demand, power companies and grid operators kept the lights and heat on during the Polar Vortex. PJM, the largest regional grid operator in the country (managing the high-power electric grid in all or parts of 13 states in the Mid-Atlantic and Midwest regions), experienced eight out of its top 10 highest power demand days ever in January 2014:
(source: PJM – p. 32 of this report)
Consumers’ power bills also spiked higher during this extreme winter because the high demand, coupled with unprepared utilities and other challenges, translated into higher energy prices. In other words, the simple laws of supply and demand meant that to continue providing power to customers without interruption, utilities had to pay a higher price to obtain their power.
This past winter’s experience, and this week’s Energy Information Administration data, have some people concerned that the situation can occur again. But let’s take a look at all the factors that should ease these concerns.
Solutions should be ready to strengthen winter reliability and reduce price spikes
Adding to the high demand, other factors contributed to higher prices last winter. The severely cold weather caused many more power plants to malfunction than usual. Grid operators have been working overtime to establish new power plant testing and related requirements designed to assure power plants will be available and ready when needed during the next serious cold snap.
Another problem: archaic natural gas markets haven’t kept up with the country’s changing electricity mix and regional energy markets. In PJM, some power plants faced a Hobson’s Choice of either paying for costly gas supply during the Polar Vortex, or facing stiff penalties from PJM for not powering up when requested. Further, in New England, some power plants faced gas supply challenges.
While electricity power markets operate around the clock using sophisticated software and secure communications to quickly and efficiently dispatch power to consumers, gas markets often operate more informally and more slowly. Assuring a reliable natural gas fuel supply often can depend on last-minute deals struck by telephone, and gas suppliers can squeeze power producers on price when demand spikes in cold weather. Gas needed to heat homes and businesses also receives priority over electric power generation most of the time.
While gas market problems will be more challenging to solve than cold weather power plant performance issues, regulators are now working on solutions. The Federal Energy Regulatory Commission (FERC), which is the independent federal body that oversees the high power electric grid and interstate natural gas pipelines, is working with electricity and gas experts to address the growing coordination issues between natural gas and electricity markets. FERC’s latest proposed rules would better coordinate the daily schedules of the natural gas and electricity markets and help to reduce gas supply shortages. Others have proposed more sweeping reforms to gas markets to increase their transparency and financial liquidity, both of which would help to reduce gas price volatility.
Our mild summer is helping consumers
This summer’s relatively mild weather in the eastern United States also should help consumer pocketbooks. In PJM, for example, wholesale prices have settled down from their winter highs to near-normal levels:
(source: PJM data)
Wind and solar: zero fuel cost = lower energy prices
Looking out into the future, wind, solar, and other renewable energy sources also can keep power costs low. Fuel costs (for natural gas, coal, etc.) are responsible for between 80 and 90 percent of the cost of electric power. (See page 103 of this document.) In contrast, renewable energy like wind and solar offers zero-cost fuel sources no matter the weather – and some renewable resources perform at very high levels during the winter months when gas supply is under the most pressure.
Last winter also highlights the important role that energy efficiency can play in meeting peak power needs and holding down bills. Unlike coal and natural gas plants, optimizing energy through cutting waste performs well in all weather conditions while costing less than half as much as building new generation.
Expanding these cleaner, cheaper resources is the best way to meet our energy needs and keep consumer utility bills down – both on an everyday basis and in winter and summer extremes.