Wired In

Every few years, the idea of taking electric distribution service public through municipalization of the low voltage poles and wires gets some traction and stirs debate about who can provide better service at lower rates – the investor-owned electric company or a publicly owned municipal light plant (MLPs).

There are several dozen MLPs, or as they are commonly known, “munis” in Massachusetts – all created many decades ago.  As a group, they have a long history of providing good service at reasonable rates to their communities. So when prices spike or when local utilities fail to restore service quickly after bad storms, the old debate resurfaces about how the munis always seem to be doing a better job.

As someone who spent 15 years working for an electric utility (including five years in the field working to restore service after bad storms), it’s tempting for me to opine on the current debate raging about whether the state’s utilities performed so badly that either their shareholders should pay a penalty or their territory should be sold off to new MLPs. But I’m not going to go there. The utilities can take care of themselves in this regard.

I think there is a more important dimension to remember in this post-electric industry restructured world. All current customers with choice of electric supplier should continue to  have that choice. The Electric Utility Restructuring Act of 1997 gave all customers choice except customers of existing MLPs.  Over the years, the fact that MLPs were also exempt from contributing to the cost of developing energy efficiency programs and renewable energy under the law has created complexities.

Pending legislation which would make municipalization easier addresses those inequities by requiring new MLPs to be subject to the Renewable Energy Portfolio Standard and energy efficiency three-year plan requirements, as well as contribute to the statewide renewable energy surcharge. What’s glaringly missing is the requirement to allow customer choice of electric supplier.

Part of the reason MLPs were exempt from restructuring was that, just like utilities, they would have had to unwind long term contracts and, in many cases, financial investments in power plants in order to provide customer choice. In essence, the MLPs had above-market electric supply costs or so-called “stranded costs” just like the utilities did. At one time, some MLPs had higher rates than the utilities because they had invested heavily in nuclear plants.

So, in the haste of putting pressure on the investor owned utilities to shape up or lose the business, let’s make sure new MLPs enter the electricity world on the same playing field in all respects. New MLPs should have to deal with all of the requirements of local distribution companies, including choice. That means all of the electronic transfer requirements to provide usage data to suppliers and the Independent System Operator, Basic Service for customers not on competitive supply and allowing customers to participate in demand response (something else the MLPs don’t currently do). I say all of this not to put a wet blanket on the idea of new MLPs but because customer choice must be defended to have a thriving, successful marketplace of competition.

I am thrilled to announce the launch of PowerOptions’ solar power program in partnership with SunEdison. Yesterday, we held an event at Woburn City Hall, hosted by Mayor Scott Galvin, which included comments from Massachusetts Energy Resources Commissioner Mark Sylvia and Representatives Jay Kaufman and James Dwyer, both of whom represent portions of Woburn. The event was well attended and heralded the accomplishment of designing and implementing this innovative program.

Over a decade ago, PowerOptions launched its first-in-the-nation electricity and natural gas programs for nonprofit institutions across the Commonwealth. By leveraging the bargaining power of a large aggregation of customers, PowerOptions provided its members with below-market pricing and very favorable terms and conditions which is critically important to nonprofits who want to focus every bit of their attention, time and money to their missions.
It was unchartered waters. Few people had even thought about, much less negotiated, the structure and terms of a retail energy program for a large consortium. We started with a fundamental knowledge that our membership brings value to suppliers and that that value must be recognized in the terms of the service delivered. Another fundamental premise was that the program should be available and beneficial to all of our members, regardless of size, and that they should have the right to opt out if we fail to deliver on our competitive promise. It is those fundamental values and beliefs that have continued to make our electric and natural gas programs successful.

We look at the market through a very different lens – keeping the interests and needs of our members always in focus and ensuring a return for the immense value that they, as a group, bring to the negotiating table. Our approach is unique and the results set the bar for all who want to provide energy to the state’s largest hospitals, colleges and universities, smaller nonprofits and cities and towns.

Once again, PowerOptions has created a program that is unprecedented in the Commonwealth and brings the power of the consortium to solar development. Our decision to develop a solar program was precipitated by the numerous calls from our members who were presented with solar proposals but had neither the funds nor the expertise to evaluate them. As one member said to me, “the solar dilemma cries out for a PowerOptions solution.” So we took the plunge.

After months of analysis, interviews and rigorous inquiries, we have chosen a solar developer who recognizes the value of our membership and is willing to be innovative in the approach to delivering solar power to our members. Our program is a turnkey solar development approach that not only streamlines the many hurdles a member would have to overcome to acquire solar energy but ensures terms and conditions which many, if not most, members could never achieve on their own.

Other developers told us we couldn’t develop a pricing structure that would ensure competitive pricing for all solar projects, regardless of size. But, SunEdison embraced the challenge and worked with us to meet the needs of our members. Many solar developers say they have access to capital, but only SunEdsion would guarantee it. Some developers didn’t quite understand who we were and what our role would be in acting on behalf of our members. SunEdison welcomed it.

This program takes PowerOptions in a new direction. We will work closely with SunEdsion and our members to find viable projects and do the hard work necessary to get steel in the ground and kilowatts flowing.

We are committed to making solar work for our members and help the Commonwealth meet its goals for solar development. We believe that our program will greatly advance the achievement of those goals, particularly for Green Communities, many of whom are already PowerOptions members, including the City of Woburn. We are excited and look forward to our next announcement with a ribbon-cutting for our first installation.

So just when we were finally getting comfortable with the joys of lower natural gas prices, a recent Energy Information Administration (EIA) report bursts our bubble.

Recent reports have touted the fact that the U.S. is rapidly becoming an exporter of both gas and oil. The glut of natural gas has caused proposed liquefied natural gas terminals to be converted from intake capability to export capability – essentially liquefying instead of solidifying the gas. All of this not only because of the glut in the U.S. from shale extraction, but because the price of gas elsewhere in the world, particularly Asia and Australia, is three or four times the price here.

Other reports have questioned whether producers would continue extracting natural gas at these currently low domestic prices given that they aren’t making any money. It’s clear that producers continue because of the export potential, and the ability to export is feeding the production machine in the U.S., to the benefit of domestic consumers.

But, last week, the EIA issued a report suggesting that exportation would increase prices to American consumers by tightening up supply. The most pessimistic scenario had prices increasing 54 percent by 2018. So the question is, what, if anything, can or should be done about it?

At a clean technology conference this week in Boston, keynote speaker U.S. Rep. Edward J. Markey declared that he would introduce legislation barring the export of domestically produced natural gas, thus, theoretically preserving its benefits for domestic use. But, will it have that effect? It’s an interesting take from a thoughtful energy leader but probably not the solution to this issue. Producers could simply curtail production.

Congressman Markey and others ought to look back to decades of attempts to regulate fuel commodity. Such action is reminiscent of the Fuel Use Act of 1978. That law prohibited the use of natural gas for electricity generation. In those days, there wasn’t enough gas for heating homes because there was little or no gas exploration. Natural gas was simply a byproduct of oil extraction.

But rather than burn if off, as was done in the old days, developers figured out it could be sold for home use at a profit. But the other effect of the Fuel Use Act was to drive the electric industry to coal and nuclear, since the industry was still feeling the effects of two Arab oil embargoes.

We should be cautious in trying to manage any fuel market. It’s a delicate balance and we must be sure of the effects – intended and unintended - before being too quick to pass laws that could backfire. The U.S.’s natural gas industry is booming—do we really want to tamper with its success?

It seems obvious to say, but it gets forgotten, we’re in a global energy market, and we isolate ourselves at our peril.

Whenever there is a bubble, there’s always someone eager to pop it. Exhibit A these days is the solar industry.

A recent article in the WSJ painted a pretty dismal view of the industry, noting, with full headline ominousness, “Dark Times Fall on Solar Sector.”  The Journal noted, for those who have been on Mars, the well-documented bankruptcies and misguided government subsidies provided to solar equipment manufacturers, from Solyndra to Evergreen and back again.  The article suggests the darkest clouds gathering are the falling prices for solar panel and components are a result of a massive supply glut from too many suppliers. 
 
There is no doubt that many of the largest publicly-traded companies in the sector have massive debt loads and falling stock prices, but the truth is there may be a turnaround for the ones that can survive the shakeout. 

Shakeouts are a common occurrence in any growing industry and global demand for solar power grew at about an 8 percent in 2011 alone. Growth may not exceed that in 2012, but there is hope in the sight for the industry as many companies find ways to control supply through plant capacity slowdown or by increasing demand of their product through dedicated development arms. The global electricity demand will undeniably be seeking clean options such as solar to fill the voids of upcoming fossil plant retirements as Environmental Protection Agency regulated water and air pollution control measures take effect, requiring capital intensive upgrades.  And as solar technology advances and costs drop, government subsidies can roll back and let the market work as intended.

Not all media is buying into the sky-is-falling theories. A recent Bloomberg News article noted that the final quarter of 2011 showed a significant uptick in solar projects in the UK and Germany, and China is on pace for record solar growth in 2012. There is even talk of the German residential market being unable to meet demand, the very opposite of what data just three months earlier showed. 

With the solar panel price drops of 51 percent in 2011, installations will escalate in many interested countries looking to ramp up their renewable portfolio. The UK installed 10 times more solar in 2011 than 2010 as prices fell, and now China is looking to double their solar plant capacity by installing 3 GW of solar capacity in 2012. Global Demand for 2012 could reach 30 GW of solar and potentially 40 GW in 2013 if pricing stays as competitive as it is today.

Is the solar industry a sure-bet or one which should be flooded with government investments and unfettered optimism? No. But the current landscape shows that reports of pending doom, gloom and possibly death in the solar industry are entirely premature.

Massachusetts has a long, successful history of energy efficiency programs and there are many reasons to ensure that continues.  But the state cannot make the kind of financial investments that it has made (currently more than $1 billion over three years) and not closely examine the costs and impacts on customers. The costs are significant and the savings do not directly offset the cost, as suggested by the numbers touted by the Department of Energy Resources and the Department of Public Utilities.

The mismatch of claimed savings and cost is simple. The cost is collected from customers now, while the savings are accrued over the lives of the many measures installed under the program. In most cases, that can take five or 10 years or more. This is, in rate parlance, called an intergenerational inequity. That simply means that customers today pay for a benefit they and customers of the future receive tomorrow.
When the first comprehensive energy efficiency programs were rolled out over 20 years ago, there was much discussion and debate about whether the investment should be amortized to spread costs over the years to match actual value to customers even though the overall cost would be higher because of the return paid to the utility for the unamortized expense. At the time, before the vast energy market restructuring in the late 1990’s, utilities with newly commercialized nuclear power plants resisted putting these expenses on their books and favored transferring the costs directly to customers. The utility also provided all of the electricity supply to the customer so, in theory, there was no intergenerational inequity since all current customers benefited from the reduction in the need for more energy.

But that was then and this is now. The world has changed. In the 1997 Restructuring Act, energy efficiency spending was capped at roughly $125 million per year. Jumping to three year plans at a cost of $1 billion so quickly from that humble point clearly warrants rethinking about how and when these funds are collected. If future investments are amortized, providing utilities a rate of return, then it will be important to rethink utilities’ energy efficiency incentives to make sure they don’t earn more on the programs than is warranted.

This is just one of many issues regulators and legislators must examine.

The business community, including PowerOptions on behalf of our 500 non-profit organizations, cities and towns and state agencies, will be raising this and a number of other issues which go to the heart of the claimed value of these expenditures. It is important to note that this challenge should not be perceived as opposition or a lack of commitment to energy efficiency. To the contrary, the commercial and industrial sector contributes the lion’s share of the energy savings under these programs and benefits from roughly 80 percent of the spending.

The beginning of a new year is a fitting time for the DPU, the Energy Efficiency Advisory Council and the Legislature to each begin the process of assessing the success of the three-year energy efficiency plans.

These plans were put in place two years ago so this examination should be incorporated  into the next three year plans to be designed over the next 10 months. All three bodies are doing just that. The process should be welcomed; it should be rigorous and must be open to new approaches as well as questioning of the underlying assumptions that supported the budget and program design.

The state’s challenge is to make the system fair and financially  sustainable for another 20 years and ensure our long, proud history of energy efficiency continues.