Electricity Price Shock Headed Our Way, and It Is Avoidable

Electric industry analysts were shocked when recent capacity auction prices quintupled current levels. Combined with expected increases in cap and trade auction prices and the higher cost from expanded use of expensive and unreliable wind and solar power1, we can expect prices to soar. Delawareans are already suffering from significantly higher electric bills than other states making it difficult for manufacturers to expand production or to locate here. Fortunately, it is not too late to turn this around. We need the political will to repeal the regional cap and trade program and the forced use of wind and solar power while encouraging local ownership and construction of new natural gas fired electric generation plants. We can not only avoid the price increase, but actually reduce current prices while adding thousands of construction jobs and about sixteen hundred permanent jobs.

The capacity auction shock was caused by a reaction to new EPA rules requiring dramatic reductions in pollution emissions from coal fired electric generation plants. Coal fired plants supply about 53% of the electricity used in Delaware. The local NRG Indian River power plant is a good example of what is happening regionally. NRG is spending $360 million to add new pollution control technology to the newest and largest boiler but will shut down three older boilers. This effort is likely to be replicated throughout the region.

The added investment and lower regional capacity was expected to result in a modest increase from last year’s capacity auction of $27.73/megawatt-hour to about $40.00. Instead the price averaged $126.00. While this will only add about $3/month to residential electric bills, it could add $2 to 3 billion/year in 2014/15 over the entire region. The renewable energy segment added to concerns about its reliability offering only 13% of expected wind capacity and 38% of expected solar capacity representing only 0.005% of total guaranteed supply.
When Delaware and other states de-regulated electric generation prices several years ago the electric grid manager, PJM Interconnection, was given authority to set prices using two new pricing models. The Reliability Pricing Model is used to ensure adequate generation capacity and an auction is conducted annually where generators bid to provide generating capacity three years out. The auction results are added to customer bills as Capacity Charges. Locational Marginal Pricing (LMP) is an hourly bidding process to supply real time power and was established to deal with peak power needs and to account for grid congestion. Since Delaware imports 60% of its power from out of state we suffer a penalty for causing grid congestion. These charges can be avoided if a power customer owns the generation as a cooperative or the power distributor, such as Delmarva Power, owns the generating capacity.

To determine the impact on your bill look at the Supply Charge portion of your electric bill. The Capacity Charge will increase five-fold and the Standard Offer of Service Charge will increase $0.0225/KWh. My Delmarva Power bill would increase 18%. The cost of cap and trade auctions, wind and solar power premiums, and LMP charges are hidden in the Supply Charge.

David T. Stevenson, Director
Center for Energy Competitiveness

See CRI publication “The Cost and Economic Impact of Delaware’s Renewable Portfolio Standard”

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