Desperate Buyers in a Sellers Market Lessons For Vermont in a Carbon Constrained World Michael Dworkin, Professor of Law & Director, Institute for Energy and the Environment Vermont Law School February 2009

Here are the prices for wholesale electric power (not including delivery!)

Vermont’s Energy Future VT DPS (2008) at 14

Why Care About World Energy Trends ? * Because the World Prices Affect You World Energy Demand Sets World Natural Gas Price. World Natural Gas Price Sets Wholesale New England Electricity Price New England Wholesale Electricity Price Sets one-sixth of Vermont power costs now Those are the prices Vermont faces already Climate Change is an environmental tragedy Carbon is global, and lasts a hundred years

Future Fossil Power Prices Look Higher  World economic down trend has slowed, but not eliminated price rises and price expectations.  Current futures prices are ca. 30% higher than predictions of two years ago --- and almost three times the price of five years’ back

How Much Time Would ANWR Buy? ANWR: 6-7 billion barrels economically recoverable (even at ‘off the chart price”) are a 10-month U.S. supply, or about 16 months of imports. If opened this summer, they would be gone by 2010 election. (EIA cut this chart off at $40/barrel in 2003)

*Energy policy is our world’s most important environmental issue. *Environmental issues are the energy sector’s most important challenge.

Putting Things in Perspective, or Why Fuel Will Rise: 6.1 Billion People in the late 1990s world 0.6 Billion averaging 10,000 kWh/household (US level ca. 12,000) 2.0 Billion averaging 5,000 kWh/household (Latin/Eastern Eur) 2.0 Billion averaging 1,000 kWh/household (Asia, Africa) 1.5 Billion Without electricity Q: What happens if China and India and Indonesia try to buy fuel and resources to provide even half the electricity that we used ten years ago ? A: We will see a doubling in bids for electricity fuels & resources.

What Does This Mean in Practice? * Power costs will be high for a long time * Relying on gas and oil will be a costly bid against the developing world * Shifting to efficiency, renewables and co-generation will save money over the next decade. * Why not just buy some power from coal-fired U.S. utilities? Because relying on coal to be cheap will hit its limits very soon (Mercury control, rail capacity limits, coal price rises, capital costs, and carbon control)

US Energy Law Basics  1) wholesale electric sales and 2) use of transmission lines and 3) use of gas pipelines are regulated by the national government through the FERC (like China’s SERC) l Federal Power Act of 1927 l Major Amendments 1978, 1984, 1992, 2005 l Can set price, usually uses ‘regulated-market’ as tool.  Retail electric and natural gas prices are set by State (provincial) governments.  Price of petroleum is unregulated (set by market)  Prices of other energy are largely unregulated  Environmental effects of energy mining, transport, and generation, are regulated by national (EPA) standards; usually states (provinces) administer those nationally set standards

US Energy Use Basics  Half of energy is used to make electricity for: 1- homes, 2- business, 3- industry  One third of energy is petroleum and diesel for cars and trucks.  One sixth of energy is for all other uses.

Current Vermont Electric Supply Simplified  30% Hydro-Quebec  30% Vermont Yankee  15% small hydro  15% wood  10% End-use Efficiency  Each kWh saved can be sold to New England grid.

So, How Is America Dealing with This Prospect? Do we have a national energy policy? We do.. And it is this - 

Do-si-do with coal: 2007:154 new plants planned GW, $137 billion 2008: 95 new plants planned GW, $210 billion

Vermont’s Electric Needs  1,100 MW peak demand now l Growth2-10 MW/yr from l 550 MW will need to be replaced in timeframe!!  Current Sources l Vermont Yankee: about 30% of VT demand and 36% energy Contract Expires 2012 l Hydro Quebec: about 30% of demand and 32% energy Most of Contract expires 2012 to 2015 l Independent Power Producers: about 10% of demand and 5% energy (all renewable) Contracts expire 2008 to 2020 l New England Market and utility-owned sites: about 30% of VT demand and 27% of VT energy

Vermont could be VERY vulnerable to the market

A Few Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Net Metered Small Projects  Major In-State Renewables  Hydro Quebec  Connecticut River Dams  Small Distributed Generation  Creative Imports  Blended Balance

Can Energy Efficiency Really Help ?  Between 1999 and 2005 Vermont doubled its commitment to strong energy efficiency programs. The result?  Lowering electric costs for Vermont residents and businesses:  In 1999, Vermont and NY had highest electric rates of seven north- eastern states; by 2005 we had the lowest such rates.   More importantly than rates, the burden went down. l Commercial & Industrial electric costs dropped from 1.9% of Gross State Product to less than 1.6%. l Residential electric bills dropped from 3.9% of disposable personal income to 3.3%.

Cost of Wholesale Electric Energy including ancillary and bulk transmission costs ISO NE Monthly Average Wholesale Market Price Efficiency Vermont, Contract Price per levelized kWh, stacked below customer-cost

Efficiency and Conservation  Highly cost-effective; but requires $ upfront  Excellent climate-change effects  Keeps jobs and $ in VT  Probably can meet all new demand  Especially if term and scope extended.  Probably can’t replace all ‘disappearing’ supply resources.

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

Vermont Yankee  VY license extension still unresolved  Assumes new VY contract acceptable  Waste storage/disposal issues still unresolved  Effect of NRC safety rulings still unknown  Price expensive if at full market rate with risk of outage-coverage built into price!  Less climate change effect, compared to others than fossil generation (which is New England market at margin)  Transportation of fuel and waste unresolved  Some jobs and $ in VT; but more jobs and dollars out  Revenue-sharing subject to market fluctuations, but most value in high markets.

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

Out-of-State Fossil Plants  Price likely to be high and volatile  Very poor climate-change and health effects  Jobs and dollars leave Vermont  Transmission constraints ? Rail capacity?  Announced coal plants, will double capital cost for construction (e.g., VELCO-NWRP); exceed rail capacity; require mercury control, should require gasification and GHG control  ‘old’ 5 cent price prediction will be closer to 10 cents for capital, Hg, transmission and rail 14 cents per kWh if carbon controls kick in

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HydroQuebec  Connecticut River Dams  Small Distributed Generation  Blended Balance

VT Cogen Plants  Siting means finding the right spots  Requires fuel delivery capacity  Price depends on installation and fuel  Keeps some jobs and $ in VT  Environmental impact must be built in  Could have high efficiency, if part of right site… e.g., Rock Tenn, Ethan Allen, Fletcher Allen?

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

Spot Market Purchases  High price risk (both core price risk and highly volatile; hedge costs expensive)  Climate problems since fossil is on New England’s margin 85 % of hours.  Exports jobs and $ (most large scale supply out-of-state)  Ancillary charges, LICAP, Transmission collection for NE, ISO costs all rising

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

Large VT Renewable: Wind, Biomass, Wood & Solar  High installation costs, low future fuel costs  Low exposure to market and fossil price changes  Sustainable forestry key for VT, NY, NH, Quebec  Keeps jobs and some $ in VT (help stimulate VT renewable businesses)  Excellent re climate effects

Large VT Renewable: Wind, Biomass, Wood & Solar (2)  Demonstrated and growing, despite Governor’s opposition (Old WEC landfill gas, Searsburg wind McNeil wood, New Coventry II, Sheffield, Wood)  Limited hydro site options; some retrofit potential  Siting needs care and sensitivity: site-specific  Supreme Court’s UPC wind decision makes PSB authority clear.

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

HQ System Power  HQ’s path to expansion is unclear, given internal Quebec issues  Price likely to be high-market  Relatively low carbon emissions  Jobs and dollars leave Vermont  HQ commitment of $1 billion+ to efficiency may free up kWh for our purchase  HQ’s wind from Gaspe may not be an option given Canada’s Kyoto commitments

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

Connecticut River Dams  Stable price might be negotiated.  Environmentally neutral, assuming someone would operate them  Dollars leave Vermont  Known technology; limited cost risk  VT missed chance to purchase; long term contracts might still be an option

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

Small-Scale Distributed Generation / Micro Turbines  Cost may be issue  Probably won’t meet all new demand  Will siting issues limit deployment??  Air Permit issues need attention  Micro Hydro needs rules changes  Interconnect rules relatively good in VT  Good to excellent climate impacts  Good for jobs and $ in VT

Major Options: Some Pros and Cons  Efficiency and Conservation  VT Yankee  Shift to Fossil Plants  New Cogen in VT  Spot Market  Major In-State Renewables  HQ  Connecticut River Dams  Small Distributed Generation  Blended Balance

Facing the Future Power: Energy Efficiency first and foremost, then renewables to minimize fuel-price risks Past increases of 2-3% for efficiency helped avoid the 40-60% increases that much of New England is now seeing. Cogeneration and Net Metering: Here, many utilities work against their customers: Some, work with them Meters: Installing automated meter reading opens the door to improved rates, bills, and user- decisions. Service Quality: Now Vermont utilities are challenged to trim the lines, to answer the phones, to meet the regulatory standards, …..then do better. Financing: Transparent Books, Controlling Exposure to Power Costs in Wholesale markets (hedging, EE, renewables).