Wednesday, June 06, 2007

The looming electricity rate shock

At a book signing event last night for Lights Out: The Electricity Crisis, the Global Economy and What It Means To You (Wiley, 2007), several people asked about electricity rate hikes. The two primary questions everyone wanted answers to were: 1) why are rates going up and 2) how high will they go.

Rates are going up now and going up rapidly for several reasons. One is that utilities are building new facilities to meet demand. The bigger reason, however, is that, especially in states like Illinois, electricity rates have been frozen for at least five years. Why? As part of the deregulation and competition program. Can you imagine the economist that would inject “competition” into an industry by forcing suppliers to freeze prices? Illinois isn’t alone, however. Many states did this. And now, rates are going up because we’re finally going to pay for the absurdities of most state deregulation programs.

Also, rates are going to go up because the power stations we’ve built over the last ten years burn natural gas which has gone up in price by five to ten times since these power plants were planned. And, for those who advocate more LNG-fueled plants, remember that as supply lines stretch and more and more LNG is imported, our electricity system--the foundation of our modern economy--will become increasingly vulnerable to similar price fluctuations and to the same kind of geopolitical influences that affect our oil supply. Personally, I don't think that's a very good idea. In my view, LNG should stand for Let's Not Go [There].

But there's an even bigger driver of future rate hikes looming overhead. Namely, global warming. As long as we're all consumers of electricity, we're all going to pay the price for addressing CO2 emissions that accompany its generation. And if we want to go to a low/no-CO2 emissions generation future, i.e. nuclear and renewables, then we're all going to pay the price for building new nuclear plants, subsidizing renewable projects, investing in energy storage and upgrading/lengthening our transmission lines to serve remote solar and wind farms.

When asked how high rates would ultimately go, I made an educated guess and said, "Higher than you think." Will rates double? Probably. At least in some places, and in others, they could go even higher. Are average rate payers aware of the sticker shock looming on the horizon? No.

Here's what industry CEO's had to say on the issue recently:

Public Not Ready For Cost Of Climate Change Fight, Say CEOs At S&P's Utilities Conference

NEW YORK June 5, 2007-- (Standard & Poor's, Writer: Robert McNatt)

Several industry chief executives at Standard & Poor's Annual Utility Conference, held in New York City on May 31, expressed the fear that one of the hottest topics in the power sector, global warming, was likely to become ever more contentious and difficult as consumers become aware of the costs of remediation. Those costs would almost surely result in rate hikes that could generate a regulatory and political backlash and have major implications for ratepayers, investors, and the utilities themselves. The five CEO panelists at the conference, "Will Surging Demands Jolt Credit Stability?" emphasized that the best approach to combating global warming would include a gradual phase-in of remediation costs for ratepayers who--despite the growing emphasis on renewable energy sources--are still likely to depend heavily on fossil fuels in the next dozen years. Finally, the panelists agreed that successfully reversing the effects of greenhouse gases will require serious commitments from governments, utilities, and industries in fast-growing overseas economies, notably China, which have become a rising source of carbon emissions.

Domestically, the full cost of reducing greenhouse gases is probably not yet apparent to ratepayers, said Thomas F. Farrell II, president and chief executive of Dominion Resources Inc., a major power generator in Virginia. "It will cost hundreds of billions of dollars and take decades to accomplish," he said. "It will have to include cars, be nationwide, and won't just hit electrical utilities." But consumers and businesses will have to be ready to contribute to the effort by reducing the amount of energy they use. "Before we leap to rate increases," said Ralph Izzo, chairman, president, and CEO of New Jersey-based Public Service Enterprise Group Inc., "there is a fair amount to be done in conservation."

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