New England's Power Predicament

 | Jul 11, 2014 | 1:00 PM EDT
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New England is short of energy. The region is low on power plants and transmission lines. That problem may sound simple, but it is not. Regional energy issues are bounded by surprising limitations. In New England's case, limitations are unique and seemingly unresolvable. 

From a macro perspective, New England has two challenges. The first is natural resources. Other than hydroelectric and renewable energy, New England has few to zero natural resources. The region's economy is dependent on energy imports. The region is a net importer of coal, oil, natural gas and electric power.

The second challenge is transportation. New England is a virtual island. Other than Canada, its only neighbor is New York. Unfortunately, New England cannot depend on New York, because New York is also short energy and must import energy from other regions.

At the power level, New England must generate its own or import it from a higher-priced region. Since the region is so dependent on locally generated power, it is troubling to see so many producers exiting.

New England's capacity markets could help solve the problem. Unfortunately, the regional transmission organization, ISO-New England, operates a capacity market that appears to discourage incumbents. Consequently, many power producers of all different types are announcing plans to leave the market.

Entergy's (ETR) Vermont Yankee is an older nuclear power plant, and the company has already announced that plant's early retirement due to grid economics. Entergy's experience does not bode well for companies such as NextEra Energy (NEE) and Dominion Resources (D), who also own major nuclear assets in the same grid. These companies are all struggling to achieve earnings. More are expected to leave. This includes coal, nuclear and oil-fired units.

New England can seek more energy from Canada. In theory, the provinces should not have surplus capacity available. However, they should have surplus energy available from sources that are relatively high up in their economic merit orders. Consequently, any power originating from Canada should be expensive. In addition, because Canada does not have surplus capacity, that energy may not always be available to New England's consumers when needed.

This leads to transmission-line challenges. There are two. New England can build transmission lines internally. In addition, New England could build long lines to Canadian provinces, if they were willing to connect.

Internal lines make the overall system more efficient. New lines reduce the need for new power plant capacity. Over the last several years, southern New England has invested billion in short lines. More investments will continue, but returns are diminishing.

There are already lines connecting New England to Quebec and New Brunswick. Some of those lines are used to help deliver energy to New York City.

If price is not important, adding new capacity from Canadian grids appears to be a solution. However, new transmission lines require years of planning and billions in private investment. It also takes cooperation from several state governments. Sometimes that cooperation is difficult, as local politics can take precedence over regional politics.

Some believe natural gas is the solution. It is not. New pipelines also face economic and right-of-way challenges. Several pipeline companies offered to invest in new capacity. Most withdrew after they failed to secure offtake agreements.

Further challenging natural gas is the view of energy planners, who believe diversity is an important success factor. Today, more than 50% of New England's power originates from natural gas. Increasing that percentage decreases reliability. It also increases pollution.

Planners offer energy efficiency as the ultimate answer. It is. However, ISO-New England conducted an auction, and the market came up short. Surprisingly, not enough resources have been offered. At least not yet.

Finally, energy cannot be viewed in isolation. Energy production is connected to pollution production. In New England, pollution concerns are real, and they are serious. Most of New England's southern states are in serious noncompliance with air quality standards. For example, every county in Massachusetts is in non-attainment for ozone.

It's worse in Connecticut. With four separate pollutants above healthy levels, Connecticut has become a virtual petri dish for lung and related diseases. Adding more pollution from gas turbines makes New England's environmental compliance more challenging.

This leads to nuclear power. Nuclear power is emission-free. Retiring Vermont Yankee, Pilgrim and Millstone exacerbates New England's environmental challenges. The closings create incredible energy and capacity shortages, and as Salem, Mass., learned, they also change transmission-line dynamics.

It seems everything is connected. What is not connected is New England politics.

One mistake is to assume that New England is one cohesive region. It is not. New England is composed of many separate areas, many of which dislike each other. Even within states, there are opposing communities. This might explain why the region is unable to reach one cohesive energy strategy.

If they cannot get their act together, southern and central New England may be facing rolling brownouts. They may also find companies and businesses leaving the region for greener pastures.

Then again, if businesses and their workers leave, New England's power problem has been solved.

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