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If you live in Connecticut, and you’re a customer of Eversource or United Illuminating you’ll be paying at least 43 percent more for electricity starting in January – a steep cost hike that the state’s smaller municipal utilities have so far managed to avoid.
Customers of Norwich Public Utilities, for example, will see just a 12.5 percent increase in the cost of electricity, and Groton Utilities customers will see their bills increase about 9 percent.
Neither Eversource nor United Illuminating pocket the added costs driven by soaring global prices for natural gas, but the sharply diverging costs highlight the unintended and sometimes counterintuitive effects of deregulation on Connecticut residents and inevitably raise questions about whether the regulations that do exist can be improved to lower costs for consumers.
Both Eversource and United Illuminating follow a relatively rigid process set by PURA, the state’s energy regulator, to buy their supply of electricity for customers, compared to the Connecticut Municipal Electric Energy Cooperative which has more flexibility to seek cost savings in the market.
Responding to a call from State Senate Democrats in Connecticut, PURA and energy regulators in Massachusetts will hold a joint hearing beginning Tuesday at 10 a.m. to review how Eversource procures power in both states.
The key question that policymakers need to answer is whether it makes sense to change how the two larger utilities buy power.
Municipal utilities have more flexibility in buying power
Eversource and United Illuminating, which together serve more than 1.5 million electric customers in Connecticut hold a set of auctions several times a year to buy supply.
Eversource held four procurements, in April, July, September and October – to buy power for its customers from January through June 2023, Eversource Director of Electric Supply Jim Shuckerow said.
Those procurements averaged together resulted in a price of 24.17 cents per kilowatt-hour – double what customers have been paying since July.
Prices fluctuate, so spreading the procurements over multiple auctions is meant to ensure that the utilities aren’t locked into the price on one day, Shuckerow said.
“Unfortunately, once you get to the point where prices are high for a long period of time, all the purchases you’re making are at higher prices,” Shuckerow said. “That’s what led to this big increase in January.”
The Connecticut Municipal Electric Energy Cooperative, or CMEEC, buys the electric supply for six municipal electric utilities in the state, including Groton and Norwich.
Unlike Eversource and United Illuminating, it’s up to CMEEC how it buys power for its members. The cooperative doesn’t have set procurements, and can buy power any day. And it can buy power for the next hour, or for five years in the future.
That allows the municipal cooperative to “hedge” against fluctuations in market prices by securing a mix of short- and long-term contracts. And having those longer-term contracts in place gave CMEEC a buffer from the price swings in the electric market this year, CMEEC CEO Dave Meisinger said.
“Prior to this big increase in wholesale rates, we had been following our in-house approach to hedging, so we had hedges in place for what at the time were future years – 2022, 2023, 2024, just by virtue of following our policies,” Meisinger said. “And it turns out those were very reasonably priced.”
Is change worth it?
Meisinger said CMEEC is able to rely more on its staff’s expertise in watching the markets, which gives it more options.
“But with flexibility does come additional risk,” Meisinger said. “The more options you have, you’re certainly positioned to make good decisions, but also maybe some bad ones.”
He said CMEEC’s track record has been stable prices, but there are still individual decisions they would like to take back from time to time. Nobody is ever going to make the right decisions 100 percent of the time, he said.
Hedging comes with risk, too. A long-term contract at a favorable price can be a benefit to customers by holding down their costs as market prices rise. But if market prices fall below the price of long-term contracts, customers won’t benefit from low market prices as quickly.
“When wholesale prices are low and stable, it almost doesn’t matter how exactly you do it, because you’re probably going to get pretty similar results,” Meisinger said. “There’s volatility, but sometimes just to change the way you do things to address the 10 percent of time there’s volatility, that can have an impact on the other 90 percent that outweighs the good.”
PURA Chair Marissa Gillett said there could be lessons from CMEEC and from other states to improve the process. But there are pros and cons to every system, and it’s not as simple as just adopting one process or another, she said.
“You have to figure out if you’re solving for the issue of volatility, or if you’re solving for the issue of least cost, and I think there’s probably a sweet spot in the middle,” Gillett said.
Those are some of the questions that the Public Utilities Regulatory Authority will look to answer in its hearings with Massachusetts.
Gillett said it would be a mistake to assume nothing about how Eversource and United Illuminating procure power needs to change, but there’s also a risk that too dramatic a change could lead to more expensive bids.
“What you hear from bidders is, the more risky they perceive your process, the more expensive the bids are going to bid, if they bid at all,” she said.
Can tweaking procurement solve the problem?
Shuckerow said the underlying cause of the volatility in New England’s electric market right now is its reliance on natural gas to produce about half of the region’s electricity, and a limited supply of natural gas to fuel those power plants – especially when gas is used for home heating. It’s a situation that routinely leads to higher electricity prices in the winter than the summer.
Without an adequate supply of gas coming in by pipeline, the region is reliant on imports of liquefied natural gas. And the price of liquefied natural gas has spiked dramatically as Europe has had to rely on it more since their regular supplies of gas have been disrupted by the Russian invasion of Ukraine, he said.
The solution, he said, is bringing on a more diverse mix of generation – especially offshore wind, which will make the region less reliant on gas plants, and less exposed to high winter prices, or global events impacting the price of gas.
“There are goals to bring on more renewables, but that’s not happening quickly,” Shuckerow said. “So we’re in a situation with high prices, really driven by the war. And we’re all hoping that prices will decline and the world markets will adjust, but those are a lot of ‘ifs.’”
Gillett said she agrees New England’s reliance on gas and supply constraints are the key issue that needs to be resolved. PURA could spend the next 18 months evaluating different procurement strategies, but at the end of the day, the price is still subject to the regional market, she said.
“And if the regional market is constrained by the lack of natural gas flowing into the region, so long as the New England market is over-reliant on natural gas, our procurement strategy is more in the peripheral,” Gillett said. “Your underlying issue of the fuel supply constraints is going to remain the primary driver of supply costs.”
But while the addition of offshore wind is expected to help stabilize energy prices – whether that means stable lower prices is hardly a given, and will depend not only on market regulation, but also on generating costs and investment in renewable energy.