Low prices roil region's markets for electricity

2012-12-24T00:15:00Z 2014-08-25T08:06:54Z Low prices roil region's markets for electricityBy MIKE DENNISON Gazette State Bureau The Billings Gazette
December 24, 2012 12:15 am  • 

Editor’s note: This story is the first in a two-day series on regional electricity prices, and their impact on power production.

HELENA — Before the financial meltdown of 2008, electricity brokers in the Northwest were shelling out $65 for a megawatt hour (mwh) of juice, which is enough to power the average home in Montana for a month or so.

Now, more than four years later, the spot price for that same amount of power can be one-third that amount — and, in some instances, even lower. Last week, spot prices for electricity in the Northwest averaged about $25 per mwh.

These rock-bottom power prices are trickling down somewhat to Montana consumers, most of whom have seen their electricity rates remain steady or even decline during this time.

But the lowest wholesale electricity prices in 15 years are definitely making waves in the power-production industry in Montana, as some coal mines, coal-fired generators and wind developers scratch to stay profitable in the down market.

PPL Montana, owner of most of the state’s coal-fired power plants, idled or scaled back its plants for months at a time this year, as regional electricity prices plummeted and made the company’s power production unprofitable.

The Rosebud coal mine, which supplies PPL Montana’s plants at Colstrip, laid off 45 workers during the summer when the power plants scaled back, and will mine about 10 percent less coal this year.

“When we look at 2012, it kind of looks like the new norm, absent economic growth,” said Bob King, president of Westmoreland Coal, which owns and operates the mine.

Industry trade publications are reporting that PPL Montana, which bought the coal-fired plants from the old Montana Power Co. in 1999 in the wake of utility deregulation, is now trying to sell them. PPL won’t comment on the reports.

PPL Montana and others in the coal industry sometimes point at the wind-power industry and its federal tax subsidies, which they say are artificially skewing markets prices downward.

Qualifying wind farms get a $22 tax credit for every megawatt hour of power they produce. If the market price of power falls below that amount, they still get the money.

In fact, during the past 12 months, wind-power producers at times have actually paid electricity buyers to take their power, because they could still get positive income on the deal through the tax credit, regional power officials say.

This phenomenon is known as “negative pricing,” when the market price for power has been less than zero during off-peak hours, usually the middle of the night. A wind farm might pay the wholesale buyer $5 per mwh to take the power the farm is producing at off-peak, but, with the tax credit, it still makes $17 per mwh.

“There is no commodity in the world that can be sold for a negative price, unless you’re making money somewhere else,” said David Hoffman, manager of external affairs for PPL Montana. “They’re willing to get less than the full tax credit, if they get a portion of it.”

Yet wind-power developers in the region say they’re feeling the crunch from low power prices as well.

Van Jamison, a vice president for Gaelectric, an Irish firm developing several wind projects in Montana, says in the past few months, scores of potential wind projects in Montana have withdrawn their spot from the queue for transmission of their power, meaning they’ve pulled back on their plans.

“This is not a very robust market, where you’ll be able to make any kind of money any time soon,” he said.

The Northwest, including Montana, has always had some of the lowest electricity prices in the nation, thanks largely to its abundance of relatively cheap hydroelectric and coal-fired power.

Fifteen years ago, prices in the $20 per mwh range were not uncommon in the Northwest. Then came deregulation, the California energy crisis and Enron’s market manipulations, and a decade of inflated growth, driving prices up to the $50 and $60 range.

Natural gas, a fuel used to generate electricity, also hit unheard-of highs in 2008, putting even more pressure on power prices.

It all came to an abrupt end in 2008, when the economy and financial markets collapsed. Oil and natural gas prices plummeted — and so did the price of power.

Elliot Mainzer, executive vice president for corporate strategy at the Bonneville Power Administration, says three factors have worked together to keep prices low or drive them down further: a still-weak economy in the region, the big increase in subsidized wind power, and the national boom in natural gas production.

BPA, the federal power-producing and marketing agency headquartered in Portland, Ore., supplies power to rural electric cooperatives and municipal utilities throughout the region, including parts of Montana. It also sells power into the wholesale market.

Mainzer says low market prices have reduced BPA’s revenue from power sales by tens of millions of dollars. Partly in response to that drop-off, BPA is proposing a nearly 10 percent increase for electricity rates it charges co-op and other customers.

Yet the effect of market prices on utility and co-op retail customers — Montana homeowners and small businesses — has been minimal so far. Most utilities and co-ops own power plants or have long-term supply contracts that provide relatively stable rates.

Consumers’ power bills also include delivery costs, which tend to increase slightly over time. The price of the actual power is half the total bill, or less, so consumers don’t see big changes from wholesale market fluctuations.

Claudia Rapkoch, spokeswoman for the state’s largest electric utility, NorthWestern Energy, says the company’s goal is to maintain stability in pricing, regardless of the ups and downs of the market. It buys about half its power on the market, but most of that is through longer-term contracts.

“We have to look at the long term; we can’t operate on the short-term market,” she said. “Everybody wants to be in the market when prices are low … but not when it’s high. That’s the kind of thinking that led to deregulation in the first place.”

Hoffmann, the PPL Montana spokesman, says the company doesn’t see much change in regional prices for at least a year or two, and that’s one reason it plans to mothball its coal-fired power plant in Billings.

Yet most industry officials say prices probably can’t go much lower, and if the economy starts to recover more quickly, a return to higher prices is likely. However, they also say predicting the future of energy prices is always a dicey prospect.

“The conventional wisdom is that there is a lot of (natural) gas in the ground, and it will have an impact in the foreseeable future,” said Mainzer at BPA. “But we know things can change pretty quickly. Things can change on a dime.”

COMING TUESDAY: The debate over whether to extend the federal wind-power production tax credit.

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