Stuart Ormsbee
Vice President, Power Supply Strategies
Colonial Power Group
Electricity prices for Massachusetts customers on utility basic service supply are setting up to be punishing this coming winter. Barring a historic market collapse or non-market intervention, consumers should brace themselves for basic service rates in the 20-cent range. For example, a 25 cent/kWh1 rate would be 8.7 cents higher than the highest winter basic service rate ever experienced to date.2 Compared to last winter’s basic service rates, a National Grid residential customer using 600 kWh/month would pay $61 more per month.3
While gratified by the consumer protection we have secured for our clients, the prospect of basic services rates at these levels is still of great concern. Excessively high basic service rates can still create hardships for our clients—municipal officials, whose constituents include CCA participants, as well as individuals on basic service or contracted directly with competitive suppliers. Overly large price disparities between CCA programs and basic service can also create volumetric risks for the suppliers serving CCAs if such disparities invite unexpectedly large customer transfers. This can result in higher contract costs over the long run. Unexpected regulatory intervention that artificially sets basic service rates below market can have negative consequences, particularly if revenue shortfalls are collected broadly from all customers, including the thousands of CCA participants that left basic service years ago.
Rather than simply taking things as they come, CPG is initiating conversations with other stakeholders to consider how the Commonwealth might approach basic service differently. We are trying to attract attention to minimize risks and any resulting cost consequences on the elements we can collectively control. For example, removing as much uncertainty as possible for wholesale suppliers bidding to serve basic service this winter. Regulatory uncertainty with respect to retail rate setting can add unnecessary risk premiums to supplier bids, which only exacerbates the problem.
We believe there are only benefits with proactive conversations, planning, and inviting innovative thinking. We are optimistic that creative options can be brought forward that still preserve most of the well-established regulatory constructs that have guided the electric procurement decisions over the last two decades. Still, the market has evolved, particularly with the tremendous success of CCA programs. We recently crossed a threshold in Massachusetts whereby there are now more residential customers supplied by CCAs than basic service. The very positive results of these programs speak for themselves, especially in securing competitive, if not better, prices for customers. Consequently, these current market conditions should spur some renewed thinking about basic service procurement and most importantly basic service rate setting that yields the best overall outcomes for all ratepayers, and that eschews resorting to cross-customer subsidies.
A confluence of factors has led us to this place (I highly recommend Ben Storrow’s excellent explainer in E&E News4). New England relies heavily on natural gas for electricity generation; the domestic supply of natural gas to New England is constrained. Consequently, we compete for natural gas in the world market, where prices are at historic highs (Russia’s invasion of Ukraine is only a contributing factor). Near-term forward natural gas prices in the US are at historic highs as production has been slow to come back from the demand destruction caused by COVID-related business shut-downs. While economics 101 taught us that high prices should spur a rapid increase in supply, that’s not to be expected in this current predicament. Producers face the same business disruptions as other industries: tight labor, supply chain issues, and high input costs; they’re also exercising considerable restraint. At least some are hesitant to make investments in an industry that many hope to render obsolete as quickly as possible. Substitutions for gas-fired generation have also gone away as the US has made impressive progress in retiring coal-fired generation. With few options immediately available for non-intermittent alternatives, forward prices for natural gas have continued higher, seemingly unbounded.
We are relieved that approximately 323,000 residential customers participating in community choice aggregation (“CCA”) programs administered by Colonial Power Group (CPG) in Massachusetts will be insulated from these unprecedented prices.5 Over the last few years, we worked with these communities to secure fixed-rate forward contracts when market prices were historically low. With a customer weighted average price of 10.9 c/kWh these client customers, in aggregate, will avoid paying over $129 million dollars over six months if, on average, basic service rates across the state come in at 22 c/kWh (note: no CCA program can guarantee customer savings relative to basic service rates in any given month).
What is a Community Choice Aggregation Program?
- A CCA Program is an optional buying group organized by a municipality or group of municipalities to benefit electric customers.
- The Program enters into an electricity supply contract for all residential and business customers currently receiving utility default service within a given municipality.
- Customers are automatically enrolled, unless they opt-out.
125 c/kWh is CPG’s projection for basic service prices for National Grid’s winter period Nov2022-Apr2023 based on current forward market prices.
2Highest residential winter basic service rate: National Grid (Nov2014-Apr2015): 16.273 c/kWh.
3National Grid’s winter residential basic service rate for Nov2021-Apr2022 = 14.821 c/kWh.
4Storrow, Benjamin, How the Ukraine war could make New Englanders shiver, E&E News, May 10, 2022. https://www.eenews.net/articles/how-the-ukraine-war-could-make-new-englanders-shiver
5Full disclosure: not included in these numbers are some CPG clients for whom contract timing was not ideal and have been pursuing new supply options in the current forward market.
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