Does Cheaper Natural Gas Mean Cheaper Electricity?

Tom Johnson | January 30, 2012 | Energy & Environment
Other factors -- including high capacity prices and congestion -- could offset any savings

For the fourth consecutive year, falling natural gas prices may lower the cost of the electricity delivered to most of the state’s businesses and residents, beginning in June.

At least that is the conventional wisdom, when the state Board of Public Utilities holds its 11th annual electricity auction this week, the vehicle officials have chosen to ensure New Jersey’s four electric utilities have the power they need to keep the lights on for their customers.

It is no sure thing, however, that those savings will result in any meaningful cuts in electric bills. Other factors, such as increased transmission costs, high capacity prices, and congestion on the power grid, could offset much of the savings, if not all.

“I’d like to see more than last year,” said Stefanie Brand, director of the Division of Rate Counsel. “It’s transmission, it’s capacity, it’s the whole mix that could offset those drops [in natural gas],” she said.

“We’ve been seeing reductions in gas bills,” Brand noted. “I’d like to see a drop [in electricity], but whether we will see it I just don’t know.”

In recent months, the state’s gas utilities have repeatedly offered customers credits on their bills because of falling natural gas prices, a result largely due to discovery of new deposits of the fuel in the Marcellus Shale formations in neighboring Pennsylvania and New York. New Jersey Natural Gas this past week said it would give its half-million customers a $33 million credit on their bills, effective in February.

Adding to the uncertainty of the auction is a report issued last week by the U.S. Energy Information Agency, which sharply scaled back estimates of how much natural gas is underground in those formations.

The online electricity auction, which begins Thursday, determines the bulk of the price most residents and small businesses will pay for the electricity they use. With the breakup of electric monopolies more than a decade ago, the BPU only regulates the cost of delivering electricity to the home or business. The cost of producing that power, about two-thirds of a typical customer bill, is unregulated.

For ratepayers, however, the small savings gained at the auctions — between $4.27 per month and $5.63 per month depending upon the utility — have been offset by other charges on their electric bills. Those charges include a much-contested tariff, which aims to encourage power suppliers to build new generating capacity. It costs consumers between $1 billion and $1.9 billion a year.

Also playing a role in higher electric bills is a spate of increases, while minimal, in transmission costs gained by the state’s four electric utilities in recent months. For instance, Public Service Electric & Gas earlier this month won an increase that will boost customers’ bills by $6.20 a year, less than one-half of 1 percent of their bill. The state’s other electric utilities won increases ranging from 84 cents a year to $10.56 annually for Rockland Electric.

Others note the state’s aggressive efforts to promote solar also have an impact in offsetting the cost of delivering electricity. The state has spent nearly $350 million in rebates in recent years to help promote the installation of solar systems, which does not include the $122 million it paid out last year to owners of solar panels for the electricity their systems produce.

Those costs have led some retail energy suppliers to argue for changes in the way the state auction is run, saying it establishes an artificial price for electricity that makes building a competitive electricity market very difficult.

As it is currently run, the state’s four electric utilities purchase one-third of the power they will need to supply customers. The other two-thirds of the electricity they need is purchased under contracts in the prior two years, a system that helps avert big rate spikes when fuels used to generate electricity experience volatility and soar.

While that system may work well when prices are rising, it fails to deliver quick savings to customers when prices drop, as they have been in recent years. The flaw has allowed retail energy suppliers to undercut prices offered by the incumbent utilities and woo customers away from them.

But Jay Kooper, New Jersey chairman of the Retail Energy Supply Association, a group representing energy suppliers, argues that the system is truly not sustainable unless the state takes steps to more quickly reflect real-time market prices to customers.

“Whether prices rise or fall, we’re indifferent so long as the BGS price [the price secured by New Jersey in the auction] reflects the true market price,” he said. “Under the current situation, when prices fall, you are squelching out choice.”

Brand said her office is open to changing the current auction from a three-year system to one involving a mixture of long-term, medium-term and short-term purchasing arrangements, but is opposed to switching to a system involving one-year contracts, a process she argued would be far too volatile.