Ohio Renewable Energy Costs - 2011

PUCO has issued their 2011 report on SB221. "Alternative Energy Portfolio
Standard Report ... Case No. 12-2668-EL-ACP".  The average cost for non-solar was $65/MWh for electric distribution utilities and $13.40 for electric service  companies. Since Ohio produced one percent of its electricity by renewables in 2011, the costs allocated to residential consumers using 1000 kWh/month were 65 cents and 13 cents respectively. To get the net cost, the cost of conventional generatio needs to be subtracted from these numbers and I don't yet have that information..

More Renewable Energy Does not Mean Higher Electric Rates

Columns in order are:
State,
Residential Electric Rates, (a)
Unemployment, Percent (b)
Renewables, Percent (c)
IA 10.85 5.0 26.2
MN 11.37 5.5 18.8
WI 13.27 7.2     8.1
MI 14.14 8.8     4.4
IL 10.37 9.5     4.2
WV    9.85 7.3     3.6
IN 10.38 8.7     3.5
KY      9.33 7.9     3.0
MO 10.07  6.7     2.1
OH 11.66 7.0     1.6

(a) Electric Power Monthly, February 2013; December 2012 rates used.

http://www.eia.gov/electricity/monthly/current_year/february2013.pdf

(b) Bureau of Labor Statistics: Unemployment Rates for States, Monthly Rankings, Seasonally Adjusted, Feb. 2013. http://www.bls.gov/web/laus/laumstrk.htm

(c) Ref (a); Amount Generated in 2012

Average Electric Rate Increase is Larger in States without Renewable Mandates.

Four Left Columns have States with Renewable Energy Mandates;

Four Rightcolumns have States with Goals or No Mandates.

Generating Electricity - Coal vs. Gas Cost

Comparison between renewable energy and fossil fuels is complicated by the different cost structures. the cost of renewables is essentially the  cost of construction, while the cost of fossil fuel plants includes a considerable fuel cost.

Articles on competition between coal and natural gas only take into account fuel prices. The logic appears to be that there is plenty of excess capacity and that the utility is flexible enough to choose which fuel to purchase. However, comparisons between fossil fuels and wind energy need to include fixed costs, because the fuel cost of wind is zero.

Table 1 compares the costs of generating using different fuels. Remembering that these are approximations, the results mirror the current situation - wind is cheapest and natural gas is most expensive.

Table 1. Comparison of Costs to Generate Electricity
Fuel Data as of 15 May 2013
(see Appendix for details of the calculations)


Fuel   NYMEX Cost of Fuel, $ Total  Generation  Cost, $/MWh
Coal 59.85 48.44
Natural Gas 4.02 53.35
Wind 0.00 45.30(a)

(a) “IRS: PTC Will Be worth Slightly More in 2013“, North American Wind Power, 04 April 2013



APPENDIX: MATHEMATICAL ANALYSIS

The cost of generating electricity consists of two parts, fixed and variable costs:

E = F + K --- (1)

Where E is the cost of electricity generation in $/MWh (Megawatt-hour), F is fixed costs, K is variable costs.

I estimated the cost of electricity generated using natural gas on my blog http://alanpeg.blogspot.com on 30 Jan. 2013:

E(ng) = 23.2 + 7.5H --- (2)

Where E(ng) is cost of electricity generated by natural gas in $/MWh and H is the cost of 1000 cu. ft. of gas using the Henry Hub price on the New York Mercantile Exchange (NYMEX) in dollars, which can be found at http://www.wtrg.com/. Since the number, 23.2, in dollars, accounts for fixed costs, the fuel cost is 7.5H.

The corresponding cost for coal is derived from data reported in “Year-to-date natural gas use for electric power generation is down from 2012”, from Today in Energy, issued by EIA on April 11, 2013.

K(co) = (20 + C)/2.5  --- (3)

Where K(co) estimates the variable cost of electricity generated by coal in $/Mwh and C is the price of coal ($/ton). Table A.1 reports the fixed cost, estimated by subtracting Equation (2) from the total cost of electricity.


Table A.1. Estimation of Fixed Costs for Coal
Used in Generating Electricity


Year Electric Gen. Cost, $/MWh   Coal Price, $/ton VariableCost, $/Mwh Eq. 2 Fixed Costs, $/MWH
2008 57.5 (a) 90 (c) 44 13.5
2013 51.5 (b) 60 (d) 32 19.5


(a) “Costs of Coal Fired Electricity” posted in Ecoal, Jan. 2011
(b) “Directory: Cents Per Kilowatt Hour”, downloaded from PESwiki on 11 May 2013.
(C)  “Regional Coal Spot Prices”, Federal Energy Regulatory Commission 07 Nov. 2008
(d)  Cost of a ton of coal on the NYMEX, which can be found at http://www.infomine.com/investment/metal-prices/coal/

League of Womenv Voters Testimony on Electric Rates

To:      Senate Public Utilities Committee

From: Alan R. Rosenfield,   ScD FASM,  Energy Specialist,  League of Women Voters of Ohio

Date:  April 23, 2013

Re:      Testimony on SB 58,   Retail Electric Service

There has been concern that the renewable energy requirements of 127-SB221 will lead to costs beyond the three-percent cost cap required by the legislation. I have found that these renewable energy costs are negligible and are likely to remain so for quite a few years.

My cost comparison is between natural gas and wind power. Gas is currently the cheapest fossil fuel, whose rapid increase in usage threatens the dominance of coal. Wind power has increased more slowly, but is the largest source of renewable energy. The price of fulfilling the mandate of 127-SB221 is essentially the cost difference between gas and wind power sources.

The history of the cost comparison is complicated. Five years ago, when 127-SB221 was enacted, gas was significantly more costly than wind. Shortly thereafter the price of natural gas fell sharply. In the spring of 2012, when the price of gas was at its bottom, electricity generation by wind cost about forty percent more than generation using natural gas. However, over the last year, gas prices have risen and the costs for the two energy sources are now similar.

What does this all mean to the homeowner faced with a monthly electric bill of more than $100? When gas prices were at their historical lows last spring, the renewable-energy requirement added about 30 cents to his utility’s monthly cost to supply him with electricity. If the wind tax credit had not been available in 2012, the additional cost would have been 33 cents more. Today the extra cost is about five cents (the Attachment to this testimony shows how to obtain residential rates from power-plant rates).

Since it costs the utility about $100 per household per month to provide electricity, renewable energy costs far under one dollar are a small cost of doing business. Clearly the three-percent cost cap is not in danger of being exceeded.

There are financial benefits to the small cost of 127-SB221. Just as counties in Eastern Ohio have benefited from the shale gas boom, there have been benefits to counties in Western Ohio from wind power. Citizens and local governments in Paulding County, population about 20,000, have already received about $1.5 million from the Timber Creek Wind Farm.

There are concerns that renewable-energy costs will sharply escalate in the future.  The small costs of 127-SB221 so far are partly due to the small amounts of renewable energy being used in Ohio - 1.5 percent of electricity produced last year and 2.5 percent this year. When the next session of the General Assembly convenes in 2015, the requirement will be 3.5 percent; for the following General Assembly, in  2017, it will be 5.5 percent. So, five years from now, non-renewable energy will still supply almost 95 percent of our electricity. It is difficult to see how renewables will have a significant effect on costs even then and it is clear that the three-percent cost cap is very unlikely to be exceeded.

Will the cost cap ever be exceeded?  Predictions of the future depend on assumptions made by economists; and the further in the future, the less accurate their predictions are likely to be. Instead of making predictions, I will discuss factors that need to be taken into account:

1. The futures prices of natural gas are currently stable. Contracts for future delivery of natural gas are traded on the New York Mercantile Exchange. The prices there are the consensus opinion of the most knowledgeable traders. Currently prices of natural gas for delivery in May 2014 are about the same as for May 2013; there is no indication that a sharp drop in gas prices is in the offing.

2. The price of wind power has fallen. Electricity generation by wind is no longer expensive. It is now 40 percent lower than it was five years ago.

3. The tax status of wind power is uncertain. In December, 2012 the American Wind Energy Association suggested willingness to accept a gradual phase-out of the tax credit during the next five years. In addition, a campaign is underway to provide renewable energy with some of the same kind of tax breaks that oil and gas producers receive, which amount to $500 billion per year according to the International Monetary Fund.  This effort appears to have been received favorably on both sides of the aisle in Congress. Both of these plans complicate the prediction of future wind prices.

4. Increasing the amount of renewable energy does not cause increased electric rates. I have surveyed ten Midwestern and Appalachian states (Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio, West Virginia, and Wisconsin) As of December 31, 2012, Ohio generated the least renewable energy and had the third highest residential electricity rates. Table 1 (attached) shows the data. Comparison among all of these states showed no tendency for residential rates to be higher in states with greater amounts of renewable energy.

In conclusion, the three-percent price cap of 127-SB221 has not been approached and chances are small that it will be approached within the next few years. There appears to be no reason to modify it.

Attachment: How Generation Rates Affect Utility Bills

There are several claims that renewable energy mandates cost customers millions of dollars. For example, the Corpus Christi Caller-Times recently reported that an opposition activist claimed that the Texas renewable law cost consumers $70 million per year. Since residences in Texas account for about half of the electricity used in the state, their share is $35 million. This amount is divided among about ten million households for an average of $35 per year or thirty-five cents per month.

An alternative is to compare the costs of generation. During last year’s debate on SB315, discussion in this committee included the comment that wind energy then cost $20 per Megawatt-hour more than gas powered electricity. One Megawatt-hour is 1000 kilowatt-hours, which is close to the electricity used monthly by the typical Ohio household. But last year SB221 required only 1.5 percent of electricity to be renewable. So the renewable-energy premium was only 1.5 percent of $20 of thirty cents per month.

TABLE 1: STATE ECONOMIC AND ENERGY DATA

State	Residential Electric Rates, (a)	Unemployment Percent (b)	Renewables Percent (c)
Illinois	10.37	9.5	4.2
Indiana	10.38	8.7	3.5
Iowa	10.85	5.0	26.2
Kentucky	9.33	7.9	3.0
Michigan	14.14	8.8	4.4
Minnesota	11.37	5.5	18.8
Missouri	10.07	6.7	2.1
Ohio	11.66	7.0	1.6
W. Virginia	9.85	7.3	3.6
Wisconsin	13.27	7.2	8.1

(a) Electric Power Monthly, February 2013; December 2012 rates used.

http://www.eia.gov/electricity/monthly/current_year/february2013.pdf

(b) Bureau of Labor Statistics: Unemployment Rates for States, Monthly Rankings, Seasonally Adjusted, Feb. 2013. http://www.bls.gov/web/laus/laumstrk.htm

(c) Ref (a); Annual result for 2012

Price Changes Favorable to Wind

Since April, 2012 the price of natural gas on the NewYork Mercantile Exchange has risen by almost $2 per 1000 cu.ft.  (http://www.eia.gov/dnav/ng/hist/rngwhhdM.htm;  http://www.wtrg.com/). At the same time, the IRS reports that the average cost of electricity from wind was $42.30 per MWh last year (north american windpower, IRS:PTC will be Worth Slightly More In 2013, 04 April 2013 ). I had been using $55.

On the other hand, I have been using $23.1 per MWh as fixed costs for gas. According to EIA (Levelized Cost of New Generation Resources in the Annual Energy Outlook 2012) the actual value is $19.1. So I have been overestimating the cost of gas-powered electrical generation by $4 per MWh.

Texas Renewable Energy Costs

According to caller.com (Corpus Christi) ‘The conservative Texas Public Policy Foundation’  said that “the renewable energy credits trading program will cost Texas consumers about $70 million this year.”  If we ask how much it costs the average homeowner, we get a very different perspective. About half of the electricity costs in Texas are borne by residential customers (EIA Electric Power Monthly), lowering the $70 million to $35 million. Texas has about ten million households (U.S. Census, Quick Facts), which lowers the cost to $3.50 per year per household or about 30 cents per month. Considering the high cost of residential electric bills, this is a small fraction of the utilities’ cost of doing business

ELECTRICITY GENERATION Natural Gas vs. Wind Power

DRAFT

ELECTRICITY GENERATION

Natural Gas vs. Wind Power

Al Rosenfield

20 February 2013

Ohio is becoming an energy state to a degree unanticipated, even a few years ago. Eastern counties are benefitting from natural gas while western counties are benefitting from wind. For example, residents and local governments in Paulding County (population 20,000) have already received $1.5 from the Timber Creek Wind Farm [1]. However, questions have been raised whether their benefits are worth the cost to all Ohio ratepayers, as required by Ohio law [2]. The answer requires a hard look at the relative costs of generating electricity by using natural gas and by using wind.

Only a year and a half ago, gas was more expensive than wind [3].  But the cost of natural gas was plummeting. By last Spring it had reached a low point and wind became more expensive than natural gas. The difference in generating costs was about $15 to $20 per Megawatt-hour [4,5]. While this appears to be a large cost difference, the Appendix to this report shows that it only amounted to about 25 cents for the average Ohio household each month. This is only about 0.2 percent of the utility’s costs to supply that home [6].

Because of long-term contracts, the cost of wind power hasn’t changed since last spring (about $55 per Megawatt-hour [5]). But the price of natural gas rose by about one-third in the remainder of 2012 [7]. The price differential between wind and gas had shrunk to about $7 per 1000 kWh, making the cost to supply the average household roughly 10 cents per month. This small cost disadvantage for wind may be an exaggeration- The MIT Technology Review recently reported that wind and gas costs are now the same [8].   Update this paragraph when final Dec. data are in.

If the wind tax credit had not been in effect in 2012 it would have added 2.2 cents per kilowatt-hour to the cost of generation; the cost of providing power to Ohio homes would have been increased by about 30 cents per month because only 1.5 percent of our electricity was generated by renewables last year. However, wind prices appear to be fixed for the rest of this year because of the extension of its tax credit in the ‘fiscal cliff’ legislation.

There is concern that the future will see wind power causing large cost increases to ratepayers. Since predictions are always imprecise, we have limited this report to a discussion of the factors that may affect the balance between wind and natural gas that need to be included in any prediction.

Recently news stories have appeared that have bearing on the future of wind. In December the American Wind Energy Association suggested willingness to accept a gradual phase-out of the tax credit during the next five years [9]. In addition, a campaign is underway to provide renewable energy some of the same tax breaks that oil and gas producers receive [10].  This effort appears to have been received favorably on both sides of the aisle in Congress [11]. Both of these plans complicate the prediction of future wind prices.

Natural gas prices are historically volatile. Some insight can be obtained from the futures quotes on the New York Mercantile Exchange. These quotes represent the consensus of the best experts on the economics of the gas industry. Currently the natural gas futures price is increasing by about 30 cents per year over the next three years [12]. While we are making no predictions that this rise will actually occur, there are reasons to believe it likely. These include increased demand due to new applications (such as motor-vehicle fuel), expanded use in electricity generation, and limitation of supply due to increased exports [13].

In summary, the cost difference between gas and wind is small and it is not clear which method will be more expensive in the future. In the absence of a technological breakthrough, we see no reason to change Ohio’s renewable-energy goals.

Appendix: How Electricity Generation Costs

Affect Electric Bills

It is difficult for the public to see how the electric company’s cost of generating electricity affects them. Generating costs are given in dollars per Megawatt-hour. An electric bill shows a cost in dollars per month.

A Megawatt-hour is simply 1000 kilowatt-hours; to convert dollars per Megawatt-hour to dollars per kilowatt-hour, divide by 1000. Since the electric bill shows the number of kilowatt-hours that a home used last month, the consumer has all of the information that he needs.

Example 1. Household Costs

A typical Ohio home uses about 1000 kilowatt-hours per month. In Columbus this produces a bill of about $120 or 12 cents per kilowatt hour. Our AEP bill also shows the charge for generation, which is about 40 percent of the total, or $48. So we are being charged about 5 cents per kilowatt-hour for generation. The rest of the bill is the charge for getting the electricity to our house plus taxes.

Example  2. Comparison between wind Power and Natural Gas

Last Spring, during the Legislative debate on an energy bill, it was pointed out that generating electricity by using wind was more expensive than by using natural gas. Two different estimates of the difference in generating costs at that time were $13 and $19 per Megawatt-hour [4, 5]. Dividing by 1000, the cost differences become 1.3 and 1.9 cents per kilowatt-hour, for an average of 1.6 cents.  According to state law the renewable-energy goal for 2102 was 1.5 percent [2]. So the household using a monthly total of 1000 kilowatt-hours only got 1.5 percent of that amount from renewable energy, or 15 kilowatt-hours. At 1.6 cents per kilowatt hour, this amounted to about 24 cents. So using renewables cost the utilities about 24 cents per household more than using gas would have. This is a tiny fraction of the $120 electric bill that the consumer sees.

References 

[1] Paulding County Receives Payment from Wind Farms ,The West Bend News, 31 January 2013

[2] Ohio Revised Code, Section 4928.64(B)(2), often referred to as SB221 or 127-SB221, the legislation that enacted this Section.

[3] NW Ohio, SE Michigan wind power is churning up cash, ToledoBlade.com, 16 Oct. 2011, http://www.toledoblade.com/Energy/2011/10/16/Local-wind-power-is-churning-up-cash.html

[4] A.R. Rosenfield, Gas vs. Wind - I. - Current Status

http://alanpeg.blogspot.com/, 30 Jan. 2013; This blog provides a method of estimating the cost of generating electricity using natural gas.

[5] Comment by Sen. William Seitz, Hannah Capitol Connection, Senate Energy and Public Utilities, SB315, 24 April 2012

[6] Columbus Dispatch 7 April 2013

[7] EIA, U.S. Natural Gas Electric Power Price http://www.eia.gov/dnav/ng/hist/n3045us3M.htm

[8] Kevin Bullis, Novel Designs Are Taking Wind Powerto the Next Level,

http://www.technologyreview.com/news/510481/novel-designs-are-taking-wind-power-to-the-next-level/?utm_campaign=newsletters&utm_source=newsletter-weekly-energy&utm_medium=email&utm_content=20130211

[9] AWEA Press Release, Analysis: Phase-out of wind energy Production Tax Credit would enable U.S. industry to become fully cost-competitive, December 12, 2012

[10] Felix Morman and Dan Reicher, (Brookings Institute) INVEST BUT REFORM Smarter Finance for Cleaner Energy; Open Up Master Limited Partnerships (MLPs)and Real Estate Investment Trusts (REITs)to Renewable Energy http://www.brookings.edu/research/papers/2012/11/13-clean-energy-investment

[11] Diane Cardwell, Renewable Energy Industries Push for New Financing Options, The New York Times DealB%K January 30 2013

http://dealbook.nytimes.com/2013/01/30/renewable-energy-industries-push-for-new-financing-options/

[12] CME Group, Henry Hub Natural Gas Futures, http://www.cmegroup.com/trading/energy/natural-gas/natural-gas.html

[13] Peter Kelly-Detweiler, Driven by Oil Shale Economics, Natural Gas Prices Primed for Slow and Steady Rise, Forbes, December 3, 2012

http://www.forbes.com/sites/peterdetwiler/2012/12/03/driven-by-oil-shale-economics-natural-gas-prices-primed-for-slow-and-steady-rise/

Natural Gas vs. Wind - Background

Natural Gas vs. Wind - Background

Cost is a major consideration when comparing different ways of generating electricity. The Data Analysis section of this posting provides a way of calculating prices of electricity generated by natural gas. In doing the calculation, it is important to recognize that there are several gas prices:

      The Wellhead price is received by the driller
      The electrical price is paid by the utility
      The price on the New York Mercantile Exchange (NYMEX) is called Henry Hub. It is useful because it is also the source offutures prices.

I am using the electrical price, unless otherwise specified. Details on the calculation of  electricity prices  from gas prices are given in the Data Analysis section below. Some examples:

In April 2012 gas was $2.79 per 1000 cubic feet. Using the relations in the Data Analysis Section below, this translates to an estimated electrical price of $42 per thousand kilowatt-hours(about the average usage for an Ohio home). The price of electricity from wind, $55 for the same amount (Ref. 1), gave gas a $13 advantage.

By February 26, 2013, the Henry Hub price had raised to $3.427 per thousand cubic feet for an electrical price of $3.77 per thousand cubic feet(over a third higher than in April 2012) and a price of generation of about $51 per thousand kilowatt-hours. Since wind is sold on long-term contracts at a fixed price, the gas advantage has been sliced to $4, about one-third of what it was less than a year earlier. In fact, Ohio State has signed a contract for wind at $46.50 per thousand kilowatt-hours (Ref. 3), escalating by two percent per year. For them wind is currently cheaper than natural gas, and will continue to be so unless the cost of natural gas rises slowly.

References

(1) U.S. DOE, Energy Efficiency & Renewable Energy: 2011  Wind Energy  Market Report: http://www1.eere.energy.gov/wind/pdfs/2011_wind_technologies_market_report.pdf

(2) WTRG Web Page:  http://www.wtrg.com/

(3) OSU to save $1 million a year by buying wind power, Columbus Dispatch, 28 Jan, 2013
Data Analysis

Relations among the Various  Gas Prices Annual data from 1997 through 2011 provided by EIA allows an estimate of the ratios of the various gas prices:

Electrical = 1.10 Henry Hub (Refs A.1 and A.3), std. dev. = 0.08
Electrical = 1.19 Wellhead (Refs. A.1 and A.4), std. dev. = 0.06

Relation between  Gas Cost  and Electricity Price The data in Table 1 comes from References A.1 and A.2. There is a close relation between gas cost and electricity-generation price:

Expressing the relation:

Electricity price = 23.2 + 6.8x(gas price) --- (Equ. A.1)

where the gas price is that paid by utilities and prices are expressed in terms used in Figure 1.

Expressing  Equ. A-1 in terms of Henry Hub spot price:

Electricity price = 23.2 + 7.5x(spot price) --- (Equ. A.2)

Table 1. Relation between Gas Cost

And Electricity Generation Cost

Year	Gas Cost, $/Mcu.ft.	Electric Price, $/MWh
1999	2.62	46
2000	4.38	56
2001	4.61	50
2002	3.68	46
2003	5.57	63
2004	6.11	58
2005	8.47	57
2006	7.11	68
2007	7.31	73
2008	9.26	86

Calculated Electricity Prices Table 2 gives an estimate of how the electricity price has changed over the past year. While the price appears to be on a plateau, futures prices suggest that this is a lull.

Table 2. Estimated Electricity Prices from Natural Gas

Date	Electrical Gas Price,$/Mcu.ft.	Electricity Price, $/Mwh,  (Eq A.1)
Apr. 2012*	2.79**	42
Jun. 2012	3.20**	45
Aug. 2012	3.59**	47
Oct. 2012	3.98**	50
Dec. 2012	4.36**	53
Feb. 2013	3.77***	49
Apr. 2013	3.84****	49
Jun. 2013	3.94****	50
Aug. 2013	4.07****	51

*     LWVO Senate testimony on 129-SB315 presented
**    Ref. A.5
***   End of Month Henry Hub spot price (Ref. A.6) + 10%
****  Henry Hub futures (Ref. A.7) + 10%


References

A.1. EIA: U.S. Natural Gas Electric Power Price (annual data): http://www.eia.gov/dnav/ng/hist/n3045us3a.htm

A.2. Brian Bush, et al., Variance Analysis of Wind and Natural Gas under Different Market Structures: some Observations, NREL Report NREL/TP-6A20-52790 (Jan.2012): http://www.nrel.gov/docs/fy12osti/52790.pdf

A.3. EIA: Henry Hub Gulf Coast Natural Gas Spot Price: http://www.eia.gov/dnav/ng/hist/rngwhhdA.htm

A.4 EIA: U.S. Natural Gas Wellhead Price: http://www.eia.gov/dnav/ng/hist/n9190us3A.htm

A.5. EIA: U.S. Natural Gas Electric Power Price (monthly data): http://www.eia.gov/dnav/ng/hist/n3045us3M.htm

A.6. (2) WTRG Web Page:  http://www.wtrg.com/

A.7   Henry Hub Natural Gas Futures: 
http://www.cmegroup.com/trading/energy/natural-gas/natural-gas.html