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.