Good news. Connecticut is No. 1 in New England and No. 2 in the country. Unfortunately, this ranking is for the cost of energy, and according to the U.S. Energy Information Administration, Connecticut’s average cost of 18.38 cents per kilowatt hour is second only to Hawaii and nearly three cents higher than the rest of New England.
Energy costs put Connecticut at a tremendous competitive disadvantage. The Southeast enjoys rates that are roughly one-third to one-half as high as those in Connecticut. Even if a business isn’t contemplating a move several states away, a move to any other state in New England will yield an average savings of over three cents per kilowatt hour, and even greater savings for industrial users. Connecticut can no longer afford to be leading the pack in high energy costs.
There are two fundamental reasons why Connecticut faces steep energy costs. First, the fuel mix used by Connecticut is one of the most expensive in the country. Connecticut relies heavily on the burning of natural gas to generate its electricity, rather than using nuclear or coal as a primary fuel source. As a result, Connecticut’s energy costs are three times higher than those of states with abundant sources of coal-fired generation, such as Kentucky or West Virginia.
Dwelling on fuel will not solve the problem, however, since Connecticut will not welcome new coal or nuclear generation, at least in the short term. Other New England states have better rates but still share our aversion to nuclear and coal generation. This leads to Connecticut’s second problem: the generation fleet is old, and the fleet is showing its age.
More than one-third of Connecticut’s power generation was built between 1954 and 1973. While those power plants have certainly been upgraded over the years, upgrades are no match for new generation. Modern plants can be more than 50 percent more efficient than the power plants of the last generation. New plants use half as much fuel to generate electricity, which in turn significantly lower energy prices. In addition, the lower rate of fuel-burn means that greenhouse gas emissions would be cut in half as well, since the amount of carbon dioxide generated at a power plant is directly correlated to the amount of fuel used.
To make an overly simplistic analogy, the power generation industry is much like the automobile industry. Innovations in both industries over the last 50 years have resulted in greatly enhanced efficiencies. To take advantage of the increased efficiencies, new equipment must be purchased at a significant cost. Replacing a 1958 DeSoto with a 2010 Honda is going to result in increased efficiency and cheaper operating costs. However, one still has to pay for the new car.
Proven Process
Fortunately, Connecticut has already developed a solution to this problem. It simply needs to re-implement that solution. Thanks to key legislation in 2005 and 2007, along with a robust process developed by the state Department of Public Utility Control (DPUC), “Connecticut’s approach to power procurement looks like one to watch,” noted the March 2009 issue of Project Finance magazine.
However, Connecticut has only used this process to address significant projected shortfalls of energy generation in Connecticut. The time has come to expand the process to not only address electricity capacity shortfalls, but to generate a capacity surplus that will result in driving down the price of electricity in Connecticut.
For this to happen, the DPUC will need to evaluate how much money Connecticut’s ratepayers would save if one or more of Connecticut’s antiquated power plants was taken offline and replaced with modern generation units. This savings can then be split between the ratepayers and the developers of new generation through long-term contracts.
Such contracts are necessary to get financing in today’s market. In order to lower rates, the DPUC takes a portion of the savings the ratepayers would have received, and uses that savings to provide the guaranteed payment stream to the developers. This is a proven process that will enable new generation to be built in Connecticut.
Critics will argue that such a program is nothing more than a boon to the private sector, but in reality, such large-scale investments will not be made without such contracts. The alternative is to do nothing, and continue to suffer some of the highest electricity rates in the nation. That is something that Connecticut can no longer afford to do.
Lee D. Hoffman is a partner with the law firm of Pullman & Comley, LLC. and the secretary of the Connecticut Bar Association’s Public Utility Law Section.
