Opinion: Long Island's Public/Private Energy Model a Failure

It should be obvious to all that Long Island’s mixed government/private energy model as it exists today is a failure and needs to be revised.

Placing our energy future under the control of a multinational monopolist, like National Grid, has eliminated competitive pressure that would lower our energy costs. Long Island needs to develop a new competitive model for our energy market. It is not acceptable that we continue to have the second highest rates for electricity in the continental United States. Addressing this market intelligently would bring new investment and new jobs to the Island.

Market reforms that were initiated in New York State by the Public Service Commission in the late 1990s were intended to bring new capital investment to the energy infrastructure. Transmission bottlenecks would be alleviated and power plants modernized through the injection of new capital. It never came to pass. More than 15 years later, capital investment has failed to materialize, transmission bottlenecks persist, and the generation plants are saddled with inefficient technology that should have been updated years ago.

National Grid owns these base-load electric plants on Long Island, the long-standing workhorse plants, for example Barrett, in Island Park; Northport; and Port Jefferson. They operate these plants under contract with the Long Island Power Authority (LIPA). These are inefficient, polluting plants that are expensive to run. They are scheduled to serve less and less often.

While these plants have been scrupulously maintained and could continue to supply power for decades to come, they require major investment to improve their technology to match the efficiency of newer combined-cycle facilities. Though the economic justification for that investment was demonstrated in an engineering study prepared for LIPA and National Grid in 2009, National Grid has indicated that they have no interest in investing in the repowering of these plants. National Grid may instead be positioning itself to get out of the power generation business entirely, and focus on lucrative electric and natural gas distribution management.

In August 2010, LIPA issued a request for proposals, soliciting bids for the supply of electric power after the Power Supply Agreement with National Grid runs out in 2013. Proposals were due by March 31, 2011.

Even though LIPA expressed an expectation that the repowering of existing facilities would be explored within this bidding process so it could be considered “on a level playing field,” National Grid did not submit such a proposal. In fact, LIPA and National Grid have now entered into a separate discussion from the RFP regarding a renewal of the existing Power Supply Agreement, leaving little doubt that they have decided to pursue a direct negotiation rather than working through the competitive bidding process.

As the current agreement winds down, these plants have lost the appeal of guaranteed long-term future earnings. This has made it hard for National Grid to find any buyers for them. But, though they are dirty and inefficient, they are still essential in meeting Long Island’s energy needs for many years to come.

That is National Grid’s ace in the hole. With their monopolistic hold on the base-load generation facilities of Long Island, National Grid has positioned itself to coerce a long-term renewal of the Power Supply Agreement on favorable terms that would again guarantee revenues far into the future regardless of efficiency. With that guaranteed revenue, the plants will increase in value and National Grid can attract a buyer or buyers, allowing it to profitably withdraw from the power generation business.

The free-market incentive to repower these generating facilities and drive down the cost of power on Long Island will have again been thwarted in order to serve the goals of this multinational monopoly, at the expense of our region’s economic health.

By comparison, NRG Energy—a New Jersey based company focused in power generation—is repowering its facilities in Queens, NY to lower costs and improve efficiencies, and projecting a tidy profit in the process. Their incentive to modernize is the competitive drive to keep costs down so they can sell power at low prices and still make a profit. LIPA’s agreements with National Grid guarantee this monopoly a risk-free profit with no incentive to improve their operating efficiencies. While NRG invests $1.4 billion to modernize their New York Astoria plant, the Long Island plants are left by the wayside.

In May 2010, National Grid raised £3.2B ($5.2B) through an equity rights issue. The Financial Times reported that the company plans to invest £22B ($35.8B) in Britain’s energy infrastructure over the next five years. In January 2011 the company reported that it expects significantly higher profits largely as a result of improvement in their U.S. business. Also in January 2011 National Grid reported that they will shed 1,200 jobs or 7% of their US workforce. Many investment advisors give National Grid stock a buy rating.

In 2005 LIPA initiated a new base-load project—the Caithness Long Island Energy Center that came online in 2009—a private project funded by a long-term power purchase agreement with LIPA and hence ultimately by Long Island’s rate payers. Caithness was supposed to lower electricity rates on the Island. It is questionable whether the plant has in fact had that effect. If the price of natural gas had continued to increase in line with projections at the time, maybe it would have. The price of natural gas went in the opposite direction: it declined.

A straightforward opportunity cost analysis of the Caithness project, the kind of analysis you learn in a basic economics course, would have shown that repowering of existing power plants would have been a better alternative compared to new development. All things considered, the cost per megawatt is significantly less than a new plant, and air and thermal pollution can be reduced to the levels of a new plant.

In short: If you build a new clean, efficient plant, you get just that: a clean, efficient plant. If you repower an old-technology plant you get the same: a clean, efficient plant, and you save the costs of locating and preparing a new site in the contentious Long Island world of NIMBY; you save by using existing infrastructure for fuel delivery and power transmission; and you get rid of a dirty, polluting, expensive plant, while avoiding the enormous cost of having to clean up a spent industrial brownfield. This is environmental and energy economics 101.

Thomas Bjurlof, a resident of Port Jefferson, consults on energy and information technology for numerous international firms.