ConEdison Solutions has released a whitepaper on the polar vortex, which notes that "structural" pricing relief to the high winter electric rates plaguing the Northeast RTOs is, "at least a few years away."

Of the polar vortex, ConEdison Solutions' whitepaper says that, "the most significant price driver was pipeline constraints that drove up the cost to transport natural gas (called 'basis') to electric generators."

We believe it would be more accurate to state, given the free market economy we enjoy, that the most significant price driver was generators' willingness to expose themselves to the potential for these high prices, rather than prudently managing their variable costs through hedging or other measures (dual fuel capability, etc.). Of course, when you create a moral hazard such as letting generators recover costs in excess of long-standing and tariffed price caps, it doesn't motivate generators to engage in such behavior. Indeed, the "problem" now being debated at FERC isn't whether the current market forces customers to subsidize poor risk management by generators, but whether "price formation" needs to be reformed (e.g. higher price caps) to allow generators to charge even higher prices when they are caught gambling, and it comes up snake eyes.

Back to ConEdison Solutions' whitepaper, ConEdison Solutions noted that price relief is not on the horizon for battered customers in the Northeast RTOs:

"Since those peak prices earlier this winter, we have seen prices moderate slightly. However, experts suggest that we are likely to experience high prices over the next few winters as well, with structural relief at least a few years away. Any proposed project to provide relief by reducing pipeline constraints will likely take years to complete, so consumers exposed to energy markets over the next few winters should expect higher-than-average prices during those months. Whether prices will be higher or lower than this winter will depend on a number of factors, including the severity and duration of cold weather."

See ConEdison Solutions' full whitepaper for more: 2013-2014 Winter Polar Vortex

Tags:
ConEdison Solutions   Polar Vortex   Price Caps  

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