Soaring electricity prices leave Massachusetts manufacturers struggling

Higher power bills contribute to plant closings

State lawmakers will soon finalize energy legislation that aims to promote efficiency and alternatives to fossil fuels. But as legislators iron out differences between recently passed House and Senate bills, businesses say they need to pay closer attention to what many firms consider the real crisis: spiraling electricity costs.

Massachusetts manufacturers pay the highest electricity prices in the continental United States, and the gap between their costs and those of competitors in other states is widening, according to the Energy Department. In 2006, the most recent annual data available, industrial users in Massachusetts paid more than double the average US rate, compared to 60 percent more in 2005. Only Hawaii has higher industrial rates.

As a result, Massachusetts manufacturers are struggling to stay in business. Electricity costs have contributed to the shutdown of several plants with the loss of an estimated 2,000 jobs, according to Associated Industries of Massachusetts, the state's largest employer group.

Among them: a 200-year-old paper mill in Lee. The mill's owner, Schweitzer-Mauduit International Inc. of Alpharetta, Ga., said electricity played a role in the decision to shutter the plant later this year and lay off about 160 workers. Power costs at the Lee mill jumped nearly 30 percent, or $2.8 million, over the past two years, with electricity accounting for 17 percent of manufacturing costs, said Bill Foust, vice president of administration.

That compares to 5 to 7 percent at Schweitzer-Mauduit's other mills.

"Electricity isn't the only reason we plan to cease operations," said Foust, citing other factors such as falling demand for the cigarette papers produced at the mill, "but rising energy costs have been significant there."

Massachusetts has long had high electricity prices, but several factors contributed to the recent run-up, specialists said. First, the state depends on expensive fuels to make electricity. About 60 percent of New England power plants run on natural gas or oil, and sharp increases in the costs of these fuels passed through to electricity prices, according to ISO-New England, the organization that runs the region's power grid.

Nationally, these fuels account for a combined 21 percent of power generation. Cheaper coal-fired and nuclear plants generate nearly 70 percent of the nation's power.

Other factors driving costs here are growing demand, lagging supply, and inadequate transmission, which creates bottlenecks that further constrain supply. Difficulties at power plants and other facilities, such as liquid natural gas depots, also push prices higher.

"These are constraints that are self-imposed in New England," said Gordon van Welie, chief executive for ISO-New England. "Yet we keep consuming more."

Western Massachusetts has been hardest hit by rising electricity costs, recently pummeled by sharp increases in delivery charges from Western Massachusetts Electric Co., a unit of Northeast Utilities of Berlin, Conn. Those increases, approved in a 2006 settlement with former Attorney General Thomas F. Reilly, helped raise power costs for large commercial and industrial users more than 20 percent last year.

Total power costs for large users are projected to rise 11 percent this year, according to the utility.

Under Massachusetts' deregulated market, utilities just deliver electricity, charging delivery rates regulated by the state. Independent generators that make electricity sell it at market prices determined by supply and demand. Utilities pass those prices on to consumers.

Economic development officials in Western Massachusetts say soaring electricity costs are not only pushing plants like Schweitzer-Mauduit's over the edge, but also are hurting efforts to recruit companies. About a year ago, Ice River Springs Water Co. Inc. of Feversham, Ontario, planned to open a bottling plant in Pittsfield. But when corporate officials saw electric rates, they put the building they purchased up for sale and opened the plant in New Hampshire

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Sandy Gott, executive vice president, said her company is working with economic development officials to revive the Pittsfield project. The Berkshire Chamber of Commerce recently formed a cooperative of smaller companies to buy power in larger volumes at lower rates. Gott said Ice River Springs is examining whether those savings will be enough.

"We're kind of in limbo and trying to make a final decision," said Gott. "The electricity prices were quite a shock."

At the Friendly Ice Cream Corp. plant in Wilbraham, soaring prices boosted power costs by nearly $1 million over the past 2 years, gobbling savings from investments in energy-efficient lighting and refrigeration and other projects, said Mike St. Marie, vice president of production and distribution. Friendly pays 14 cents a kilowatt hour for electricity, up from about 8 cents three years ago.

"Rates have really spiraled out of control," St. Marie said, "and it makes us a little uncompetitive."

Ian Bowles, the state's secretary of energy and environment, said the Patrick administration recognizes that high electricity prices hurt competitiveness and is pushing initiatives to lower them. They include investing heavily in energy efficiency; revamping utility rate structures to promote conservation; and developing renewable sources, such as wind, solar, and biofuels, to reduce reliance on natural gas and oil. Significantly increasing efficiency could slice electricity expenses 3 to 5 percent a year, Bowles said.

Robert Rio, senior vice president at AIM, agreed energy efficiency could cut prices. But, he said, policy makers should move carefully in subsidizing alternative energy and other programs.

"We need a policy that puts electricity prices first," Rio said. "All these programs are nice, but we need to constantly ask, 'How is it going to reduce prices?' "

Many of these programs are funded with surcharges on utility bills, typically fractions of a cent per kilowatt hour. Many homeowners barely notice these charges, Rio said. But for industrial users, consuming millions of kilowatt hours a year, they boost costs by thousands of dollars.

M. Brian O'Shaughnessy, chief executive of Revere Copper Products Inc. of Rome, N.Y., said surcharges for energy efficiency, renewables, and other programs contributed to the shutdown this fall of Revere's plant in New Bedford. About 90 workers lost jobs.

New York development programs exempt manufacturers from such surcharges, O'Shaughnessy said, and rates at Revere's Rome facility are half those at New Bedford. "Massachusetts has to recognize that industrial companies have to be competitive with industrial plants around the world," O'Shaughnessy said. "You can't burden manufacturers with higher costs in a region where high costs already make it harder to compete."

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Short-Term Energy Outlook (U.S. Energy Information Administration)

Short-Term Energy Outlook
December 11, 2007 Release

To see details of this forecast update, go to: http://www.eia.doe.gov/emeu/steo/pub/contents.html

Highlights

Global oil markets will likely remain tight through the forecast period. EIA projects that world oil demand will grow much faster than oil supply outside of the Organization of Petroleum Exporting Countries (OPEC), leaving OPEC and inventories to offset the resultant upward pressure on prices.

However, at last week’s meeting in Abu Dhabi, OPEC decided to maintain existing production targets, noting that, in its view, the global oil market continued to be well supplied. Additional factors contributing to expectations that prices will remain high and volatile through 2008 include ongoing geopolitical risks, Organization for Economic Cooperation and Development (OECD) inventory tightness, and worldwide refining bottlenecks.

West Texas Intermediate (WTI) monthly crude oil prices averaged more than $85 per barrel in October and almost $95 per barrel in November, up $27 and $36 per barrel, respectively, from a year earlier. The daily closing spot price for WTI peaked at $99.16 per barrel on November 20, but started falling near the end of the month in anticipation of additional OPEC production and is expected to continue to decline slightly through 2008. Monthly average prices for WTI are expected to exceed $80 per barrel over the next year.

The $80-plus per barrel projected crude oil prices are likely to result in historically high prices for the major petroleum products. Residential heating oil prices are projected to average $3.23 per gallon this heating season, a 30-percent increase over the previous heating season. Both motor gasoline and diesel prices are projected to average well over $3 per gallon in 2008, with gasoline prices peaking at over $3.40 per gallon next spring.

Working natural gas in storage reached 3.44 trillion cubic feet (tcf) as of November 30. This high level of storage going into the heart of the winter, combined with limited remaining fuel switching capability, has insulated the natural gas market from the impact of the recent price increases in petroleum markets to some extent.

Consequently, while petroleum product prices are expected to increase and remain historically high, only moderate gains are expected for natural gas prices through 2008. The Henry Hub natural gas spot price is expected to average about $7.21 per thousand cubic feet (mcf) in 2007 and $7.78 per mcf in 2008. Average household natural gas expenditures this winter are expected to show an increase of about 7 percent compared with last winter.

Global Petroleum Markets

Expectations that tight market conditions will persist into 2008 are keeping oil prices high. Despite the OPEC decision to hold production steady at its meeting last week and downward revisions to projected consumption growth in 2008, the oil balance outlook remains characterized by rising consumption, modest growth in non-OPEC supply, fairly low surplus capacity, and continuing risks of supply disruptions in a number of major producing nations.

Although the balance assumes a mild slowdown in world economic growth, the major downside risk remains the possibility of a sharper-than-expected economic slowdown brought on by the fallout from the unsettled financial markets that would dampen oil demand and ease oil price pressures.

Consumption.

China, non-OECD Asia, and the Middle East countries are expected to remain the main drivers of higher world oil consumption through 2008. World oil consumption in the fourth quarter of 2007 is expected to rise by 1.7 million barrels per day (bbl/d) above fourth quarter 2006 levels and oil consumption in 2008 is projected to rise by 1.4 million bbl/d. Both projections are slightly lower than last month’s assessment.

Indeed, higher prices appear to be dampening oil consumption in a few countries, including the United States, in recent months. (Table 3a indicates U.S. consumption in third quarter 2007 was 210,000 bbl/d lower than third quarter 2006 levels, compared with a year-over-year rise of 170,000 bbl/d during first half of 2007.)

In 2008, China alone is expected to account for over 400,000 bbl/d, or one-third, of world oil consumption growth. Downward revisions, however, in consumption growth are certainly possible, particularly if the slowdown in world economic growth is greater than expected.

Non-OPEC Supply.

Non-OPEC production is expected to rise by 0.5 million bbl/d in the fourth quarter of 2007 compared with fourth quarter 2006 levels.

For 2008, non-OPEC supply is projected to grow by 0.9 million bbl/d over 2007. Gains in Brazil, the United States, Russia, and Canada will more than offset lower production in a number of countries, including Mexico, the United Kingdom, Norway, and Egypt. Russia and the other countries of the former Soviet Union combined are projected to account for nearly half of the gain in non-OPEC supplies in 2008.

Non-OPEC supply is expected to increase by less than global oil consumption in 2008, putting pressure on OPEC and inventories to bridge this gap. Projected growth of production capacity is very sensitive to the progress of several large-scale projects, including the already-delayed Sakhalin II project in Russia, the Marlim field in Brazil, and the ACG project in Azerbaijan.

Recent history has shown non-OPEC capacity growth projections often fall short of expectations.

OPEC Supply.

OPEC members decided to maintain existing production targets at last week’s meeting in Abu Dhabi. The combination of recent price weakness, downward revisions in demand projections, and higher supplies already expected from Saudi Arabia, Angola, Iraq, and Abu Dhabi (after recent maintenance), led OPEC to dismiss the need for additional supplies.

EIA projects that OPEC crude production in the first quarter of 2008 will average about 31.6 million bbl/d, an increase of 400,000 bbl/d from fourth quarter 2007 levels. For full year 2008, EIA’s balance assumes that OPEC crude oil production will average 31.7 million bbl/d. In addition, OPEC production of non-crude liquids is expected to increase by 300,000 bbl/d in 2008. OPEC countries’ plans to add substantial crude oil production capacity in 2008, with growth totaling roughly 1.3 million bbl/d by year’s-end, should help meet growing oil demand.

Saudi Arabia and Angola will account for most of the growth in capacity. Despite higher capacity, our balance indicates that OPEC surplus production capacity, held mostly in Saudi Arabia, will remain fairly low, averaging about 2 to 3 million bbl/d.

Inventories.

Total OECD commercial inventories continue to fall. Preliminary and partial data indicate commercial OECD inventories fell by 16 million barrels in October, leaving inventories slightly below the 5-year average at an estimated 2.6 billion barrels.

Last year at the same time, inventories were 125 million barrels above the 5-year average.

Preliminary data for the United States indicate that inventories declined by more than the past 5-year average during November. EIA’s oil balance suggests that OECD commercial stocks will be just below their 5-year average at year’s-end.

Even with the additional OPEC production expected next year, OECD commercial inventories (measured on a days-supply basis) would remain in the low end of the 5-year range in 2008.

U.S. Petroleum Markets

Consumption.

Total domestic petroleum consumption is projected to average 20.8 million bbl/d in 2007, up 0.4 percent from the 2006 average.

A further 1.1-percent increase to an average of 21.0 million bbl/d is projected for 2008. Motor gasoline consumption is projected to increase by 0.6 percent in 2007 and 1.0 percent in 2008. Reflecting moderate economic growth and assumptions of normal weather during the upcoming winter season, total distillate consumption is projected to increase by 1.8 percent in 2007 and 1.4 percent in 2008.

Production.

In 2007, domestic crude oil production is projected to average 5.1 million bbl/d, 0.2 percent higher than 2006 production levels. Domestic production in 2008 is projected to rise by 2.3 percent to 5.23 million bbl/d. Contributing to output growth are the Atlantis deepwater platform, which began production in October, and the Thunderhorse platform, expected to come on stream late in 2008.

Prices.

The refiner acquisition cost (RAC) of crude oil is projected to increase from an average of $60.23 per barrel in 2006 to $67.89 per barrel in 2007.

Although RAC prices are expected to decline slowly from their November peak, they are expected to average almost $80 per barrel in 2008. WTI prices are projected to increase from an average of $66.02 per barrel in 2006 to $72.05 per barrel in 2007 and to nearly $85 per barrel in 2008.

Slower U.S. economic growth of 2.1 percent is projected for 2007 and 1.8 percent for 2008, compared with 2.9 percent in 2006, which may be a mitigating factor for even higher crude oil prices.

Gasoline prices, which hit a recent weekly peak of $3.11 per gallon in mid- November, fell by about 19 cents per gallon over the last several weeks corresponding drop in crude oil prices. Nevertheless, by the middle of next spring they are projected to rebound to over $3.40 per gallon as the driving season begins.

In 2008, heating oil prices are projected to average $3.11 per gallon while diesel fuel prices are expected to average $3.21 gallon.

Inventories.

Commercial crude oil inventories have generally been declining since May, a trend that is expected to continue through the forecast. As of November 30, total motor gasoline inventories were an estimated 201 million barrels, down 3.4 million barrels from 2006 and 5.5 million barrels below the previous 5-year average. Distillate stocks were an estimated 132 million barrels on November 30, down 8 million barrels from 2006 but about equal to the previous 5-year average.

Natural Gas Markets

Consumption.

Total natural gas consumption is expected to increase by 5.0 percent in 2007, largely driven by increases in the residential, commercial, and electric power sectors that occurred earlier this year. The return to near-normal weather in 2008 is expected to increase total consumption by 1.1 percent.

Even though consumption of natural gas in the industrial sector is projected to decline by 0.7 percent in 2007, the weaker U.S. dollar and global demand for natural-gas-intensive goods produced domestically are expected to contribute to a 0.8-percent increase in industrial sector consumption in 2008.

Production and Imports.

Total U.S. marketed natural gas production is expected to rise by 2.1 percent in 2007 and by 1.6 percent in 2008. In 2007, a portion of the 2.8-percent rise in marketed natural gas production in the Lower-48 onshore region is being offset by a 1.7-percent decline in Gulf of Mexico production. However, new deepwater supply infrastructure in the Gulf and ongoing efforts to develop unconventional reserves are expected to increase Gulf of Mexico and Lower-48 onshore production by 5.1 and 1.0 percent, respectively, in 2008.

Imports of liquefied natural gas (LNG) are expected to reach about 790 billion cubic feet (bcf) in 2007, a 35-percent increase over 2006, and about 940 bcf in 2008, a 19-percent increase over 2007. In recent months, LNG imports have slowed due to complications with key production and liquefaction facilities as well as increases in global demand.

The expansion of global liquefaction capacity is expected to boost LNG shipments to the United States in 2008, but the risk of project delays and production shortfalls, as well as negative price differentials between the U.S. market and other LNG-consuming countries, could temper the number of spot cargoes directed to U.S. ports next year.

Inventories.

On November 30, 2007, working natural gas in storage was 3,440 bcf (U.S. Working Natural Gas in Storage). Current inventories are now 273 bcf above the 5-year average (2002-2006), and 32 bcf above the level during the corresponding week last year.

Prices.

The Henry Hub spot price averaged $7.31 per mcf in November, $0.37 per mcf more than the average October spot price. Despite high storage levels and the relatively moderate winter weather thus far, the onset of seasonal natural gas demand for space heating has caused an steady increases in the monthly average spot price since September.

Spot prices at the Henry Hub are projected to reach a winter peak of $8.22 per mcf in January 2008. On an annual basis, the Henry Hub spot price is expected to average about $7.21 per mcf in 2007 and $7.78 per mcf in 2008.

Electricity Markets

Consumption.

Total electricity consumption in 2007 is projected to increase by 1.9 percent over last year. Cooling degree‐days in 2008 are assumed to be about 12 percent lower than in 2007. The assumed return to near-normal temperatures should keep residential electricity sales growth relatively flat at a rate of 0.2 percent next year. Slow macroeconomic growth in 2008 will also limit growth in electricity sales to the commercial and industrial sectors.

Prices.

U.S. residential electricity prices are expected to average 10.6 cents per kilowatthour in 2007, 2.1 percent above prices in 2006. Residential prices are expected to grow at a somewhat lower rate of 1.7 percent in 2008. Most States that had planned to let price caps expire within the next year have either delayed those plans or changed the expiration schedule so that increases occur over a longer time frame.

Coal Markets

Consumption.

Electric-power-sector coal consumption, which accounts for more than 90 percent of total U.S. coal consumption, is expected to grow by 2.2 percent in 2007. Slow growth in electricity consumption, combined with projected increases in natural-gas-fired and hydroelectric generation, will lead to a 0.5-percent decline in 2008.

Production.

U.S. coal production, which increased by 2.8 percent in 2006, is expected to fall by 1.0 percent in 2007. Interior region coal production is expected to grow slightly (by 0.5 percent) in 2007. The projected decline in coal consumption, coupled with continued draws on inventories, will lead to a 1.7-percent decline in total coal production in 2008, with declines occurring in all coal producing regions.

Inventories.

Withdrawals from primary (producer/distributor) and secondary (consuming sectors) inventories are expected to supply approximately 28 percent of the projected coal consumption increase in 2007.

Total coal stocks are expected to fall by 3.6 percent in 2007 to 180 million short tons. Primary inventories are projected to fall by an additional 11.2 percent in 2008, and secondary inventories are projected to be 2.2 percent lower than the previous year.

Desktop Orb Could Reform Energy Hogs

Mark Martinez couldn't get Southern California Edison customers to conserve energy. As the utility's manager of program development, he had tried alerting them when it was time to dial back electricity use on a hot day — he'd fire off automated phone calls, zap text messages, send emails. No dice.

Then he saw an Ambient Orb. It's a groovy little ball that changes color in sync with incoming data — growing more purple, for example, as your email inbox fills up or as the chance of rain increases. Martinez realized he could use Orbs to signal changes in electrical rates, programming them to glow green when the grid was underused — and, thus, electricity cheaper — and red during peak hours when customers were paying more for power. He bought 120 of them, handed them out to customers, and sat back to see what would happen.

Within weeks, Orb users reduced their peak-period energy use by 40 percent. Why? Because, Martinez explains, the glowing sphere was less annoying and more persistent than a text alert. "It's nonintrusive," he says. "It has a relatively benign effect. But when you suddenly see your ball flashing red, you notice."

Electricity is invisible. That's why we waste so much of it in the home — leaving rechargers permanently plugged in and electronic devices idling in power-slurping "sleep" modes. We can't see that our houses account for nearly a quarter of the nation's energy appetite; we don't know when the grid is nearing capacity and expensive to use. So Martinez hacked his customers' perceptual apparatuses. He made energy visible.

That's the power of "ambient information," which tries to combat data overload by moving information off computer screens and into the world around us. The Orb was originally sold as a tool for monitoring financial portfolios. You could set it to shine a serene sky blue when your stocks were going up or pulse an alarming red when they were tanking. Studies showed that people were two to three times more likely to actively manage their investments, selling off deadbeat stocks and buying better-performing ones, when they used the Orb. This is the psychological paradox of ambient information: We're more likely to act on a subtle but continuously present message than an intermittent one we're forced to stare at.

So here's the radical idea: Maybe the real killer app for ambient information isn't alleviating data overload or tracking investments. Maybe it's taming global warming. To improve energy efficiency and reduce emissions, we first need to make omnipresent the hidden facts about our usage — paint them on the world around us.

After all, we already know we're energy hogs, right? We talk about our personal carbon footprint, argue the finer points of buying carbon credits, tut-tut over Al Gore's energy-bingeing McMansion. Ambient display of our actual usage might just get us to cut back.

There's already solid evidence that feedback mechanisms can change eco-behavior. Think about how hybrid-car owners become obsessed with the dashboard display showing an on-the-fly calculation of gas mileage. The result? They change the way they drive, specifically trying to maximize mileage. It becomes a game, an enjoyable challenge, complete with quantifiable personal bests.

Here's an even wilder idea: How about making our energy use visible to everyone? Imagine if your daily consumption were part of your Facebook page — and broadcast to your friends by RSS feed. That would trigger what Ambient Devices CEO David Rose calls the sentinel effect: You'd work harder to conserve so you don't look like a jackass in front of your peers.

This isn't as far-fetched as it sounds. The design firm DIY Kyoto (as in Kyoto Protocol) recently began selling a device called the Wattson, which not only shows your energy usage but can also transmit the data to a Web site, letting you compare yourself with other Wattson users worldwide.

In a Borg-like way, users can see how much they've collectively reduced their carbon impact.

The hope is that it could spawn a cascade of conservation. It's fun seeing your personal energy tab go down by kilowatts — but just imagine watching the world's usage plunge by terawatts or petawatts. It would be like a global Prius, with millions worldwide tweaking the Earth for maximum mileage. Now that's fun.


Clive Thompson - wired magazine