Income Guarantees Approved for FirstEnergy and AEP – Customers to Pay More for Power

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In December, EPCO took a stand against the power purchase agreements that FirstEnergy and AEP presented before the Public Utilities Commission of Ohio (PUCO). Over the last several months additional hearings were held, and experts testified for each side, regarding the viability and potential consumer costs of the proposals. On March 31, the PUCO issued their ruling in favor of the power purchase agreements for both FirstEnergy and AEP. The complete order with opinions from the PUCO can be read here.

The PUCO has given FirstEnergy and AEP approval for an eight year rate plan. This plan will go into effect over the summer, following a set of auctions on pricing later this spring. Simply put, the customers in these territories will be subsidizing FirstEnergy and AEP to ensure they turn a profit through 2024. FirstEnergy has argued that over the eight year term, the rates consumers pay will be lower in aggregate (projected at $256 million), following an initial increase in the first couple years.

However, many in opposition including the Ohio Consumers Council believe this deal will cost consumers at least $3 billion over the eight year term. Some estimates have even put the cost to consumers at nearly $6 billion. There is clearly a stark contrast regarding the potential cost to consumers. This divide is due in large part to differing assumptions regarding where the natural gas market, and state of renewable energy, will be in the future.

To understand this argument better, let’s take a brief step back to evaluate how we got here. Historically, most electricity in Ohio has been produced from coal fired plants. But over the past five years, half the large coal fired plants in the state have been retired.  During that time, generation from coal dropped from 82 percent throughout Ohio to 59 percent.

There are two significant reasons why this shift has occurred. First, the influx of natural gas in the market has provided a less expensive and cleaner alternative to coal fired generation. In just the past couple of years, the price for natural gas is down roughly 60 percent and trading below $2 on the stock exchange. The second issue is the increased cost of compliance due to additional federal and state regulations levied on coal and nuclear plants.

The utilities were able to successfully argue to the PUCO that their coal fired and nuclear plants are unable to compete in this changing market. As more natural gas fired plants come online, and additional regulations are issued, it has become exceedingly difficult for FirstEnergy and AEP to compete. In order to ensure that their plants stay active and produce the necessary power for the regional grid, they required a subsidy from the consumer in the form of an income guarantee.

The utilities have argued that natural gas pricing is going to dramatically increase to bolster their claims that rates will precipitously rise in the future. According to their logic, once rates increase their plants become more competitive. The utilities added that the need for the income guarantee is short term until the market turns in their favor.

The only problem with this argument is there is nothing to support the utilities claims. To the contrary, a great deal of research, data, and market analysis has shown the opposite trends have, and will continue, to occur. The current freeze on the Ohio renewable energy portfolio is likely to expire by the end of the year. Even Governor Kasich has come out strongly opposed to any continued freeze.  Once this current legislation expires, private investment in renewable energy will continue at an increasing pace. Furthermore, many of the projections that FirstEnergy has cited have already been proven wildly incorrect. Natural gas prices continue to plummet to historic lows and show absolutely no signs of significant increase over time.

Groups such as the Ohio Consumers Council have vowed to challenge these rulings at the state level, while others seek appeals through the Federal Energy Regulatory Commission (FERC). Despite claims to the contrary, it is unlikely to change the outcome of the PUCO ruling. At this time, EPCO is warning clients that rates will be increasing in the near future. The PUCO ruling will result an increased cost of doing business that ultimately will adversely affect business growth and development in Ohio. As such, the best course of action to take is reducing the amount of electric consumption at your facility through a comprehensive set of energy efficiency measures. Be sure to consult your energy advisor on what your next steps should be.

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4 Essential Tips to Prepare for the Next Recession

2016 is off to a rocky start and some economists are predicting a recession. Over the first two weeks of the year, the markets are trading down over eight percent. Chinese stocks have dropped more than 20 percent and have entered into bear-market territory. As the second-largest economy behind the United States, a slump of this nature will have an indisputable effect. Regardless of the direct fiscal impact to the U.S., the volatility in China will continue to send ripples through the global economy.recession-blog-photo

The dramatic decline in oil prices will also play a large role in the instability of the US economy. The price per barrel has dropped below $30; a 12-year low. The past year has seen prices plummet nearly 39 percent and almost 17 percent in just the past month. This has certainly been met with glee by consumers, as the price at the pump has dropped below an average of two dollars nationwide. However, the players on the world stage aren’t nearly as elated. China’s woes have further exasperated the market while oil producing states, such as Saudi Arabia and Russia, have seen dramatic declines in profits. Many smaller fracking and energy companies in the U.S. may be forced to shut down as well.

Furthermore, the fiscal policy of the Federal Reserve has amplified volatility. Continued tightening of monetary policy will reinforce the dollar’s strength and weaken U.S. exports. In turn, this could negatively impact the manufacturing sector, which represents over 12 percent of the U.S. GDP, and nearly nine percent of total employment (in 2013). Many news outlets have cited a December Citi Research report projecting the likelihood of a recession in 2016 at 65 percent, the highest odds in several years.

As the economy continues to foster uncertainty and instability, I am advising many of my clients to begin taking steps to protect themselves against a potential recession by years end. Here are four industry tips to get you started.

1. Evaluate Existing Contracts
•  Review in detail all your current and proposed equipment maintenance and service contracts. Be sure all maintenance and service agreements have significant returns on investment. Don’t simply allow contracts to roll over; instead negotiate for the best terms possible.
•  Evaluate your gas and electric generation contracts. Be knowledgeable on the current state of the market. It is extremely likely there has been a dramatic shift in market conditions since your last contract. Review with your energy advisor if you are uncertain on prevailing market value or contract terms.

2. Modify Behaviors: Little Changes Can Cause Big Savings
•  Turn off ancillary office machines and lighting when not in use.
•  Shut down non-essential equipment during down-time in production.
•  Evaluate facility energy systems to remove vampire power in standby mode.

3. Institute Controls and Energy Management Systems
•  Install a comprehensive controls platform and dashboard to enable you to monitor and manage your energy systems from one devise.
•  Mount sensors when possible to ensure systems such as lighting aren’t in perpetual use.
• Incorporate variable frequency drives (VFDs) on mechanical equipment to control the speed and energy output of motors.

4. Create a New Income Stream-Take advantage of the suite of utility rebates, tax incentives and financing structures that will increase your energy portfolio’s return on investment.
• Enroll in the “RIGHT” demand response program that will compensate you for curtailing energy usage at times when the grid is overly taxed.
• Talk to your advisor about maximizing energy related tax deductions (EPAct 179D) and capitalizing on accelerated depreciation.
• Take advantage of the many financing solutions available that provide immediate net savings for energy related projects. These are offered by many traditional banking institutions, Port Authorities, PACE financing agencies, and in the form of Energy Service Agreements (ESAs) by reputable energy planning companies.

The markets and the economy are cyclical. It is inevitable that we will have downturns and recessionary periods. We cannot predict what the next recession may look like, but we can take steps to lessen its effect. Working with an energy advisor, instituting long term energy management plans, and making low-to-no-cost investments, will better protect your business, resources and most importantly your wallet.

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Ohio’s Ranking Drops on ACEEE Scorecard for Energy Efficiency

Every year, ACEEE (American Council for Energy-Efficient Economy) ranks states on their energy efficiency policy and program efforts and also provides recommendations for ways that states can improve their energy performance. The State Scorecard is a benchmark, which serves to encourage states to continue “strengthening their efficiency commitments as a pragmatic and effective strategy for promoting economic growth, securing environmental benefits, and increasing their communities’ resilience in the face of the uncertain costs and supplies of the energy resources on which they depend.” Last week, the 2015 State Scorecards were released and Ohio was ranked 27th. This is a drop from Ohio’s 2014 placement at 25th.

This drop in ranking is no surprise after Ohio became the first state to reverse energy efficiency and renewable fuel mandates in 2014. Ohio Governor John Kasich signed Senate Bill 310 in 2014, which froze annually-increasing energy mandates until the year 2017. At which point, the “the automatic levels are to be restored”, a provision that Kasich requested to be part of the legislation, according to The Plain Dealer (Cleveland). The bill also included language that establishes a legislative study committee tasked with evaluating the effectiveness and future of the original portfolio standards.

Senate Bill 310 counteracted Ohio Senate Bill 221, which was passed in 2008 and established the efficiency standard. Under Senate Bill 221, Ohio ranked #1 in the nation for advance energy and renewables, “bringing in more renewable energy facilities than any other state,” according to JobsOhio. Under the legislation, utilities can count improvements made by their own customers and also roll over any savings above a given target into the next year. Language in SB 310 created a provision that permits large industrial users to opt-out of utility offered programs; allowing these users to develop and institute internal programs. Concern has arisen that this may adversely impact the effectiveness of the utility offered programs; potentially increasing the cost and burden of compliance on smaller commercial entities.

Overall, the passage of SB 310 has negatively impacted the implementation of commercial energy efficiency retrofits throughout the First Energy territory. Unlike other state utilities, First Energy has opted to discontinue any rebates for energy efficiency work performed by its customers. As a result, there has been a decline in the number of small and mid-size commercial entities instituting energy efficiency related projects. This concern may persist beyond the current two-year freeze in place under SB 310.

Recently, the legislative study committee released a report recommending an indefinite freeze on the mandates. This has largely been met with criticism from environmental groups, politicians and industrial entities alike. In response, Governor Kasich stated that “a continued freeze of Ohio’s energy standards is unacceptable”. There is much debate still to take place before a final determination is made on the future of Ohio’s renewable and energy efficiency portfolio standards. EPCO will continue to provide additional review and analysis as more information becomes available.

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