Out-of-State Whole-Sale Suppliers Make Billions in CT Energy Market
In the last post I highlighted how the general service charge on utility bills in Connecticut does not appear to reflect the cost of electricity in the New England energy markets. I concluded by asking who Eversource is buying its energy from, given the apparent upcharge. To answer that question, I examined the Eversource procurement process as well as the standard contract that it signs with energy providers. Eversource and UI effectively buy their energy from whole-sale suppliers, who make billions of dollars passing electricity from power plants to distributors.
Given the information available on CT government websites1, the way Eversource describes the process, “We purchase electricity from third-party suppliers that generate electricity at a power plant or generating station”, and the fact that the CT government required Eversource and UI to sign a contract with the millstone power plant2, it would be reasonable to conclude that the two big distributors buy their energy from power generators at a fixed price and pass that on to consumers. This is not what happens. Instead, Eversource and United Illuminating purchase price guarantees for their future energy use from whole-sale energy suppliers. This means they sign a contract to ensure that no matter what the price of energy is on the market in the future, Eversource pays its suppliers a preset rate. This means that there is an additional actor between you and the power plant.
How Energy Changes Hands On Its Way to Your House
While Eversource and United Illuminating are not allowed to profit from the sale of energy, the whole sale suppliers can. According to documents available on the PURA docket page, suppliers selling energy to UI include companies like Dynegy, Constellation Energy, and Nextera.3 The names of companies working with Eversource are all redacted, but it is presumably a similar set.
While Eversource and United Illuminating are not allowed to profit from the sale of energy, the whole sale suppliers can.
To reiterate, suppliers do not have to generate energy, they just have to be willing to assume the risk associated with promising to pay Eversource’s future electricity bills. They commit to covering Eversource’s eventual electricity costs in return for a fixed rate paid by the distributor. If electricity is ultimately cheaper than that, the supplier makes money, if it’s more expensive than that, they lose money.
Rates are set through periodic auctions where suppliers compete with one another to offer the lowest rates to Eversource.4 The suppliers offer rates for ten percent chunks of Eversource and UI’s future energy use, which translates to hundreds of millions of dollars in covered expenses. The scale of these commitments represents a massive risk for those who agree to cover Eversource or UI’s future energy costs, as they could potentially have to shield the companies from a price spike and end up paying tens or even hundreds of millions of dollars on their behalf. Because of this, only those with the deepest pockets can participate in the bidding process. On the other hand, if the rate is far above the market price, Connecticut consumers end up spending much more on electricity than they would have if Eversource had purchased the energy on the market.
This is not a good set up for Connecticut consumers. The distributors and PURA do try to choose the lowest possible rates from suppliers, but they are not spoiled for choice. There are relatively few participants in the bidding process because of the scale of the investment, which reduces the competition that is supposed to keep prices low. Eversource needs its electricity to be paid for and is legislatively bound to the current bidding structure, the suppliers do not need to assume the risk, so at the end of the day the suppliers set the price for their commitment.
This is what happened in 2023, after the spiky energy costs in 2022, which did force suppliers to consistently pay for energy at prices above the fixed rates. Investors were unwilling to cover Eversource’s future use for anything other than exorbitant profits and Connecticut consumers paid the price. General service charges to Connecticut consumers reached records highs last year even though prices on the New England energy market actually remained low. The chart below tracks the shift between supplier costs and the fixed rates that Eversource and UI pay.5,6
Your Rate vs What Wholesale Suppliers Pay ($ per Megawatt Hour)
After a period of convergence in 2021 and 2022, the difference between the market rates for energy and the price that Eversource and United Illuminating have been obliged to pay has expanded dramatically. The margins in 2023 and 2024 represent billions of dollars in profits for the wholesale suppliers.
In 2023, when fixed rates spiked in Connecticut, Constellation, Nextera, and Dynegy’s parent company Vistra all reported billions of dollars in increased profits.
Just because UI and Eversource cannot profit from the sale of energy doesn’t mean nobody’s profiting. In 2023, when fixed rates spiked in Connecticut, Constellation, Nextera, and Dynegy’s parent company Vistra all reported billions of dollars in increased profits.7 None of these companies maintain a significant physical presence in Connecticut, but they have all managed to extract massive amounts of wealth from Connecticut consumers. Money that could have been spent at local businesses went to largely anonymous energy companies in Texas, Maryland, and Florida instead. Something must be done to ensure that UI and Eversource’s fixed rates protect consumers like they are supposed to and don’t simply serve to pad the pockets of out-of-state energy companies.
Sources
1) https://portal.ct.gov/occ/electricity/electricity/electricity
2) https://www.cga.ct.gov/2020/rpt/pdf/2020-R-0203.pdf
3) https://www.dpuc.state.ct.us/DOCKCURR.NSF/$FormDocketElectricRevView?OpenForm&Start=1&Count=1000&Collapse=4&Seq=2&scrollTop=0
4) This link provides a more complete explanation of the bidding process: https://www.cga.ct.gov/et/related/20190205_Informational%20Forum%20on%20Regulators%20&%20Utilities/Eversource%20Procurement%20Process%20Handout%20Regulator%20Forum%202.5.19.pdf
a. For obvious reasons, there are stringent financial requirements for participants. You need to either have the backing of a large financial institution holding ten billion or more in assets, have an investment grade credit rating from Moody’s (Baa3 or better) or Standard and Poors (BBB- or better), or make a $5 million deposit with Eversource upfront before bidding starts. So, the pool of potential bidders is small to begin with. Moreover, if the distributors/PURA turn down offers, they risk paying higher rates later in future auctions, this happened to Eversource in 2023.
5) I’m treating the production cost here as the sum of the Forward Capacity Market and Generation costs. The ancillary and carbon-credit costs, which also contribute, are very minor.
6) Reports used for wholesale costs:
a. https://www.iso-ne.com/static-assets/documents/100017/2024-summer-quarterly-markets-report.pdf
b. https://www.iso-ne.com/static-assets/documents/2022/05/2022-winter-quarterly-markets-report.pdf
c. https://www.iso-ne.com/static-assets/documents/2020/02/2019-fall-quarterly-markets-report.pdf
d. Report for CT zone loads: https://www.iso-ne.com/isoexpress/web/reports/load-and-demand/-/tree/whlsecost-hourly-connecticut
7) Sources for 2023 profits:
c. Constellation: https://www.macrotrends.net/stocks/charts/CEG/constellation-energy/gross-profit
p.s. The set up described here explains why Eversource can buy electricity at $50 per MWh from Millstone and lose money. Eversource and UI sell the energy back on to the market, where $50 is a relatively high price, effectively losing money, but then buy the energy consumers use at the much higher fixed rate from suppliers. The supply rate adjustment processes in 2022 and 2023 gave no indication that the Millstone agreement factored into the price of energy, consistent with what Eversource and UI have said publicly about losing money on the energy when they sell it back into the market. I need to do more research on the topic, but it seems like it would make much more sense for Eversource and UI to use this energy, which is dramatically cheaper than the energy the suppliers sell them.