Donald L. Hoffmann wasn’t expecting last month’s electric bill to cost him an arm and a leg.
But it did.
During February, the electric bill for the owner of Airport Plaza Jewelers for his two Cheektowaga locations on Union Road jumped by more than 60 percent, pushing his power costs up by almost $900 compared with his January bill.
“I was stunned,” Hoffmann said. “But since you really don’t have much of a choice, you’re stuck paying the bill.”
Tahsin A. Sallaj, owner of the French Road Apartments in Cheektowaga, was equally surprised by his last utility bill.
The 56-unit apartment complex, which is heated by electricity and includes utility costs in the rent its residents pay, saw its bill, which averaged about $4,600 a month last year, jump to about $10,000 in December and January, before shooting up to just under $18,000 last month.
“This is crazy,” Sallaj said. “I know it’s been cold, but how the heck did that happen?”
All across the Buffalo Niagara region, electricity bills for residents and small businesses are causing sticker shock as the combination of the bitterly cold winter across the country and the soaring price of natural gas used to generate more than half of the state’s electricity has caused power prices to spike.
And it’s only going to get worse. Utility officials warn that March’s electricity costs are likely to be the highest yet, with National Grid’s commodity prices – what the utility pays producers for the power it delivers to its customers – expected to be 40 to 50 percent higher than in February, when power prices were temporarily frozen at January’s levels.
“March is going to be a very difficult month,” National Grid spokesman Stephen F. Brady said, noting that the temporary price freeze during February deferred what would have been about an 18 percent increase in commodity costs on last month’s bills until this summer. “It’s going to be tough.”
While those costs actually have eased, the overall commodity charges that consumers will pay during March are going up because the utility underestimated the scope of the January spike in power prices and is collecting that shortfall this month, part of the normal monthly process to balance a utility’s actual electricity expenses with what it collected two months earlier.
“Even though we forecast an increase, we did not forecast high enough,” Brady said. “We have to collect what we underbilled in January.”
NYSEG’s average bills during February for its residential customers are expected to run about 6 to 12 percent higher than they were in December because of the increase in wholesale electric prices, said spokesman Clayton Ellis. Total bills could be even higher if the cold weather led to an increase in electricity use.
Electric bills have two components (plus a surcharge): the price consumers pay a utility to deliver electricity to their homes and businesses – a rate that is regulated by the State Public Service Commission – and the price of the electricity that consumers use, which utilities pass along at cost. Residential delivery rates for National Grid dropped by 6.6 percent last year. Delivery rates for New York State Electric & Gas Corp. have been frozen since September 2012.
But the commodity price has been skyrocketing. The wholesale electricity price that business customers paid in Buffalo Niagara, which stood at about 5.5 cents per kilowatt-hour in early December, rose steadily through mid-January and then spiked sharply, hitting a peak of 15.6 cents per kilowatt-hour on Feb. 18 – about triple the price from just 12 weeks earlier.
The wholesale prices that retail customers paid for power have since dropped by more than a third but still are historically high, with an average of 11.6 cents per kilowatt-hour Tuesday, according to BlueRock Energy, a Syracuse-based energy marketer that tracks electricity prices.
As a result, the monthly electricity costs that National Grid’s residential customers are paying in this winter season are expected to be almost double what they were during cold-weather months in the previous two years.
Energy officials blame the spike on higher natural gas commodity prices, which shot up earlier this year as the cold weather took hold across the country, driving up demand from consumers who use the fuel to heat their homes. Natural gas commodity prices, which opened the year at $4.23 per 1,000 cubic feet, shot up to a more than six-year high of $6.49 on Feb. 24, only to tumble over the last two weeks as spring approaches. Natural gas closed Wednesday at $4.55, up by 8 percent for the year and 29 percent higher than a year ago.
“The higher prices of natural gas are actually driving the higher prices of electricity,” said Mark S. Lynch, NYSEG’s president and CEO.
“It really is supply and demand,” Lynch said. “What you’re seeing is the effect of a higher commodity price and a really cold winter.”
Electricity commodity prices dropped to unusually low levels beginning in 2010, when vast new supplies of inexpensive natural gas from shale formations began flooding the market.
With prices cheap and supplies more than ample as relatively warm winters reduced demand, natural gas became the fuel of choice for new power plants. New York now gets about 55 percent of its electricity from plants that run on natural gas, according to the New York State Independent System Operator, which manages the state’s power grid.
“I think what you’re seeing is a greater overall dependency on natural gas,” Lynch said.
But the market changed this winter, when the prolonged stretch of bitterly cold temperatures across much of the country led to a big jump in demand for natural gas. Stockpiles now are at their lowest levels in almost six years, according to the U.S. Department of Energy.
“Even though there’s plenty of supply, particularly coming out of Pennsylvania, there’s a lack of pipeline infrastructure that’s keeping it from getting to where it’s needed,” said Philip R. VanHorne, president of BlueRock Energy.
The cold also has driven up electricity consumption. On Jan. 7, the state set a winter record for peak power use. The way the state’s wholesale power market operates, the market price is set by the most expensive power plant that is needed to meet the demand.
So when demand is high, as it has been during most of the winter, the state must rely on more expensive power plants to provide all the electricity that is needed, and those high-cost plants become the price-setter for the market.
While many energy officials expect electricity prices to drop as spring turns to summer, VanHorne thinks power prices are likely to remain higher than they have been in the last few years because the need to rebuild depleted natural gas inventories will keep gas commodity prices from dropping too low. And that could mean further price spikes this summer if a heat wave causes an air conditioning-driven jump in demand.
“I think we’re going to see more volatility going forward than we’ve seen in recent years,” VanHorne warned.
Sallaj, the Cheektowaga apartment complex owner, already has had enough of the volatility he has seen this winter by purchasing his electricity through the fluctuating commodity prices charged by NYSEG. He met with an energy marketing company Friday and signed an agreement to start purchasing his electricity later this month at a fixed price that will last through the next year.
“I have no choice,” he said.