Friday, January 30, 2009

The economics of electricity

From the 02 February 2009 Greater Niagara Newspapers

By Bob Confer

Every year dozens of people ask me about our electrical expenses at Confer Plastics. They know we’re a heavy power user (it takes a lot of juice to melt-down plastic) and, with our proximity to the Niagara River, they assume that we save a lot of money by operating in Western New York.

Their curiosity quickly turns to shock when I give them the numbers. Our power bill in 2008 was just under a million dollars; $934,967 to be exact. Even though we operate on the shores of Nature’s dynamo and from it get a small allotment of NYPA power (300 kilowatts), our unit cost was still 12.1 cents per kilowatt hour (kwh).

That cost, like everything else in this once-great state, is much higher than what it is in other areas. The average electrical cost for industrial users in the United States is a paltry 6.16 cents, almost half of what I’m paying.

But, when I look to compare apples to apples, I prefer to analyze the electrical costs in Ohio and Ontario. Ohio is the epicenter of the plastics industry, home to some 1,600 molders and, therefore, our greatest number of competitors. Ontario’s Golden Horseshoe, so financially vibrant and so near to our site, offers almost unlimited potential for us, but we’ve been mostly unable to crack the market because Canadian manufacturers can make things for less than we can. In the case of Ohio, their cost is 5.65 cents/kwh. So, had we been operating in the Buckeye State we would have saved $496,500 last year. Ontario, just across the river, is even cheaper at 4.1 cents US per kilowatt hour. Had we been there we would have saved $616,513 in 2008.

Let’s just say on average between the two we lost $565,507 by working in the Empire State. That’s not chump change. As a matter of fact, it’s ridiculously expensive. Considering that we were a $16.22 million company in 2008, that means we devoted 3.5 percent of our revenues just to cover the cost of New York’s electrical rates over and above what everyone else pays.

That cost disadvantage is a key reason why Buffalo’s and Niagara Falls’ once-proud manufacturing corridors are now ghost towns, quiet, almost-vacant shells of their former selves. The steel, aerospace, and chemical giants are long gone and many automotive parts manufacturers on quickly on their way to joining them because it makes total sense to one, move out of New York or two, close their New York operations and focus on more profitable sites elsewhere. That’s because most of those manufacturers were/are heavy power users and electricity ranks as one of their two or three greatest costs. They can control the other big expenses (material and personnel) but they really have no control over electricity. They have to run their machines and can only accept the electricity at the rate at which it is delivered to them. It’s not a resource that can be bartered.

If my roots weren’t so strong and if I weren’t so committed to my coworkers I would join those companies in their new far-flung locations. But, here we stay and here we suffer.

We suffer not only at work, but also at home. Just as industrial electrical rates are high, so they are for residences, too. Based on national statistics for 2007, the average household in New York paid 16.6 cents/kwh. Across the US that number was only 10.22 cents. That means we’re paying 62 percent more than the rest.

No homeowner is going to, like a business, pick up and move because power is so expensive. But, that doesn’t mean they aren’t feeling the pinch. The average American household consumes 935 kwh per month. At that level, New Yorkers pay $155/month to keep their homes going. The average American pays only $96. That means that every month we’re literally throwing away $59. Over the course of the year we’re losing $708. Think of what you could do with that money!

Think of what our economy could do with that money. There are 600,000 households in WNY. If each one of them spent the money that they wasted on New York’s grid by buying goods and services, $425 million would be pumped right back into our local economy every year, really giving this area a much-needed shot in the arm.

In this case, it would be awesome if we were just average. If we as businesses and homeowners could pay the bills that the typical person pays, we’d be so much better off for it. Average, folks…is that too much to ask?


Anonymous said...

The average US residence uses 935 kwh per month perhaps, but the average NY residence uses six hundred something kwh.

Look at the table in the link in the second FAQ.

NY's average usage is about 65% of the national average.

That means the US average kwh sales are 50% higher or so.

Why does this matter? At the height of the summer, our usage per customer is about the same as anywhere. What does this mean? A utility needs to have transmission lines and distribution lines in place to serve all of us. They need people in crews to take care of the lines. They need office people to bill, handle new customers, etc. A typical utility in NY needs about the same of everything as a utility in FL. The costs of the plant were discussed before...they are about the same for all. Labor costs are about the doubt a little higher in NY versus the rest of the US. Not really the NY utility's fault. The level of property taxes is SKY HIGH in NY versus the rest of the country.

So...the costs of wires, trucks, employees, etc. are about the same when comparing a NY utility to an average US utility. But the costs are spread out over MUCH FEWER units of sale.

NY's average residential average bills are actually nearly identical to the U.S. average:

I'm not familiar with the industrial base in say Ohio. Perhaps some of the difference comes from the large auto plants there (again, usage spread over more kwh). Taxes are no doubt a big part of the difference as well. Also, in a lot of states they get very large amounts of very cheap power from say the TVA.

Bob Confer said...

A big contributor to the high cost of electricity in NY is the mingling of energy and environment in Albany. Envi interests oversee energy rather than working with them.

It is darn near impossible to site new coal and nuclear plants in NY and some of the latter are in the process of being decommissioned. The environmental crowd believes coal and nuclear plants to be extremely dangerous to the environment.

Other states can produce electricity cheaply through nuclear energy, coal, and hydro while we rely on an inordinate amount of natural gas plants which are much too expensive.

We need a major change in policy which will never occur based on how "progressive" NY is, meaning our problems will exist for the long-haul.