High Impact: How Massachusetts energy policy is raising electricity rates

Executive Summary

Several years ago, the ISO New England (ISO) shared the below graph showing the all-in cost of operating the wholesale electricity market in New England compared to residential retail rates for each of the six New England states (ISO New England Inc., 2021, p. 127). Included in the all-in price were fuel and transmission costs, capacity payments, and all other costs related to the different markets and ancillary resources necessary for ensuring the grid’s reliable and efficient operation.

The graph shows that for each of the years from 2008 to 2020, administration of the grid was significantly less expensive than retail residential rates on a kilowatt hour basis. In 2020, the cost to operate the grid was just 30 percent of the retail rates charged to most New England consumers. In that same year, average residential rates for electricity in the United States were 13.15¢ per kilowatt hour. 

The advent of cleaner low-cost fracked natural gas produced in the United States prompted a shift in New England’s fuel mix away from coal and oil. Carbon emissions from the electricity sector dropped precipitously and so did costs. More natural gas meant that New England, with the rest of the United States, was on a path to lower wholesale prices that would last more than a decade. In this same period, New England also experienced an 11.4 percent drop in annual energy demand from 132 million megawatt hours in 2008 to 117 million megawatt hours in 2020 (ISO New England Inc., 2022b). Yet despite lower wholesale prices and a drop in energy consumption, retail electricity rates in Massachusetts and New England remained stubbornly high.

The delta between residential rates and the all-in wholesale price is directly related to energy policies that state governments have implemented, including renewable energy mandates and incentives, energy efficiency, and climate programs.

As various government officials have expressed frustration at global events, electricity and fuel suppliers, and the ISO for the high rates, it appears that the first place to look for the cause would be the ambitious energy policies enacted in the states where the growing costs fall squarely on New England ratepayers.

This paper examines several of the policies contributing to higher electricity rates in Massachusetts, and throughout New England.

Key findings

• New England has experienced an 11.4 percent drop in energy demand from 2008 to 2020 yet New Englanders pay 20 percent more on average for each kilowatt hour of electricity delivered to their homes (Energy Information Administration, n.d.). As renewable energy and climate policy requirements expanded, the costs increased. This outcome suggests that the promise of alternative energies lowering and stabilizing rates has not been realized.

• New England’s renewable energy mandates represent some of the most complex and costly in the country. Twenty-six separate programs are active across the six states, with nine in Massachusetts alone. Each covers different technologies with different annual compliance requirements and costs. Entities that sell electricity retail in New England are obligated to satisfy the mandates in every state where their electricity is sold.

• Renewable energy technologies, particularly wind and solar, require substantial public funding in the form of federal tax credits and state programs that pay a premium for their renewability. Massachusetts, among other states, also require electric utilities to negotiate long-term power contracts with renewable energy generators at prices above New England’s competitive market rates. To the extent renewables may lower wholesale energy prices, the contract rates and added subsidies are passed through to ratepayers in the form of higher retail rates.

• The annual cost of Massachusetts renewable energy policies has quadrupled in 10 years from $250 million in 2011 to $1 billion in 2020. Cumulatively, this has cost Massachusetts ratepayers $6 billion in increased electricity prices in that period.

• The Regional Greenhouse Gas Initiative (RGGI) has cost ratepayers in the participating states $3.8 billion in higher electricity rates in the period from 2008 to 2020. Fifty-three percent of the cumulative RGGI funds raised went towards energy efficiency programs, however, limited data are available to validate the corresponding cost savings and avoided emissions. For projects where information is available, it appears the cost per carbon ton avoided is significantly higher than the value of the allowances sold suggesting that RGGI is an inefficient use of resources.

• If the region’s climate policies are followed to their expected conclusion of zero emission energy, recent modeling shows that the amounts of new wind, solar, and high-voltage transmission needed would produce significant land-use conflicts in the region, both onshore and off.