Coal takes a back seat to cheaper and plentiful natural gas in Ohio.
Twenty-five years ago, Ohio was a place where plentiful coal led to low electricity rates, and almost nobody was talking about getting oil or gas from shale. The state's utility companies were shielded from competition thanks to a price regulation and monopoly service.
And all of that was about to change, although in fits and starts.
Ohio's energy landscape today has been shaped by two big developments. First was deregulation of utility service in the 1990s, with natural gas followed by electricity, moves that took years of implementation but have clearly left their mark. Second were advances in hydraulic fracturing, or fracking, in the 2000s, which later allowed energy producers to extract vast amounts of oil and gas from beneath Ohio.
The upshot is that gas is now plentiful and inexpensive, and Ohio companies are learning to adjust to a dramatically different set of rules.
In 1992, Ohio's average electricity rate was 6.1 cents per kilowatt hour, which includes all residents and businesses, according to the Energy Information Administration. That was a relative bargain, giving the state the 29th highest costs in the nation.
But the statewide average did not reflect some big inequities. If a consumer lived in a territory served by American Electric Power, including central Ohio, rates were much lower than the average, thanks to a reliance on coal. Meanwhile, the utilities that served the northern part of the state had high rates, due largely to the high expenses of running two nuclear power plants.
The disparity was a glaring problem in areas along the borders of utility territories, with customers in the same counties or metro areas having big differences in bills.
Concerns about high bills had a potential remedy in another popular idea of the 1990s: energy deregulation. Ohio was one of several states that opened its natural gas and electricity markets to competition. The gas market was the first to change in 1997, allowing customers to choose a gas supplier other than the utility.
“Natural gas deregulation was a response to intense volatility, and mainly supported by businesses,” says Don Mason, who was chief of the Ohio Department of Natural Resources' Division of Oil and Gas and later a member of the Public Utilities Commission of Ohio. “People were able to lock in a lot of savings because they were able to lock in six months or a year of prices,” he says.
In 1999, the Ohio General Assembly passed Senate Bill 3, which was designed to allow customers to choose their electricity provider.
The bill was controversial, with electricity utilities and business groups jockeying for the most favorable deal. The final package came together with a marathon session in which then-House Speaker Jo Ann Davidson got the sides to agree on key points.
“My approach was it had to get done,” as Davidson was quoted at the time by The Columbus Dispatch.
Implementation of the bill turned out to be slow and filled with detours. A key moment was in 2008 when the General Assembly passed Senate Bill 221, which modified the rules for electricity utilities and included new benchmarks requiring the companies to invest in renewable energy. Soon after, developers broke ground on new wind farms and solar arrays that were much larger than any renewable projects the state had previously seen.
It wasn't until the 2010s that every major electricity utility had changed their corporate structures to accommodate deregulation. This usually involved selling or spinning off their power plants. The result is the companies now focus on the delivery of electricity, and they get their supply with purchases on an open market.
With the current setup, Ohio power plants no longer have a guarantee of profit. They need to compete by offering the lowest prices, which marginalizes high-cost options. Right now, nuclear and coal are on the losing end of this market dynamic.
The shift to deregulation was happening right as one fuel for power plants— natural gas—was getting much less expensive.
Energy companies developed ways to use hydraulic fracturing to unlock oil and gas that was in previously unreachable parts of shale formations. The shale drilling boom hit Ohio in the 2010s. The state's gas production went from 78.1 billion cubic feet in 2010 to 1.47 trillion cubic feet in 2016. Oil production has also soared, but Ohio shale has turned out to be richer with gas rather than oil.
In 2011, Gov. John Kasich hosted an energy conference in Columbus featuring a panel with Aubrey McClendon, who was then CEO of Chesapeake Energy, a company that was an early and prolific driller in Ohio shale.
McClendon helped to set the tone when he predicted shale energy “will be the biggest thing in the state of Ohio since maybe the plow.”
The gas boom was especially stunning for people who had been close to the energy business for decades. Mason, the former regulator who is now an energy attorney, recalls that in the 1990s “nobody was looking at the Utica shale as a gas-producing formation.”
Now, shale gas has transformed the energy economy. Among the losers have been coal producers, who see falling demand for their product because coal-fired power plants are more expensive to operate than gas-powered counterparts.
Electricity utilities and power-plant owners are adapting with investments in gas-fired power plants, solar arrays and wind farms. But the transition is difficult. American Electric Power and FirstEnergy are trying to figure out what to do with coal-fired plants that have useful life remaining, but are not profitable enough.
In 2014, Kasich said the state was going through a “challenging time” figuring out deregulation. He was speaking at the swearing-in ceremony for a new PUCO chairman.
“The ideological effort to deregulate, I'm not so sure it's the smartest thing we've done in the state of Ohio,” he said at the time. “But we are where we are and we can't go backwards now. So it's onward in a deregulated environment, and we've got to figure it out.”
What about consumers? Residents and businesses paid 10 cents per kilowatt-hour in 2015, the most recent year available, which was 21st highest in the country, up from 29th in 1992. If not for shale gas, prices would almost certainly be higher in Ohio and many other states.
One thing that hasn't changed is that many, if not most, consumers do not understand the things that contribute to energy bills. Mason sees this as a persistent problem.
“If there is anything I could have started in 1992 to be ready for now it would be within the K through 12, making sure there is more energy education and science classes,” he says.
Dan Gearino is aDispatch business reporter.
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