In terms of area, New York is the 27th largest U.S. state and the third most populous. New York City (NYC), the most populous city in the country, and is home to more than 8.3 million people, making up nearly half of the population of New York. Residents of “The Big Apple” live within less than one percent of the area of the entire state! On a daily basis, about 32 percent of the state’s electrical load is located in Zone J (NYC), yet less than 25 percent of the state’s power generation is located there. The natural flow of electricity in the state funnels down into the NYC area from the rest of the state because the demand is so high there. Understanding these unique facts provides insight into the great disparity in energy and capacity prices between NYC and the rest of the state.
The flow of electricity into NYC is similar to an hourglass because the electricity flows through power lines and there are only so many lines leading into the city. No matter how much power is generated upstate, the amount getting into the city is limited. As a result, NYC is considered a ‘load pocket’; Long Island, or Zone K, is also considered a load pocket. As you might guess, energy prices are much higher in these pockets than the non-constrained areas north of the city. Power prices in Zone J are almost $8 higher per megawatt-hour than the average prices in Zones A through I.
Reliability standards for NYC stipulate that a certain amount of the electricity used during hours of peak demand must be sourced from generation plants located within the city. To avoid running out of electric generating capacity, regulators created a market to make sure there is always enough generating capacity available to meet peak demand loads. This market enables generating companies to recoup the costs to build and maintain generating plants. Without payments from the capacity market, it may not make economic sense to build these plants because they might only be needed to run a few hours each year.
Where would you even build a power plant in NYC? Think about the real estate cost, the difficulty in getting all of the proper approvals and the regulatory hurdles involved!
Furthermore, the transmission constraints going into NYC greatly reduce the amount of power that can be imported to serve its needs, so state regulators require companies selling electricity to NYC customers to buy 80 percent of their capacity from generators located within the city. Companies such as Direct Energy do so through the NYC Installed Capacity Market. There are separate markets for In-City (Zone J), On-Island (Zone K) and all of the Rest Of the State (ROS). In-City capacity prices are, on average, over six dollars more per kilowatt-month than ROS prices. A customer in NYC can expect to pay over $12 more per megawatt-hour than customers in the rest of the state for their electricity! Now, you can begin to understand why electricity is much more expensive in NYC.