Will Indiana’s economy cool due to rising energy costs?

If you own the poplar iPhone application “Gas Buddy,” then you are no doubt familiar with its periodic “Price Hike Alerts” warning of impending local gas price spikes. Though not as imminent or dramatic as the overnight price spikes we often see at the pumps, there is indeed an increase looming for Indiana’s electricity prices. Indiana is losing its foot-hold as a low-cost energy state, having dropped from fourth to 13th in the nation since 2002. The reason? Simply stated, new and pending environmental regulations are requiring cleaner coal energy. For better or worse, more than 80 percent of Indiana’s electricity generation comes from coal. The cost to clean up the coal plants to meet environmental regulations can easily climb into the hundreds of millions.

Shoultz

Another culprit for Indiana’s rising energy costs is Father Time. More than 76 percent of Indiana’s utility-owned electricity generating units are nearing retirement with over 30 years in service. There’s a bit of a perfect storm brewing, leaving Indiana utilities with few good choices for serving demand, controlling prices and complying with environmental regulations.

Indiana’s largest commercial and industrial companies are understandably concerned. One Hoosier manufacturer has stated that utilities account for approximately 50 percent of its total costs to convert raw materials to a finished, marketable product. Many of Indiana’s manufacturers are competing nationally and internationally. While Indiana enjoys the jobs and tax contributions from large companies, the cost of energy often plays a significant role in a company’s decision to stay here, particularly when millions can be saved by relocating production facilities to another state or country with lower-cost energy.

Like commuters jockeying to find cheap gas before the price hike, some Indiana companies are exploring ways to minimize the harm expected from increasing electricity prices. Some are considering building their own generation facilities; others are seeking discounted rates through special contracts with their electric utility. Many are taking a closer look at ways to conserve energy, either through efficiency measures or by agreeing to interrupt their operations during high-cost peak demand periods.

Policymakers have noticed. In the 2013 session, the Indiana General Assembly passed legislation that, among other things, allows large customers to apply for short-term discounts of up to 30-percent off a portion of their electricity bill. To receive the discounts, companies must get approval from the Indiana Economic Development Corporation and show that the discount is necessary to attract and maintain jobs. After prodding by some of Indiana’s largest companies, the Indiana Utility Regulatory Commission is now investigating whether large users must pay for their utility’s standard energy efficiency programs if the customer self-funds its own initiative that is specifically tailored to reduce the customer’s energy consumption.

Many question if Indiana can be saved by competition. On Sept. 19, the Indiana General Assembly’s Regulatory Flexibility Committee will hear at least one view on whether Indiana’s law should be changed to allow customers to choose their electricity provider. Proponents of the idea say that in “customer choice” states like Illinois, customers enjoy lower overall electricity prices because the competitive market is at work. Opponents, including Indiana’s investor-owned utilities, say that states with customer choice actually have higher electricity rates. They claim that an open market creates volatility, which in turn discourages utilities from investing in much-needed baseload capacity.

It is too soon to tell whether our state’s energy policy has gone far enough to save Indiana’s economy from an exodus of our largest businesses. Will our leaders successfully navigate the complicated political waters to create energy policies that attract and retain jobs critical to Indiana’s economy while satisfying residential customers, utilities and federal mandates for cleaner energy? It is a tall order, for sure, but we need to get it right.•

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Nikki Shoultz is a partner is the Utilities, Energy & Renewables Group at Bose McKinney & Evans LLP. She can be reached at [email protected].