This summer has been filled with a number of highs… like high temperatures, high drought indexes, high grocery costs, and high transportation costs. Higher electricity costs can also be added to the list, sometimes even after consumers took efforts to conserve energy.
So What Happened?
Let’s start by talking about the Energy Cost Adjustment (ECA), called the Power Cost Adjustment (PCA) charge by some electric utilities. Near the beginning of each month, electric utilities calculate their Energy Cost Adjustment (ECA) for the energy load served in the previous month. The ECA, a monthly pass-through cost or credit on consumers’ electric bills is used to recover variable energy costs including fuel, market energy purchases, and other energy-related variable operating costs. Electric cooperatives do not mark up or make a profit on the costs of fuel and energy purchased from the market. The ECA/PCA is a way to for electric utilities to recover the fluctuating energy costs in order to remain financially whole.
On September 9, 2022, Sunflower calculated its ECA for August. The August ECA was $0.04995 per kWh, which was slightly higher than the July ECA of $0.04850/kWh and a 48% increase over the ECA in August 2021.
The Key Contributor
The summer spike in the ECA is directly related to the cost of natural gas, a key driver for the cost of energy purchased from the Southwest Power Pool’s Integrated Marketplace. Sunflower sells and purchases its wholesale electricity through the Southwest Power Pool’s Integrated Market, the regional entity that dispatches generating units across its 14-state region based on reliability and lowest cost. The basic dispatch philosophy is to dispatch the cheapest units first while ensuring that system reliability is protected.
The cost of energy from a given generator is a function of its fuel cost and its efficiency. While wind energy has relatively high fixed costs, it has no fuel costs so from a dispatch perspective it is very cheap. Coal and nuclear generators also have high fixed costs but relatively low fuel costs, so their energy costs for dispatch purposes are also relatively low. Gas generation has lower fixed costs, but the fuel cost is a variable that can drive energy costs from gas-fired generators high when natural gas prices increase. The U.S. has begun to retire a significant portion of its power plants fired by coal, and the replacement for that retired coal generation is an increased reliance on natural gas-fired generation, as well as renewable resources like wind and solar.
Continued heat across the Southwest Power Pool region has caused higher demand for electricity. When the energy demand increases, SPP is forced to go “higher up the generation resource stack” and call on more expensive generators in order to serve the higher load. During periods of high gas prices, available capacity from resources that provide cheaper energy such as wind, nuclear, and coal resources provide cheaper energy than gas-fired generators do. However, when available capacity from these resources is fully utilized, more expensive gas-fired generators must be used to serve the remaining demand. When load increases on hot summer days with less wind, like occurred in August, SPP has to go even “higher up the resource stack” to less efficient and more expensive gas-fired resources to serve the load. Of course, the increased demand in natural gas for generating fuel then results in high fuel costs per MMBtu due to the economic principle of supply and demand.
The supply of natural gas has also been impacted by increased natural gas exports. The U.S. now exports three times the natural gas it did in 2015 after significant investments in liquified natural gas terminals at major ports. This is due to many countries voluntarily halting imports of Russian gas, higher demand in countries using less coal or, in Germany’s case, closing nuclear plants.
Add to these factors the reality that domestic oil drilling has slowed. Much U.S. natural gas is associated with oil production, which primarily comes from shale gas formations. Those wells tend to deplete quickly, and when oil and natural gas prices were low, oil companies reduced exploration for profitability reasons. Now we are seeing the impact of slowed exploration. Rising interest rates and sustainability goals of investors have made it difficult for exploration companies to attract new capital to quickly ramp up exploration and production. The pressures of increasing demand, particularly for export, while supply has been unable to increase as rapidly have contributed to increasing prices.
Is Relief in Sight?
Unfortunately, probably not soon enough. The New York Mercantile Exchange (NYMEX) is predicting that natural gas prices will remain elevated at least into the first quarter of 2023, although a ramp up in gas production and mild temperatures could lead to a decrease in natural gas prices.
The good news is that Sunflower’s fleet of electric generation units will continue to provide an offset to market energy price increases; in August, about 50% of the market increase year over year was offset by the Sunflower generation fleet. From July to August, about 80% of the increase in market prices was offset (market prices increased $0.00737/kWh but the ECA only increased $0.00145/MWh) by Sunflower’s fleet of electric generation units.
Other good news is that Sunflower is pursuing additional solar energy projects, which tend to guard against increasing summer energy prices. Though Kansas has its windy days, those days are less common during July and August. Just when we need wind energy the most during July and August, we usually have it the least. However, stable-priced solar energy helps moderate electricity prices during the sunniest and hottest parts of the summer when electricity demand is at its highest.
Using less electricity and natural gas can help control high bills. Raising thermostat settings a couple of degrees on hot days will make air conditioners cycle less frequently. If not done already, switching the most-used light fixtures to LED bulbs and slightly lowering the temperature setting on gas or electric water heaters will save energy. Similarly, turning thermostats down a few degrees in the winter can help reduce the cost of home heating in the home next winter.
“As fellow electric cooperative members and consumers of electricity, we at Sunflower understand the pain in receiving high electric bills, especially at a time when the cost of everything else is going up,” said Stuart Lowry, president and CEO of Sunflower. “Be assured that Sunflower will continue to pursue measures to help mitigate the high market cost of energy.”
For more information about energy efficiency measures visit energy.gov. To follow Henry Hub natural gas spot prices and futures prices, visit eia.gov.