A Letter from the CEO
to URECC Members.
CEO of Upshur Rural Electric Cooperative
Well, here we all are at the beginning of a new year! It is easy to get distracted with all the things going on around East Texas and the nation when there are so many of things to consider and then time seems to quickly pass by us. In our rearview mirror are the mid-term elections and to quote Will -“there is only one redeeming thing about this whole election…. It will be over at sundown and let’s pray that it’s not a tie”. Meanwhile, in the background news, the world seems a bit more destabilized, polarized, and, at times, just lacking any sense of direction. What is also true is that elections have consequences – and this has never more true for the electric business than now.
For us at Upshur Rural Electric there is one issue this year that has our attention…the price of electricity. It has been a difficult year for most members on our system. The acceleration in prices has made the URECC Mission of affordable, reliable, and diverse electric energy difficult to balance. Those three mission goals tend to exist in tension with each other in any ‘normal’ environment. Reliable requires maintenance and redundancy at the expense of affordable; affordable is an overhanging limit to reliability and diversity; and diversity of generation costs money but protects against the upside of rising costs. A system that has limited impact from storms because it has lots of redundancy and resiliency built in can become unaffordable, but one that goes out often and for long durations begs the question of its value. And it’s similarly true for power supply and diversity of resources. URECC tries to balance all three of these as its mission with one occasionally taking precedence over another.
For the mission of diversity in generation, that helps protect against upside cost increases, the landscape is quickly changing. Traditionally, diverse generation speaks of diverse fuel sources and diverse source locations. It takes a long time to build a diverse portfolio of resources and contracts. Today’s significant government intervention is changing the playing field for this mission goal. Current policies are eliminating generation diversity and skewing the markets. The ability to choose is what keeps prices in check but also offers choices in quality and quantity. We are losing those choices quickly. One of the larger fallacies in the renewable debate is that removing 1 MW (that is a megawatt) of dispatchable generation like coal, gas, or nuclear from the grid can just as easily be replaced with 1 MW of solar or wind which is an intermittent resource. The equation does not have an equal sign between the two choices. Dispatchable resources (meaning the ability to ramp up and down to meet changing load) is not the same as intermittent, pound for pound. To accommodate its intermittency, most renewable resources must be overbuilt, sometimes to a factor of four to five times as much, to account for their intermittency. And that still does not resolve the dispatchability concerns. It doesn’t take much to understand that the sun shines only 8 to 10 hours a day, but we need power 24 hours a day. To account for this issue there is great effort to create energy storage options, such as batteries, which could be dispatched after being charged during the renewable supply day. However, the current technology is early and dispatchable generation is closing rapidly. There are signs of other options like electric vehicles (EV’s) that might be able to store some dispatchable energy, and storage technology itself will surely improve over time, but the current availability is not there. The difference between what is needed and what is available in the near term is stark. It will take time to roll out new resources to fill what is being retired in the next decade. And extreme weather conditions will exacerbate these issues. There certainly is some glide slope to a lower carbon future but there needs to be a plan to get us there with lower risk and a smoother costs adjustment.
So, why spend this time discussing the larger generation picture and the impact of renewables on the greater system? For this year the main concern has been for higher bills. This year’s rapidly increased costs have been affected by two issues: 1) very hot and dry summer that caused near record usage this entire year and 2) high prices for electric supply. And both causes are impacted by limited fuel source options or what the industry terms fuel switching.
The adage that “dry means fry” in Texas has been true this year. This can be seen in the following graph:
The graph is a ten-year history of total monthly energy sales to members per month. The red bars on each month represent this year, 2022, through August. What this graph indicates, and we know to be true based on our bills, is that the entire year either set or is near a record high in sales. The only notable exception is when compared to the prior year’s Winter Storm Uri in February 2021. The only summer in recent history where sales to members were higher than this year was the drought of 2011 (not included on the graph). The result of higher usage is higher bills. Higher usage occurs because air conditioning has to work harder as the outside temps get hotter.
The second driver to high bills is the extraordinarily fast rising cost of fuel to generate- that is natural gas that we saw into August and then the cost to close regional coal plants, some of the cost of which is being run into current year’s bills. We live in a time where generation using natural gas is the norm. Not that many years ago coal was the base load fuel of choice. Most generating utilities both stored copious amounts of coal for ‘rainy day’ or ‘black swan’ events and had locked in long term contracts. In our last member update, October of 2021, we reminded members that around 70+% of URECC’s cost goes into its power supply. We also noted that there were four major issues that we foresaw having the potential to greatly impact our membership- 1) Winter Storm Uri and its outfall both from the market shocks and also the government reaction to that disaster, 2) the green energy transition and its uncertainty shifting investments to renewables and away from traditional assets, 3) the mothballing of long-term coal generation in the Northeast Texas region caused by skews in the electric market caused by government subsidies, and 4) the oncoming cost of inflation on everything from materials, to fuel, to labor that was forcing operational costs to rise. All four of these factors have a political thumbprint on them- state and federal. And under no circumstance did we foresee just how much these factors would affect URECC and its members. Furthermore, the black swan events like the Russian invasion of Ukraine, or the instability caused by a Federal Reserve policy have piled on the consumer. Factors, added together, have caused the energy markets to have become expensive, increasingly volatile in pricing, and markedly difficult and costly to hedge or lock in pricing. As we last noted, Elections, and we may add foreign policy, have consequences.
The issues with natural gas as a main fuel? From a generation perspective it is not easily and cost-effectively stored, pipelines for delivery become highly constrained during epic events and are costly to reserve ahead of time, and natural gas is perhaps one of the most volatile pricing markets. Natural gas markets are extremely linked to weather forecast (which ironically is also when electric customers tend to use the most electricity), foreign export options, and headline news. There are certainly upsides to natural gas. It is plentiful in the U.S., has a very liquid trading market, and is more carbon neutral than other carbon related options. But these benefits have become muted in today’s political arena.
Below are 3 published fact sections from the U.S. Energy Information Administration from this summer.
And as for Texas specifically, the August monthly cost increase in $/MWh, represented in the orange bar for Texas, was nearly four times the yearly range, averaged over the entire year before (in blue).
One can also see the price of natural gas through October of this year below as published by the EIA in October:
The chart runs from October 2020 to October 2022. The price range of the chart shows that start in the mid-$3’s per MMBTU in 2020, and then the steady rise to $10/MMBTU this summer.
The two factors, higher usage this year and the rising gas prices this year, greatly affected the power bill that URECC pays to its suppliers and therefore what the members paid for their electric energy. The higher cost that the Cooperative paid for energy was breathtaking and showed up on member’s bills in the PCRF. By the end of August, URECC had spent $20.45 Million more for power supply, year-to-date, compared to the same time 2021. And 2021’s prices included Winter Storm Uri. The 2022 power cost represents a 46.22% increase in power supply costs over 2021 costs.
The other factor that has been steadily growing this year is the retirement of regional coal plants. It has caused reginal power prices to rise. And at the same time, URECC as a minority owner in the Pirkey Power Plant that is slated to close in March of 2023, has paid for some of the costs to close it. As a minority owner, URECC and the other local coops have little to say in the plant’s closure but have experienced costs from the decision to do so. Costs for closure come through various price tags including the cost to close mines, the cost to remove the plant, and the cost to contain things like ash and water onsite for the long haul. Those cost go on but the output to pay for them is gone.
So, what is the scene going forward?
We believe that natural gas will continue to be volatile, greatly influenced mostly by the weather but also domestic production output and the headline news in Europe. We cannot simply say where the price cap for natural gas will be but U.S. production is higher than it was earlier in the year which is a good sign. The $10 range appeared to be a top, but there are just too many factors influencing the price to make it a predictable commodity.
With a growing list of coal plant closures, a growing reliance on non-dispatchable renewables, and an increasing reliance on natural gas fired generation to make up the difference, prices for gas and any available resources will remain volatile and subject to periods of high demand.
Not only gas prices but prices for electricity will only increase going forward. The one thing most of us recognize is that coal plants are closing quickly due to the economics of subsidized renewables. The cost to close any plant is expensive and Pirkey’s closure is working on URECC’s power bills. The plant itself will continue to depreciate on the books until its expected life has ended – a term called stranded assets - but the closing costs come in the year they are experienced. What further exacerbates power pool prices once the plant closes is that supply must be replaced with something. Thee something that has been stated by our regional suppliers is renewable energy. Renewable Energy is certainly cleaner to operate but comes with a steep price tag that requires federal subsidies to enable their construction. The benefit that any Investor Owned Utility (IOU) has in this generation turnover is that added assets on the IOU’s books mean additional profits because of a guaranteed Rate-of-Return. Whereas the typical cooperative or municipal flows the cost to ownership through to the members with little margins. If a company can keep a stranded asset on its rate base and then add its replacement also, that becomes a win for that company’s owners and a price increase to the consumer.
The facts are simply that to tear down existing generation and replace it with cleaner technologies will cost more money – there is just no way around that one. The two paths to collect this costs are the taxpayer and the rate payer. The federal government is providing the first source of money and the second one’s coming.
The other concern that will flow from these shutdowns of large, rotating machines is that there will be a loss of system inertia that helps any electrical system ride through the changing environment of the electric system. Everyday the electric grid is impacted in some way, aging, growth of load, storms, electrical faults, overloaded infrastructure, you name it, the system sees it. The inertia in the system allows it to ‘push-through’ many of these factors. Comparatively, it’s much like trying to stop a car versus trying to stop a tractor-trailer. The later has much more inertia and requires more effort to bring it to a stop. That is what a large machine brings to the electrical grid. Static and non-dispatchable generators may not be able to replicate what is leaving the system. There will be a continued focus on how to keep the system stable as these machines shutter. That will include additional costs to ensure the grid remains viable. These costs will show up in the regional operators’, like ERCOT and SPP, plans to require more backup or spinning reserves to backstop the system. Those debates are ongoing at the time of this letter.
What are we doing about all of these factors at the Cooperative? First, we continue to speak about the realities of policy as we see them. After all elections matter. Then we interface with political leaders hoping to bring a more planned transition into focus. Many local political leaders understand that need. But the national picture is much more difficult. Locally, we look for ways to inject more affordable generation into the system and construct assets that enhance resilience and reliability for those tougher times that we occasionally face. URECC staff and employees are also taking additional looks at ways to reduce operational cost and offset some capital expenditures to another day. URECC takes its mission seriously and we continue to look for affordable resources for our members. An example is the contract URECC has with Hecate to purchase Hecate’s output from a 3MW local solar field at costs well below the current market prices. URECC is focused on working with its suppliers to find ways to wring volatility out of the fuel and electric prices. We also look for funding opportunities to participate in projects that we believe will either add resilience to the system and provide more local options for generation. So, in the current economic environment, we continue to tighten our belts and cut spending. While none of these measures will change or abate a $20 Million rise in power cost over the last year, every little piece we can add to the mix will help. In the end, URECC seeks to carry out its mission for the sake of its members – Affordable, Reliable, and Diverse Electric Energy.
And nationally speaking: