Power Supply Puzzle
March 26th, 2012 by Mike Federman

New wholesale energy rates leave some holes for utilities to fill

powersupplyIn the old days—pre-October 2011—public utilities in the Northwest bought most or all of their wholesale electricity from the Bonneville Power Administration. There were fluctuations in products based on a utility’s specific needs, but for most consumers, the federal hydro system was a reliable source of low-cost power.

The good news is the hydro system is still a reliable source of low-cost power. The bad news is the hydro system has reached capacity, which means utilities experiencing population or economic growth in their service territories will have to expand their baseload needs with energy generated from somewhere other than Northwest dams.

The options are to buy market power at higher rates than federal hydropower or build utility-owned generating facilities. A few years ago, it looked as though utilities would be racing to find new resources, but then a national recession intervened.

“We thought initially BPA wouldn’t have enough power to cover the load, but as the economy went down over the past two or three years, there was not the kind of demand for load increase we expected,” says John Saven, CEO of Northwest Requirements Utilities, an association of 50 consumer-owned utilities that rely on BPA as their primary or exclusive source of power. “We will have to see how the economy turns around before we know how utilities will be affected.”

Some NRU members do not have the luxury of a grace period. They agreed to a three-year power contract with Shell Energy that took effect in October. Shell’s obligation is to acquire power and deliver it to a point of receipt in the BPA transmission area. From there, appropriate loads are transferred and credited to NRU members who need them.

“This is for utilities with an above high water mark type load,” Saven says. “It is a market purchase agreement. They (Shell) are in this to make money just like anyone else.”

NRU has 22 members who have agreed to meet at least half of their load growth needs from nonfederal sources. Northwest Energy Supply Cooperative is made up of 11 electric cooperatives. Northwest Intergovernmental Energy Supply is made up of 11 municipalities and public utility districts.

The strategy of these coalitions is to serve the initial modest load obligation with market purchases, but consider other options beginning in fiscal year 2014, Saven says.

“Utilities have a longer-term view of resource commitments that could lead to ownership or the right to control the resources they use,” he says. “Right now they are renters, not owners.”

Market prices are favorable today, especially for natural gas, where supply is greater than demand. Market power also consists of a “fairly large component” of nonfederal hydropower from the hydroelectric system in British Columbia, Saven says.

Generation resources that have low or no carbon emissions are important to utilities in states where renewable portfolio standards require a percentage of electricity comes from green power.

“These utilities have to go out and get a resource that would be more expensive than just going out and buying the cheapest thing they can find,” Saven says. “There are some utilities that prefer cleaner sources of energy.”

A New Business Model

BPA is still the largest wholesale power supplier in the Northwest. The majority of its customers have retained the agency as their power broker for all of their load growth needs. Many of those utilities have yet to surpass their high water mark and still serve their consumers with power from only traditional BPA resources.

BPA did a market forecast through 2015, but has not gone through a rate case for the 2014-2015 period, says BPA spokesman Mike Hansen.

“We have to play in the same market as every-one else,” he says. “We need a long lead time to observe the market and make augmentation to the transmission system to serve additional load. We are looking three years in advance for long-term contracts.”

Hansen stresses that by establishing a two-tier rate structure and not melding federal resources with higher-priced market purchases, BPA preserves the low-cost power of the hydro system for its preference customers.

Today, the cost of Tier 1 hydropower is about 1.6 cents per kilowatt-hour lower than Tier 2 market power purchased through BPA. That difference will increase to nearly 1.9 cents in 2013.

“This sends a signal to the Northwest that we will need more resources to meet future energy needs, and we will have to do something about getting those facilities built,” Hansen says.
Another message to take away from this new era of wholesale market power is the less you use, the more you save.

“There is an incentive for utilities to engage in conservation and energy efficiency because it delays when they have to purchase Tier 2 power or how much they have to buy,” Hansen says. “If utilities have to go to the market, either by themselves or through BPA, their costs will likely be higher.”

New contracts with the Bonneville Power Administration that established two-tiered rates took effect in October 2011. The table below shows the difference in cost BPA customers pay for the two tiers. Some utilities have decided to explore market purchases on their own or in coalitions with other utilities to improve their economy of scale.
Tier 1 is electricity from the Federal Columbia River Power System and the Columbia Generating Station nuclear plant. This power is sold at cost to distribution utilities based on each utility’s high water mark of energy use prior to the new contracts. For utilities not experiencing significant growth in their service territories, Tier 1 power will continue to serve their baseload needs.
Tier 2 is electricity from nonfederal sources that utilities will need in addition to Tier 1 to meet baseload expansion. BPA is the primary wholesale buyer and provider of Tier 2 power for 120 of its 135 customers. For utilities that negotiate their own market purchases, the cost of Tier 2 power could be different than that of BPA.

Cost of power from BPA per megawatt-hour
Tier 1 (through Sept. 2013) $30.17
Tier 2 (2012) $46.32
Tier 2 (2013) $48.66