Rural Missouri — Future Watts: The high price of fuel

March 2008

Future Watts

CONTENTS

The high price of fuel
Higher costs for coal and natural gas are driving up
the price you pay for electricity

by Jim McCarty

Editor’s note: Across the state, electric rates are on the rise. This is the eighth in a series explaining why this is taking place and what you can do to help manage your energy bill.

• August 2007 — "Great growth means rising rates."
• September 2007 — "The high costs of cleaner air."
• October 2007 — "The need for more baseload."
• November 2007 — "When time is money."
• December 2007 — "Unconventional kilowatts."
• January 2008 — "Spend now, save later."
• February 2008 — "What about transmission?"
• March 2008 — "The high price of fuel"
• April 2008 — "Negawatts"
• May 2008 — "The glass half full"

Filling the tank on the family car can be a painful task these days. What once cost petty cash now almost requires a bank loan as gas prices edge closer and closer to the $3 a gallon mark and the typical fill-up runs $50 or more.

Imagine filling dozens of thirsty vehicles from a fleet that must travel a 10-county area every work day, and you will understand the concern Black River Electric Cooperative Manager Tom Steska feels when he reviews the cooperative’s fuel budget each month.

“Some of the bills that used to be $20,000 or so are now running as much as $48,000,” Steska says. “When you’re paying a $48,000 fuel bill, that gets your attention.”

Despite these dramatic increases, the high price of gasoline and diesel is not what’s driving rate increases at Black River and other electric cooperatives across the state. Instead, it’s increases in the wholesale price of electricity, which can make up 60 percent of a typical cooperative’s operating expenses.

For Black River Electric, the wholesale power cost increase works out to $6 million the cooperative must pass on to its members in higher rates this year.

“We’re going to be paying $6 million extra for wholesle power,” Steska says. “That’s not like coming up with an extra $150,000 for gasoline. It’s the cost of power that is the driver.”

What’s ironic is that one of the chief reasons for the wholesale power increases being handed down by power-supply cooperative Associated Electric is the rising cost of fuel. In this case, we’re talking coal and natural gas, not gasoline and diesel.

But the kind of fuel increases being seen by Associated and other power suppliers make the price at the pump pale in comparison. Consider this: At its coal-fired power plants, Associated uses 10 million tons of coal per year. Just a $1 increase in the cost of a ton of coal would translate into $10 million. But Associated is seeing increases in coal prices that are much higher than $1 a ton.

“AECI is operating on coal contracts that were negotiated years ago,” says Roger Clark, director of engineering and operations at Associated. “As such, we haven’t been subject to the volatility reflected in the short-term market price, but the price we pay has moved up dramatically.”

Clark says these coal contracts allow prices to change based on an average over time. “Over the past several years, we have watched the spot price for coal move from around $5 per ton to over $20 per ton at its peak,” he says. “While the price has moved down from those extremes, it is currently around $13 which has a significant impact on the cost of wholesale power to our members.”

What’s driving the price of coal is simple supply and demand economics, Clark says. Environmental concerns drove Associated to close its Missouri mines in 1993 and switch to low-sulfur coal that comes from Wyoming’s Powder River Basin. Now, some utilities farther east are making the switch to this western coal.

Coal from Wyoming’s Powder River Basin provides much of the fuel to generate electricity for Missouri’s electric cooperatives. Dramatic increases in the price of coal and natural gas are among the factors driving rate increases for electric co-ops.

“As the price of eastern coal goes up, more and more utilities are wanting to buy the coal out of the West,” Clark says. “So the demand for western coal has gone up and that has driven up the price for that coal.”

Another significant factor is the export of American coal. “They are actually exporting coal. A mine doesn’t care where it sells its product. They will sell to where ever they can get the highest price, and in some cases this is overseas.”

Even more volatile has been the price for natural gas, and this increase comes like a double-edged sword. “Gas was $2-$3 (per million Btu) for years,” Clark says. “Today it’s $8. A couple years ago, it was as high as $15. The price for gas moves a lot farther and faster.”

What hurts with the natural gas situation is the fact that Associated is being forced to rely on this higher-priced form of energy more and more.

It costs roughly three to four times as much to generate electricity with natural gas than with coal. That’s why coal is used to provide 82 percent of the electricity for electric co-op members on the Associated system versus 7 percent from natural gas.

But, as more members have moved onto rural electric lines and existing members use more electricity each month, heavy load growth is taking place across the system. Clark says all of the low-cost coal generation is being utilized and there is no excess coal-generation capacity.

“Because of load growth, we are generating more with gas to serve our member load every year,” he says. “We know it costs more, we know we are using it more. That’s putting upward pressure on rates.”

Clark says natural gas units such as the St. Francis Power Plant in southeast Missouri and the Chouteau plant in Oklahoma are being used more like baseload plants, sometimes running 24 hours a day.

“In the past, we didn’t need to do that to meet member needs,” he says. “We used to generate a higher percentage of our energy with coal. Now we are generating more high-cost energy. When you blend that, the cost goes up.”

The wholesale rate increases Associated member systems have seen to date have been all about rising fuel costs. This includes higher costs for coal and natural gas, combined with the effects of generating more with natural gas.

Associated is sensitive to the cost of fuel because fuel represents 40 percent of the Springfield-based cooperative’s cost of doing business. Associated currently spends between $350 milion and $400 million annually on fuel.

In the works is a new coal-fired plant planned for Norborne in north-central Missouri. It represents the first coal-powered plant the state’s electric co-ops have built since Thomas Hill Unit 3 came online in 1982.

The new plant should cost less to operate than the natural gas generation it will supplement. But like the price you pay at the pump, no one expects the price of electricity to go down anytime soon.

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