FAQ – Georgetown Electric Fund
1. What is purchased power?
Purchased power is the cost incurred by the City to buy electric power and bring it to Georgetown. It covers the cost to produce and transmit large amounts of electricity from power plants to Georgetown.
It is the City’s single largest expense. In 2018, the total cost for purchased power was about $53.6 million.
2. Where does Georgetown purchase its power?
Georgetown is under contract to purchase power from four different providers. Our two largest energy providers are Spinning Spur 3, a windmill farm and Buckthorn, a solar farm, both located in West Texas. The wind power covers the bulk of the city’s energy needs. The solar farm provides energy needed during peak times of the day and year (primarily summer during the daylight hours).
The third source of energy is a smaller wind farm operated by American Electric Power (AEP) which primarily covers Southwestern University’s energy needs.
Our final energy contract is with Mercuria for natural gas-based energy. This contract was initiated in 2013 with the former JP Morgan following our termination of our relationship with LCRA. It was intended as a short-term power supply and is set to expire in 2021.
3. How long are these contracts?
Our two largest contracts are for 20 and 25 years. The contract with Spinning Spur 3 started in 2015 and runs until 2035. The contract with Buckthorn started in 2018 and runs until 2043. The AEP contract expires in 2028 and the Mercuria contract ends in 2021.
4. Is the City of Georgetown losing money on all its purchased power contracts?
No, not at all for the power that is used to meet the demands of the City’s electric customers. The average cost of the power supplies is well within the City’s current rates.
As for the excess power, not all the time or all year long, it is time-of-day and season dependent. But on average for the year, yes. However, over time, the losses will lessen. The biggest relief will come in 2021 when the last Mercuria contract expires. That will create a savings of over $10 million per year.
While our original strategy worked well when fuel prices were high, the state’s energy market is in turmoil with a drop in fuel prices. At the same time, we are seeing a drop in consumer demand which is largely driven by conservation efforts, energy-saving technologies, and more energy-efficient new construction. Due to these two factors, the City is projecting a $6.7 million shortfall in the electric fund. It is important to note that renewable energy is not the issue at hand, but the long-term, fixed rate contracts.
Additional relief will come as electrical demand in Georgetown grows. The less electricity the city needs to sell back to other electric providers, the better the financial outlook.
5. Why are most of these contracts so long?
Long-term contracts are standard practice among municipally-owned utilities and the best way to negotiate lower, fixed rates. Going back to the table every five or 10 years increases the city’s exposure to what can be a volatile energy marketplace.
Leading up to 2012, electric power prices were fluctuating widely and extremely unstable. At the same time, there was uncertainty in how federal and state regulatory policies might impact traditional power generation via coal and fossil fuels.
6. Was the current situation created by the city’s move to all-renewable energy?
No. The current challenge has nothing to do with renewable or non-renewable energy sources. The outcome would have been the same if we had used the strategy with other sources of energy. Simply put, we are buying more power than we currently need. We did not anticipate disruptions in the market and overstated the projected growth in demand.
At the time, and based on a 20-year forecast of continued city growth, it was only logical to anticipate the need for more energy. Georgetown continues to be one of the fastest growing cities in Texas, so we remain ready to serve demand from consumers and businesses. At the same time, we are planning several steps to adapt our strategy.
7. Why do we have such an excess in energy and what can we do about it?
In addition to preparing for city growth, a few other factors have led to the excess in power supply:
- We were to have a partner purchase a similar share of the Spinning Spur 3 wind contract, however, that partner pulled out last minute. The City was left with two choices: either cover both shares or walk away. If the City pulled out of the wind farm project, there would have been a substantial delay in procuring another source of energy. At that time, there were also federal tax credits for renewable energy set to expire. Without the tax credits, the costs associated with the wind farm could have gone up 20 percent.
- In addition to having 50 percent more power than the City needed coming from the wind farm for the short-term, the City also contracted with a solar farm that was larger than it needed in the short-term. Contracting for the larger solar farm allowed more purchasing power at cheaper rates. At the time, it made sense to purchase for the more power for the longer term.
- Smart technology and improvements in new home and commercial construction have slowed the growth in local energy consumption. Energy efficiency is indeed a good thing, but until we have a larger population to serve, we will continue to have excess power.
The City sells our excess power back into the marketplace. Because of the lower energy market costs across the board, we are selling at prices below our contracted rate. That will change when prices for power increase. In the meantime, we are adjusting our original power strategy.
8. Weren’t the long-term contracts supposed to ensure low rates?
The contracts guarantee a fixed-rate for power. However, if the market price of power decreases, the City is still obligated to pay the fixed-rate for power. When the contracts were executed, the City did not expect power prices to decline and remain low for years.
9. What is the solution?
The City is working through several approaches to address this issue. One or all of these tactics will be used to address the electric fund’s current financial position. Note that City Council must approve any contractual changes.
- We are working to renegotiate the two long-term power contracts to extend the life of the contracts in exchange for lower costs for the next few years.
- We must curtail operating expenses in the electric department. This includes not issuing any new debt for capital projects, halting current projects, a temporary hiring freeze, and limiting non-critical expenditures.
- The Power Cost Adjustment (PCA) charge will continue for the foreseeable future. This is the charge which allows the City to recover costs associated with purchasing power. The PCA is an adjustment to rates to compensate for fluctuations in purchased power cost caused by market prices as we are currently experiencing. It is a means to pass through the impact of short-term market factors without constantly changing the energy rate.
- Lower the annual Return on Investment (ROI) payment into the city’s general fund.
10. Didn’t Georgetown electric rates just increase?
Yes, the base rate customers pay will increase by $4.80 starting Jan. 1 to cover costs associated with operating the electric department — not in relation to the current budget shortfall. The City has experienced a large increase in fixed-costs over the last few years related to the electric infrastructure within Georgetown. For example, think of the power poles, power lines, and transformers you see around town.
The base rate increase is to help cover costs associated with maintaining and growing the system in Georgetown. These costs include large projects like providing power to new subdivisions, burying overhead electric lines, and upgrading aging infrastructure.