FAQ Georgetown Energy Contracts
Download an executive summary of the energy management assessment here: Energy Resource Management Assessment Executive Summary. A video of the May 14 energy management assessment presentation given to City Council can be viewed here.
1. How does the City purchase electricity?
The City electric utility purchases power from wholesale energy suppliers. The cost to purchase electricity includes the cost to generate and transmit power to Georgetown.
Georgetown is under contract to purchase power from four different providers. The two largest energy providers are Spinning Spur 3, a windmill farm near Amarillo, and Buckthorn, a solar farm near Fort Stockton. 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.
The 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 the City’s relationship with LCRA. It was intended as a short-term power supply and is set to expire in 2022.
2. Is the City of Georgetown losing money on its purchased power contracts?
No, not for the power used to meet the demand of the City’s electric customers. The average cost of the power supplies is well within the City’s current rates.
For the excess power the City doesn’t consume that is cleared to the market, the price depends on time-of-day and the season. But on average for the year, this excess power is cleared at a loss due to depressed market prices. However, over time, the losses will lessen. Relief will come in 2022 when the Mercuria contract expires.
The increased costs for energy is in part tied to energy providers not being able to supply energy to the statewide electric grid. This phenomena, known as congestion, occurs when there is more energy generated than is needed to meet demand. If the energy is not consumed, the transmission lines “fill up,” breaching their limits, which can cause reliability issues. This congestion increases the overall cost of energy for the City.
To a lesser extent, the utility is seeing a drop in individual consumer demand driven by conservation efforts, energy-saving technologies, and more energy-efficient new construction. Due to these factors, the City ended the 2018 fiscal year with a $6.84 million shortfall in the electric fund, leaving a fund balance of $1.97 million. It is important to note that renewable energy is not the primary issue at hand, but the amount of energy under contract.
Additional relief will come as electrical demand in Georgetown grows. The less electricity the City needs to clear to the market, the better the financial outlook.
3. Why did the City sign long-term contracts?
Long-term contracts are standard practice among municipally-owned utilities and the best way to negotiate lower, fixed rates. Going back to the market 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 and unstable. At the same time, there was uncertainty in how federal and state regulatory policies might impact traditional power generation (e.g. coal and fossil fuels).
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 2022.
The City recognizes that contracting for more energy than we currently need led to a risk of having to clear excess energy to the market. Due to depressed energy prices, the City is working to mitigate costs associated with that risk.
4. Was the current situation created by the city’s move to all-renewable energy?
No. The current changes in the electric fund are due to the amount of energy that the City has under contract, not the type energy. The outcome would have been the same if we had used the strategy with other sources of energy. Simply put, the City is buying more power than is consumed in Georgetown. The City did not anticipate disruptions in the market and overestimated the projected growth in demand.
At the time renewable contracts were signed in 2013 and 2015, and based on a 20-year forecast of continued city growth, it was logical to anticipate the need for more energy. Georgetown continues to be one of the fastest growing cities in Texas, so the City remains ready to serve demand from consumers and businesses. At the same time, the City is planning several steps to adapt our strategy.
5. Why do we have more energy under contract than we need for Georgetown?
In addition to preparing for city growth, a few other factors have led to the excess in power supply:
- In 2013, along with Georgetown and Garland, a third public power utility was planning to partner in purchases from Spinning Spur 3. However, that partner pulled out at the 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 initially having 50 percent more power than the City needed coming from the wind farm, the City also contracted with a solar farm that was larger than it needed at the time. Contracting for the larger solar farm allowed the City to purchase power at lower rates. At the time, it made sense to purchase for the more power for the longer term.
The City clears excess power to the market. Because of the lower energy market costs, the City is clearing excess power at prices below the contracted rate. That will change when prices for power increase. In the meantime, the City is adjusting the original strategy.
6. Don’t the energy contracts provide a fixed energy cost?
The contracts guarantee a fixed-rate for the energy that is purchased.
When the market price of power decreases, the City is still obligated to pay the fixed-rate for power and sells the excess at a loss. When the contracts were executed, the City did not expect power prices to decline and remain low for years.
If energy prices had maintained the trajectory they were on in 2013, the City would be experiencing a very different financial reality. However, the strategy does not work when energy prices are depressed and remain depressed for several years.
7. Why is the City just now addressing the increases in purchased power?
Over the past few years, the energy market in Texas experienced a fundamental change. Forecasts provided by industry experts have been challenging to employ correctly. What were perceived as anomalies in 2016 and 2017 due to reduced consumption, unpredictable pricing, and unusually cold weather, masked the true impact of a depressed global energy market. Looking back, it is apparent that a longer-term trend of lower energy prices is the driving factor of the electric fund’s current finances. The effect of depressed energy prices became abundantly obvious in 2018.
In 2016, 2017, and 2018, the City addressed these ongoing challenges with one-time solutions, including adjusting how the City financed electric infrastructure projects (i.e. cash vs. debt financing), adjusting the timing of projects, increasing the power cost adjustment, or PCA on electric bills, and completing a rate study. All these efforts were intended to resolve what was previously perceived as one-time problems.
These efforts did not resolve on-going financial arrangements with the City’s energy providers. This year, the priority for the City is to change the on-going financial obligations of the electric fund. This could involve selling a portion of the energy to a third-party and better managing the energy portfolio day-to-day.
8. What factors led to the growing underestimate of energy costs from 2016 through 2018?
The City has traditionally estimated its future energy costs based on market projections provided by industry experts. Since 2016, these projections have proven challenging to employ correctly.
Going forward, the City will estimate energy costs based on several key indicators, including the previous year’s performance and market indicators, as well as taking into account the anticipated revenue from customers. Any shortfall will need to be addressed by increasing the power cost adjustment or PCA to account for fluctuations in energy costs.
The City implemented a PCA on Feb. 1 and June 1 to address the immediate financial concerns of the electric utility. The City has raised or decreased the PCA in the past to respond to power costs.
9. When will the City not have excess energy?
Based on the City’s current growth in demand for electricity, the City expects to need to buy more energy in 2028. That is also when the energy contract for Southwestern University expires.
At certain points in the coming years, the City may be short on energy supply during peak demand. Peak demand occurs during the summer months, when customers use the most electricity.
The City expects to not be able to meet peak demand energy needs as early 2022.
This shortfall during peak demand also coincides with the end of the Mercuria contract, which expires in 2022.
10. How much energy is produced for each energy contract? How much energy is consumed in Georgetown? How much energy is cleared to the market?
The amount of energy produced by each energy contract can vary year-to-year. Additionally, the amount of energy consumed in Georgetown varies year-to-year. Further, energy production and energy consumption can change dramatically depending on the time of year.
For example, in January 2018, Georgetown paid for 79,581 megawatt hours, and Georgetown customers used 52,742 megawatt hours. However, in July 2018 Georgetown paid for 100,554 megawatt hours, and Georgetown customers used 76,206 megawatt hours.
Swings in production and consumption throughout the year are critical to keep in mind when reviewing Georgetown’s energy usage for a given year.