Download a copy of the electric purchased power costs presentation given to residents at the Sun City Town Hall meeting Jan. 24 here: Sun City Town Hall electric purchased power costs presentation. Video of the Jan. 22 presentation to the City Council on the electric fund 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 2021.
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 a loss due to depressed market prices. 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 the City’s original strategy worked well when energy prices were high, the state’s energy market is in turmoil with a drop in fuel prices. At the same time, the utility is 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 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 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 via 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 2021.
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 addition to the public power utilities in Georgetown and Garland, a third public power utility was planning in 2013 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 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 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 power strategy.
6. Don’t the energy contracts provide a fixed energy cost?
The contracts guarantee a fixed-rate for the energy that is purchased. Current rates cover costs of energy consumed in Georgetown. The contracts require the City to purchase a set portion of the wind facility output and all of the solar facility output.
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 ERCOT, the State’s energy grid operator, have proven to be unreliable. 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 reducing the energy Georgetown is obligated to purchase, selling a portion of the energy to a third-party, adjusting the terms of some of the financial obligations, or some combination of all these efforts. The City is also exploring options to better manage 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 ERCOT. Since 2016, these projections have proven to be unreliable.
Going forward, the City will estimate energy costs based on the previous year’s performance, while taking into account the anticipated revenue from customers. Any shortfall will need to be addressed by restructuring the financial arrangements the City has with its energy providers and increasing or decreasing the power cost adjustment or PCA to account for fluctuations in energy costs.
The City implemented a PCA on Feb. 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. Currently, the goal is to reduce the PCA as soon as possible.