Price$ under Pressure
Local electric co-ops work to keep electric bills affordable as energy challenges grow
By Megan McKoy–Noe, CCC
Pressure cookers are ideal for heating liquids without reaching a boiling point. Outside influences are sealed off, and as pressure builds a liquid withstands higher and higher heat. But if you apply too much pressure the liquid explodes, popping a gasket in the process.
Electric co-ops face a similar situation. Pressures from new government regulations, rising fuel and materials costs, escalating demand for electricity, and required investments in both adding generation as well as upgrading existing power plants have been climbing over the last decade. While the current economic downturn released some steam — such as causing electric demand to dip — this respite may just mark the “calm before the storm” when financial fortunes rebound and pressure builds again.
Let’s lift the lid to explore different pressures impacting your electric bills:
1. Pressure Point: Growing Electric Demand
The U.S. Department of Energy (DOE) predicts by 2030 residential demand for electricity will increase between 16 percent and 36 percent above 2007 levels. Historically co-op demand rises faster than the industry average — before the recession hit co-op sales increased by 4.4 percent while industry sales only increased by 2.6 percent between 2006 and 2007.
The U.S. Energy Information Administration (EIA) predicts industry demand will rebound by 5 percent in 2010 and estimates that with strong economic growth, electricity prices will jump 19 percent by 2035. However, the forecaster fails to factor in added costs of complying with new federal regulations aimed at curbing emissions of greenhouse gases, such as carbon dioxide, from power plants.
2. Pressure Point: Added Regulation
The U.S. Environmental Protection Agency (EPA) will begin regulating greenhouse gases, such as carbon dioxide, this month — an action made possible by a 2007 U.S. Supreme Court decision (Massachusetts v. EPA) that gave the agency a green light to consider imposing such controls. In late 2009, EPA declared that six greenhouse gases, including carbon dioxide, "endanger the public health and welfare" of current and future generations.
Although carbon dioxide measures crowd headlines, the cumulative impact of new federal mandates for handling coal ash, water, and limiting hazardous air pollutants along with state (and perhaps federal) requirements for renewable energy generation could become a much more expensive hurdle.
During the past 20 years EPA has used the federal Clean Air Act to slash nationwide emissions of nitrogen oxides, which contribute to smog, by 54 percent, and cut acid rain-causing sulfur dioxide emissions by 42 percent. That's an impressive reduction, considering electricity use rose 64 percent over the same period. However, proven technology existed to achieve those results — something not currently available for removing carbon dioxide and other areas under scrutiny.
"The Clean Air Act as written was never designed to deal with carbon dioxide, and it could be awkward at best and probably a disaster, at worst," warns Glenn English, CEO of the Arlington, Va.-based National Rural Electric Cooperative Association (NRECA).
"We're entering an era where regulatory activities are going to play a more significant role in the electric industry than what happens on the legislative front," asserts Kirk Johnson, NRECA vice president of energy & environmental policy, noting Congress has debated climate change policy for more than a decade without reaching a clear consensus. "Environmental statutes that have been on the books since the 1970s, especially the Clean Air Act, are like a one-way ratchet: they only tighten."
Tighter emissions standards could have a multi-billion dollar impact on the cost of doing business for electric co-ops, adding more pressure to electric bills.
3. Pressure Point: Need for New Power Plants
Even as new regulations are announced, utilities must be ready to make quick decisions on moving forward with power plants to meet growing electricity demand — especially since the number of operating plants may start to fall, not rise.
"Because of these new rules, we're expecting a number of current power plants to go offline and retire," predicts Johnson. "The cost to comply with the rules may simply be too much."
The North American Electric Reliability Corporation (NERC), which oversees the reliability of the bulk power system covering the United States and most of Canada, estimates that by 2017 peak demand for electricity will jump 135,000 MW — equivalent to the current amount of power used by the entire western half of the nation. Planned new generation resources will only provide another 77,000 MW, far short of the amount of energy Americans will need.
Co-ops are working hard to relieve some of this pressure and delay the need for new plants through energy efficiency programs. Most co-ops offer energy efficiency education. Many take this a step further; 77 percent provide residential energy audits while 49 percent offer financial incentives for members to make efficient choices. But these measures can only go so far.
"When the economy turns around, co-ops will resume growing faster than other electric utilities," remarks English. "We've got to be ready for that development and have new power plants planned and largely ready to go. However, co-ops must first know how carbon dioxide and other rules could impact the price of power to make prudent decisions."
4. Pressure Point: Cost of Materials
Every year investments in new power plants are delayed, jacks up the final price tag. Worldwide, steel prices soared 42 percent between 2009 and 2010 while costs for other construction supplies like nickel and concrete jumped as well.
Materials costs for distribution co-ops are also climbing. Prices for copper, a critical raw material used for wire and to ground electrical equipment, reached a 27-month high at the end of 2010. Between 1990 and 2010 in the north-central part of the nation the price tag on utility poles, towers, and fixtures skyrocketed 98 percent while line transformers spiked 154 percent.
"Electric co-ops have an obligation to keep the lights on and electric bills affordable at a time when the costs for fuel and raw materials to build new generation are steadily rising," acknowledges English. "Combined with costs of additional regulatory compliance, these are just some of the pressure points that will affect electric bills in years to come — all of which are largely beyond the control of local co-ops."
Sources: U.S. Energy Information Administration 2009 Annual Energy Outlook, North American Electric Reliability Corporation 2010 Special Reliability Scenario Assessment, Cooperative Research Network. Handy-Whitman Index of Public Construction Costs, U.S. Environmental Protection Agency, Steel Market Update