Download How Electricity Might Compete with Alternate Fuels for Certain End

How Electricity Might Compete with
Alternate Fuels for Certain End Uses
Presented to:
2006 Business and Financial Workshop
American Public Power Association
Minneapolis, MN
Presented by:
Tim Miller, Senior Rate Analyst
Missouri River Energy Services (MRES)
Sioux Falls, SD
September 19, 2006
Contact Information:
Phone: 605-330-6960
Email: [email protected]
Background Information
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MRES information:
 Joint action agency with long-term contracts
 Serves 60 municipal utilities in Iowa, Minnesota,
North Dakota, and South Dakota
 Rate studies completed - 47 members plus others
Members receive 50% of power from MRES, 50%
from Western Area Power Administration (WAPA)
Wholesale power rates – traditional demand and
energy rates; actual demand billed each month
Presentation will focus on heating applications, but
could be applied to other uses
Customer Viewpoints - Heating
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Natural gas and other fuel costs up 75% or more; volatile
Forecasts indicate prices may not return to historical
levels
Many rural coops offer rebates and low off-peak rates
Customers asking municipals what rates are available for
electric heating and water heating
One utility – number of dual fuel customers jumped by
20% in just a few years after stable for many years
Should we as a municipal utility attempt to serve
customers where possible, as long as we don’t subsidize?
Current Residential Heating Saturations
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52% Natural Gas
31% Electricity
9% Heating Oil
6% Propane
2% Other
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70% of new homes choosing gas or propane
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Source: American Gas Association, 2003 Residential
Natural Gas Market Survey
Factors Impacting Utility Rates
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Rising power costs and distribution materials costs;
greater risk of serving new loads
Qualified distribution employees harder to find;
salary and insurance cost pressures
Low sales growth rates due to:
 Flat or declining population in some cases
 Service territory laws and disputes with coops
Low growth rates lead to less contribution margins
as fixed costs rise
In some cases, pressure from local government to
provide additional funds through transfers
Considerations for a Competitive Rate
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Comparison of electric to other fuels
Possible places to compete or not to compete
Cost considerations:
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On or off peak power costs
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Average or marginal costs
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Impact of transfers on rates
Rate concepts:
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Off-peak rate design
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Recovery of direct costs in rates
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Water heater credits
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Rebates and incentives
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Customer payback
Comparison of Electric to Other Fuels
– Residential Heating
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90% Efficient Forced Air – recent price levels
 $1.10 / therm gas = 4.2 cents / kWh electric
 $2.25 / gallon heating oil = 6.2 cents
 $1.50 / gallon propane = 6.2 cents
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200% Efficient Heat Pump – recent price levels
 $1.10 / therm gas = 8.4 cents
 $2.25 / gallon heating oil = 12.4 cents
 $1.50 / gallon propane = 12.4 cents
Places to Compete
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In general, should be controlled or off-peak usage
For heating, areas with more heating degree days
Residential:
 Forced air, dual fuel plenum heat
 Off-peak storage heat – typically on 11 PM-7 AM
 Heat pumps
 Storage water heaters
Commercial and Industrial:
 Storage or slab heat
 Dual Fuel – plenum or boilers
 Some heat pumps
Places Not to Actively Compete
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In general, uncontrolled heating where the bulk of
usage occurs during daytime, on-peak hours
 (If rates don’t match marginal costs)
Many commercial and industrial uses would fit into
this category
 In many cases, predominately on-peak demands
 C & I might also have access to lower natural gas
prices and/or interruptible rates
On or Off Peak Power Costs
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Must look at utility resource mix and characteristics:
 Purchased power – short or long term contract
 Owned generation
 Market purchases
 Utility load shape
Identify marginal fuel and other variable costs for
off-peak hours
Many potentially lower cost hours – Mon-Fri.
10 PM-6 AM plus weekends equals 52% of hours
Should regional market prices dictate your retail
pricing?
Average or Marginal Costs
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Covered at many previous APPA sessions
Which costs change as a result of this decision or action?
Should each kWh sold carry an equal “allocation” of
fixed costs?
Most generation, distribution, administrative, and
customer service costs are irrelevant when pricing offpeak services that directly compete with other fuels
Transfers to other city funds may be relevant
Impact of Transfers on Rates
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MRES Study of 62 area utilities
 Median transfer is 9%
 Range is 0% to 52%
How transfer is assessed is key
 If it varies by units sold or percentage of revenue,
must consider in off-peak rate design
 If flat amount or free services provided to city, not a
factor
Gas customers may pay franchise fee of perhaps 5%
High transfers may make electric utility less
competitive
 $0.034 marginal cost + 20% transfer = $0.041
Off-Peak Rate Design
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Upper Midwest – Typical Off-Peak Rates
 Currently range from 3.2 to 3.7 cents for many utilities
 Rate depends on whether cycled or off for several
consecutive hours
Separate meter or combined meter
 If no time of use rates, better to separate the off-peak
usage instead of combining all power in one meter
Apply the power cost adjustment to off-peak rate?
 Calculation based on total power costs or just fuel
 Make sure capacity costs aren’t rising faster than energy
 Customers want stability – advantage over other fuels
 But don’t guarantee the rate for a long time period!
Off-Peak Rate Design (Continued)
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Should only the controlled customers receive the
benefit of not contributing to the peak? Or are we just
giving them the rate that matches the costs?
Is a lower profit margin acceptable on off-peak sales?
Is getting “something” better than “nothing”?
Mandatory Time of Use Rates
 Would be good fit for these concepts
 Automatic incentive to use power off-peak
 Might be tougher to market – customer has to
interpret rate schedule instead of flat discounted rate
Recovery of Direct Costs in Rates
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Direct costs of providing off-peak service
 Marginal power costs (energy rate)
 Additional meter
 Load management receiver
 Load management system – portion of costs
 Maybe some customer service costs
Many utilities prefer flat energy rate with no additional
customer charge
 Example – direct costs billed as $0.003 vs. $2 / month
 Disadvantage to higher volume users
Water Heater Credits
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Used for controlled water heaters not on separate meter
Typical credits are $2 - $4 per month, depending on
cycle times and avoided costs
Advantage of credit: Easy for customer to understand
and see savings on bill
Might specify a minimum usage per month to qualify
for credit
Rebates and Incentives
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Pay the customer to buy power from you?
Rebates are several hundred dollars in many cases
Chips away at sales margin; calculate utility payback
of rebate divided by additional annual margins
In some states, utilities must spend money on
efficiency - rebates targeted to efficient appliances
 High efficiency water heaters
 Heat pumps
Low or no interest loans are another option
Make sure incentive isn’t a complete give-away –
creates excess demand even if current appliance is
working
Customer Payback
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Compare upfront costs of adding off-peak capability
against annual savings to determine payback years
Can help set ceiling for proposed rate
Could shorten payback period if tied together with
controlled water heating and/or air conditioning
Converting to dual fuel / electric plenum
 Payback shorter for fuel oil than natural gas
 Some residential customers still switching despite
relatively long paybacks (7 to 10 years)
 Some gas companies charge for gas service line if
not primary heating source
Conclusion
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Electricity can be competitive with alternate fuels for
certain end uses
Make sure off-peak rates aren’t subsidized by other
customers
Provide what the customer is asking for if you can!