Surging fuel costs, market conditions prompt wholesale power increase
We rely on electricity to power our lives. Whether at home or at work, at the gas pump or the grocery store, electricity – an abundant and affordable resource – affects us.
Unfortunately, real-world conditions can affect the price of electricity. While the energy we use every day remains a tremendous value, especially compared to the skyrocketing prices of other common goods and services, the cost of producing and purchasing that energy is rising.
West Florida Electric Cooperative (WFEC) works alongside its wholesale power supplier, PowerSouth, to keep rates as stable as possible. As a member of the local community, WFEC is driven by the goal of providing reliable electricity at an affordable price. Several factors beyond our control have increased the cost of achieving such a goal. In May, PowerSouth’s Board of Trustees approved a measure to increase wholesale power costs.
Electric rates are directly related to fuel costs. Operating an electric utility is much like owning a car. Expenses related to car ownership include fixed costs (loans, insurance and taxes) and variable costs (gas, oil, tires and other maintenance). Your fixed costs remain relatively stable throughout the life of the vehicle, but your variable costs are determined by how you operate it – the number of miles the car is driven and the price of the fuel and other materials you purchase. Energy demand can be equated to how hard you push the accelerator.
Similarly, electric utilities are subject to fixed and variable costs. Fixed costs include loans for capital expenses (power plants, power lines and equipment) and purchased power contracts with other utilities. Variable costs depend on how the utility is operated – the amount of electricity produced and the cost of fuel needed to generate it. Your electric usage is also a variable cost that is determined by the amount of electricity you use in your home.
For electric utilities, the variable costs associated with our operations have experienced dramatic increases over the past several years, especially fuel costs. Natural gas is a primary fuel for electric generation, and extreme volatility in that market has impacted electric utilities nationwide.
Rising inflation has increased the cost of fuel and materials. As the nation struggles with rising inflation, WFEC and PowerSouth have felt the impact and worked together on efforts to meet current and future energy needs. Despite these efforts, the cost of keeping the lights on has trended upward.
Some of this upward pressure is driven by the higher cost of power generation resources, including natural gas. According to the U.S. Energy Information Administration, natural gas spot prices averaged $6.59 per million British thermal units (MMBtu) in April 2022. They are forecasted to rise to $8.59 per MMBtu in the second half of 2022 – more than triple the $2.66 MMBtu average cost seen in April 2021.
Supply chain shortages are also leading to a spike in the costs of materials, including transformers and electrical conduit. A reduction in the labor force which started with the pandemic continues to impact production. A shortage of truck drivers and high fuel costs are also factors impacting the supply chain.
High demand factors into rate increases. Global demand and tight fuel supplies, along with labor shortages, are affecting the cost of generating and purchasing power. Demand is expected to increase. Summer is a peak electricity usage time, when most people demand a lot of electricity for things such as cooling. This summer, impacts on bills will likely increase.
We’re doing our part. Unfortunately, the factors that drive wholesale power costs are beyond West Florida Electric Cooperative’s control, and we are actively pursuing solutions to minimize the impact of spikes in fuel prices.
One way we protect our assets is with our partnership with other electric cooperatives and municipal electric systems through PowerSouth. By pooling our resources with others, we gain economies of scale to help cushion the impact of higher energy costs.
PowerSouth actively compares the cost of generation with the cost of power available for purchase from other utilities, choosing the lowest-cost options. PowerSouth staff also purchases fuel in advance, projecting fuel needs, negotiating lower prices and ensuring adequate supply. Their aggressive natural gas risk management program – executing financial hedges for protection from price increases – helps mitigate the impact of volatile natural gas markets.
As in the past, WFEC will continue to work with our members to help reduce the impacts of increased rates and find solutions to stabilize your power bills. Maintaining dependable service at the most affordable price possible remains the cornerstone of our business.