Not only are cheap petroleum and gasoline relics of a bygone economic era, so is cheap electrical power. Citing explosive increases in the price of energy prices globally, Dominion Electric Power has filed for permission to pass on $1.1 billion a year in energy costs to its rate payers. On average, consumers will see electric rates rise 18.3 percent. (Additionally, the utility is requesting reimbursement for another $697 million in unbilled fuel costs from years past, which it proposes collecting over three years.)
Inevitably, we’ll hear carping from “consumer” advocates that Dominion is ripping everyone off. To deal with those concerns, the power company has proposed several measures to buffer consumers from financial hardship, which I won’t dwell on here. For details, look for coverage in your local newspaper.
These rate increases are not concocted by greedy utility executives. They reflect fundamental shifts in the supply and demand for energy: relentlessly rising demand combined with constrained supplies. There is no way around it: Energy is getting much more expensive, and there is no way to protect consumers from that harsh reality. Before I delve into the details of Dominion’s situation, permit me to quote a statement made yesterday by Peter T. Socha, CEO of Richmond-based James River Coal, in that company’s 1Q quarterly report:
The first quarter of 2008 will be remembered as a watershed period for the coal industry. For the first time, it became clear to the general public that large developing economies around the world have a voracious and growing appetite for all commodities, including coal. It also became clear that the coal industry in the United States will play a much greater role in meeting the world’s demand for coal.
The reason I quote Socha is to assure readers that Dominion is not fabricating a crisis here. In truth, Virginia consumers remain better off than most.
Dominion has a balanced fuel mix, which is designed to reduce the exposure of consumers to spikes in the price of any one fuel. Trouble is, energy prices are rising across the board. Here is a list of Dominion’s energy sources, including the share of the energy source in the power company’s energy mix, and the percentage increase in the cost of that fuel since 2004:
Coal — 46% of the fuel mix, up 143 percent
Nuclear — 42% of the fuel mix, up 14 percent
Natural gas — 7% of the fuel mix, up 129 percent
No. 6 fuel oil — 1% of the fuel mix, up 224 percent
Hydro, biomass, wind and other renewable energy sources also account for a small portion of Dominion’s fuel mix. The utility also buys electricity from other companies, both from within the state and outside of it. Purchased power, which accounts for 28 percent of the company’s power supplies, has increased 130 percent in cost.
Electric consumers can be darn thankful that nuclear power is a major component of the energy mix. Even though the price of yellowcake (unprocessed uranium) has soared 400 percent since 2004, the cost of the raw material constitutes a relatively small portion of its delivered cost to Dominion. The uranium must be extensively enriched and fabricated, and the cost of those processes have increased only modestly, says Dominion Virginia Power President David Heacock.
That’s the past. What about the future? The good news is that Dominion is far along in the permitting process to expand its nuclear power capability at North Anna. “North Anna Three would be a good option for us,” Heacock says. That facility would provide about 1/3 of the projected 4,000 kilowatts in additional capacity the company sees as necessary over the next decade.
Meanwhile, coal prices will continue to increase. Dominion has buffered itself against price hikes through long-term contracts with coal producers. But as those contracts expire, they will be replaced by contracts at higher prices. No one is expecting much relief in oil or natural gas prices. While alternate fuels are an option, they still are not price competitive with coal or nukes, Heacock says. “As fossil fuel costs goes up,” he says, “it tilts the balance to renewable energy. But, for the most part, renewables are not competitive. Wind fuel is best. But our customers don’t always use power on the same schedule as the wind blows.”
One more note, which for the sake of brevity I will mention only in passing here: The cost of fuel at the proposed “hybrid energy” plant in Wise County would be highly competitive. I had always assumed that, because its use was mandated by the General Assembly, Virginia coal sources would not be price competitive. But Heacock insists they are. But that’s a subject for another post.
