Could Co-ops Save Money Buying Cheap Electricity from Wholesale Markets?

Service territories of Old Dominion Electric Cooperative’s member co-ops.

The Old Dominion Electric Cooperative (ODEC) provides electric power to eleven regional cooperatives in Virginia, Maryland, and Delaware. The Virginia co-ops supply electricity to about 10% of Virginia’s population. Now comes a study by the Institute for Energy Economics and Financial Analysis (IEEFA) claiming that customers of Rappahannock Electric Cooperative (REC) are paying 1.4 to 2.4 cents per kilowatt/hour more than they would had they purchased it from the PJM wholesale electricity market.

REC purchases 89% of its energy from ODEC, with which it has a contract through 2054. ODEC generates its own power through three gas-fired plants, a 50% ownership stake in the Clover coal-fired plant, and an 11% share of the North Anna nuclear plant. It supplemented that power with purchases on the wholesale market.

In 2017, ODEC reported that it purchased power (energy and capacity) at an average of $46.56 per MWh (4.6 cents per kilowatt/hour). That is consistent, states the report, with the following chart comparing ODEC power costs with the costs from outside suppliers:

Concludes IEEFA: “It appears that REC customers could enjoy significant savings in power supply costs of REC were not locked into a long-term contract with ODEC.”

The study was commissioned by Repower REC, which describes itself as “a grassroots group of concerned REC members working in partnership with Solar  United Neighbors of Virginia, a nonprofit group that helps homeowners go solar, ‘to promote a more transparent and democratic Rappahannock Electric Cooperative (REC).”

Bacon’s bottom line: The comparison is useful. It shows how purchasing electric power from PJM’s wholesale market could be cheaper than building new generating capacity… at least in the short run. But, then, short-term benefits need to be weighed against long-term prospects. There is an abundance of electricity supply in the PJM territory right now. That may not always be the case, especially if power companies continue shutting down legacy coal and nuclear power plants. The advantage of signing a long-term contract is that it guarantees cost stability for decades at a time.

A prudent compromise might be to nail down a significant percentage of capacity — say, half — in long-term contracts and let the balance float with wholesale market conditions. And that appears to be exactly what ODEC has done. As the IEEFA report itself says, ODEC purchases between 55% and 63% of its total power supply from the outside.

One other cautionary note: The lower cost of purchased power requires maintaining an adequate transmission system to wheel in the power from other states. If Virginia starts pulling in too much power from the outside, capacity constraints result in transmission congestion charges. There are limits to how much power can be imported without building more transmission lines. And as we have learned in recent years, nobody likes transmission lines.

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10 responses to “Could Co-ops Save Money Buying Cheap Electricity from Wholesale Markets?

  1. One does need to remember ODEC as the future of North Anna is considered, and now I wonder if ODEC is supporting the extension of NA’s operational life or if it’s purchase agreement or partnership expires when the existing license does.

  2. I am basically ignorant about what’s the right length of time to lock in an energy agreement but folks who build 3rd party probably have to have long-term agreements to get adequate or cost-effective financing.

    but also:

    re: ” There are limits to how much power can be imported without building more transmission lines. And as we have learned in recent years, nobody likes transmission lines..”

    but isn’t that exactly how they propose to make the grid more reliable, resilient, robust, etc?

    There is a certain amount of ignorance with respect to some of these issues. People want abundant, reliable power but they don’t want to see it – no power lines, no solar panels, no wind turbines, and keep those dirty coal and Nuke power plants out in the country somewhere…..

  3. NOVEC answered this question about a decade ago. The answer is yes.

  4. Build versus buy is always a tough decision. It gets harder when the decision is long-term in nature. How long can one reasonably expect PJM to have excess capacity? How many other retail power providers are and will be competing for the excess capacity? Do they have higher growth rates?

  5. I always thought PJM was more like a market where demand brought generation and competition.

    I’ve also wondered by the Rural Electric Co-operatives pooled together to get their generation from ODU rather than all of them buying it from Dominion or independent producers.

    What did ODU provide that made them a better choice because the downside was a longer term purchase agreement. Might be something in the law and regs that drove it but the thing is that even now – REC has to pay more for electricity when demand is high and probably the ODU plant is maxed. They make note of the higher cost when demand is high and encourage folks to cut back during high demand periods and they sell water heaters and thermostats that they can control during high demand periods.
    For example, if you have your thermostat set at 77 in the summer – they will turn it to 80 for a couple or three hours. You can override it but the folks that are not at home won’t and thus electricity is saved.

  6. One thing to keep in mind, PJM requires all Load Serving Entities, such as REC, to have capacity under contract to meet their peak load, plus a designated reserve. PJM will not allow LSEs just to buy power without contributing to the stability of the system. There is a significant surplus of generation in PJM. The surplus is 75% greater than they need to meet reserve requirements. But older units, such as those slated for moth-balling by Dominion, are having a tougher time clearing the capacity auctions, so the utilities don’t make any money from them when they are not running.

    REC and other co-ops should consider reevaluating their ODEC contracts. It is possible that those contracts are fuel cost indexed. Gas prices will go up dramatically between now and 2054. Coal output will be affected by the new CO2 standards adopted by Virginia, as will gas-fired plants. ODEC better hope they can get out of the contract with North Anna, otherwise they will be exposed to a huge increase in costs if those units are extended, perhaps without an ability to increase their price.

    The best strategy for customer owned co-ops is to embrace energy efficiency and customer sited solar to reduce demand and reduce their reliance on outside supplies. Otherwise they will face rising costs.

    The energy landscape is rapidly changing. In Virginia, we are not doing ourselves any favors by pretending it is still the 20th century.

  7. re: ” PJM will not allow LSEs just to buy power without contributing to the stability of the system.”

    ah… either I did not know that or forgot it…

    so really the basic REC does not usually generate electricity – they basically exist to buy it and bring into areas the more traditional for-profit companies are less interested in… or if I stated this wrong/badly – re-state properly please.

    so one more question – If a company like Dominion is granted a monopoly can the regular also require them to serve less profitable areas that they normally would not be interested in and/or sell power to them at regulated rates, etc?

    Still trying to understand why the RECs did the ODU thing instead of just buying it from Dominion or independent producers…

    For that matter what actually determined the service areas for Dominion and Apco and then the rest ended up as RECs.

  8. Larry,

    I don’t know the details in Virginia so I can’t say. I suspect the big utilities grew out of an aggregation of small power companies in the early part of the 20th century. These grew up around the densely populated areas so the big utilities were oriented around the population centers. The rural areas were ignored until the rural electrification move in the 30’s and 40’s. The bigger utilities weren’t interested in the higher costs of serving rural areas so co-ops sprung up. They still serve most of the rural areas of the U.S. By being customer-owned they reduce costs by avoiding the need for dividends, although money does flow back to the customer/owners under certain circumstances.

    I think ODEC acts like a buying club for the co-ops. They can buy on a larger scale and divvy it up between the co-ops. Dominion does provide some of the energy.

    We need a thorough review of our energy systems in Virginia. Co-ops serve a significant portion of our population with the investor-owned utilities serving the majority. They can only respond to the directives and regulations they are given. Right now all they have are the schemes developed 100 years ago that incentivize them to build more to earn more because that was what was needed to develop our nationwide system for electricity.

    Things have reversed themselves in the 21st century. Virginia will prosper the most when we understand how to produce more goods and services using less energy. And we need to create a new scheme for our energy companies to help us do that in a way that also serves their shareholders.

    We need to get on with it. Other states are passing us by.

  9. “Still trying to understand why the RECs did the ODU thing instead of just buying it from Dominion or independent producers…”

    When the Virginia REA Coops joined together to form ODEC (essentially as a buyer on behalf of all of them), they figured it would give them greater market power. But that only went so far. ODEC is a part owner of big generating plants built largely by others; but what was missing was a wholesale marketplace for spot energy, and a mechanism for sharing the cost of reliability, and a way of assuring that market entry by new independent generators could not be denied by the incumbent utilities. The FERC, by rulemaking in the late 80s and 90s, required that the incumbent utilities join “independent system operators” (ISOs) who would achieve all three goals: that is, they would manage grid reliability and run a wholesale energy market in which any “load serving entity” (LSE), including the REA Coops and the private utilities with retail customers like Dominion, could participate; indeed they were required to participate. The local ISO covering the mid-Atlantic region is PJM. Regarding your question, “PJM will not allow LSEs just to buy power without contributing to the stability of the system?” the answer is yes. If an LSE wants to participate in the PJM regional market (and FERC gives it no option not to), it must meet PJM reliability requirements as well.

    “For that matter what actually determined the service areas for Dominion and Apco and then the rest ended up as RECs?” This was a tradeoff negotiated back in the 1930s to 50s. The REA Coops were Congress’ answer to the fact that private utilities were unwilling or unable to afford expansion of their service into thinly-populated, spread-out areas of the State. They got low-cost government backed loans which subsidized their rates. The State got involved when the incumbent utilities, which largely served urban areas, demanded protection from the encroachments of these REA Coops on their customers or potential customers. The VA GA, through the SCC, essentially said, we will divide the State into service territories within which any customer can know who will provide service, and if the incumbent urban utilities want to claim suburban areas as “theirs” then they had better connect all the customers residing there whenever asked to do so. This was the genesis of the 1950s “utility facilities act” which said, in effect, if you want the exclusive right to serve customers within a certain area, here is what you must do to keep that monopoly: meet certain requirements for adequate service, provide that service under regulated, non-discriminatory rates, and get approval for anything you build the financing of which will cost ratepayers.

  10. [continued] As Tom H says, “We need a thorough review of our energy systems in Virginia. Co-ops serve a significant portion of our population with the investor-owned utilities serving the majority. They can only respond to the directives and regulations they are given. Right now all they have are the schemes developed 100 years ago that incentivize them to build more to earn more because that was what was needed to develop our nationwide system for electricity.” I agree, except the current scheme (incorporating the co-ops) became Virginia law only 70+ years ago. It needs updating; but the co-ops are not the problem. Co-ops have the same access to the PJM marketplace that the private LSEs do; to the extent the co-ops buy through ODEC, ODEC has that same access to the PJM markets (as a middle-man). ODEC and Dominion and the rest also own generation and they are sellers into that same marketplace.

    As I said, co-ops are not the problem. The problem is that the private utilities, though not so much the co-ops, are both retail suppliers and generation owners; they have an incentive to use their own generation even when it’s not the lowest cost solution for ratepayers. Specifically, the continued rate-basing of new generation construction by the private utilities in the State is a practice the VSCC should be much more skeptical of, and generally should forbid. As discussed here many times, this drives up retail electric prices and unfairly shifts financing, construction, operating and obsolescence risks from the owners’ shareholders to their ratepayers. As co-ops demonstrate, LSEs should concentrate on serving retail customers, not on making money from selling bulk power at wholesale.

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