The Price of Power

December 2022

Seminole Electric Cooperative — SVEC’s wholesale power provider —works hard, even in the most difficult times, to provide affordable and reliable power to its 9-member retail cooperatives. That mission has been especially challenging over the last year as Americans paid more for electricity.

According to the latest Short-Term Energy Outlook from the Energy Information Administration, the average price of residential electricity this year has been a little over 15 cents per kilowatt hour. That’s up about 10% from 2021. As much as SVEC strives to weather economic challenges without impacting our consumer-members’ wallets, we are not immune to the global trends driving this increase.

About 40% of your monthly bill goes toward fuel costs for Seminole Electric Cooperative. Seminole uses that fuel to generate electricity which SVEC then distributes to your home or business.

If the cost of that fuel goes up, the price we pay for electricity rises with it. In recent months natural gas, one of the most important fuel sources for Seminole, has reached its highest price in over a decade.

“We saw a significant run-up in prices even before the war in Ukraine started and that just magnified it even more,” says Dan Buckner, Seminole’s director of natural gas supply and optimization. “When you get to those levels, any peak event, such as the really hot summer we experienced this year, pipeline outages and international events can quickly drive the price up.”

Supply & Demand

What has been driving this surge in the price of natural gas? Our old friends supply and demand. On the supply side, producers have been increasingly limited in the ways they can access and transport the supply of natural gas. Both state and federal regulations on fracking have made it difficult to tap new natural gas sources, while pipeline constraints made it harder to move the fuel providers do have to where it needs to go.

Even with those challenges, our current supply might be adequate if not for surging demand outside of the U.S. Exporters are shipping record amounts of natural gas internationally, in the form of liquefied natural gas, for much higher prices than they can get domestically. Most of that supply has been heading to Europe, where the war in Ukraine led to widespread shortages.

On the other side of the equation, demand for natural gas in the U.S. is now higher than ever. Closures of coal-powered facilities have had an impact, but labor shortages around rail transport have an even bigger effect on the availability of coal. With coal increasingly not an option for energy providers, there has been increased reliance on natural gas to keep the turbines moving both at home and abroad.

Hedging Bets

While many factors contributing to the rising cost of natural gas are beyond Seminole’s control, the cooperative takes steps to even out price spikes and lessen their impact on SVEC. One of those is known as “hedging,” a strategy designed to keep the price Seminole pays for fuel relatively stable even when there is volatility in the market.

To mitigate some of that volatility, Seminole hedges by using financial and physical tools to lock-in pricing or options to protect against potentially harmful future movements in the price of physical energy commodities. Reducing volatility provides a more stable price that allows the cooperative to budget more effectively.

“With an unhedged position, the price would be subject to daily market volatility which hit an all-time high in 2022” says Buckner. “By layering in hedges over time, you can lock in pricing and cut down on volatility.”

Seminole has also made investments in physical natural gas storage services that provide some cost flexibility for SVEC and other member cooperatives. By investing in natural gas when prices are lower, Seminole can store this supply to utilize during leaner times. That means when short-term prices are high, Seminole has the option to draw on those reserves to moderate costs passed on to member cooperatives and, ultimately, to you.

Seminole has also built up a diverse portfolio of energy resources. By investing in alternatives like coal, solar and other sources, Seminole member cooperatives have additional generation options to lean on when natural gas prices rise.

Hitting Home

So how does this impact you, our consumer-member?

SVEC utilizes the Wholesale Power Cost Adjustment (WPCA) to adjust the amount charged to members when the cost of fuel used to generate electricity, and hence the price of the power we purchase from Seminole, rise and fall. When the cost goes up, the WPCA can become a charge on the member’s bill. When the cost goes down the WPCA can be a credit.

From 2014 to 2021, SVEC returned more than $35 million in credits to its members through the WPCA. Unfortunately, because of the rapid increase in the cost of natural gas, SVEC has been forced to adjust the WPCA this year from a credit to a charge on members’ bills.

This adjustment wasn’t made lightly. We know that this added cost may put an extra degree of strain on some households, especially with the inflation we are experiencing throughout the economy.

As a not-for-profit cooperative, we always work to provide reliable electric service at an affordable price. So, please rest assured that as soon as market forces and the price of natural gas allow, we will readjust the WPCA accordingly. The price of natural gas dropped somewhat in October and November, in what we hope will become a continuing trend.