OPD5 signs 3-year power contract

By VERNON ROBISON

The Progress

Overton Power District (OPD5) locked in a three-year power purchase agreement last week with Tenaska Power Services to provide power supply, forecasting, scheduling and other services to the district for the years 2025 through 2027.

The agreement, which will go into effect on January 1, 2025, will replace an eight-year agreement with Morgan Stanley Commodities Group which is set to expire on December 31.

Cost of power
Although the Tenaska agreement doesn’t go into effect until next year, the cost of power was locked in at the time that the contract was signed, which took place early on Thursday morning, April 18. That price came in at $87.70 per megawatt hour (MWh).

The OPD5 board voted to approve the agreement on Wednesday afternoon at a price not to exceed $88 per MWh during a meeting held in Mesquite.

The previous agreement with Morgan Stanley, was locked in at a much lower cost of $51 per MWh back in June of 2016.

In an interview after the meeting, OPD5 General Manager Mendis Cooper stated that there have been major changes in the market since the 2016 agreement was signed; changes that have brought significant price increases to the energy market.

“When we entered our last contract eight years ago, the price of power was driven almost solely by natural gas prices,” Cooper said. “In today’s world, natural gas prices are a component, but it’s a much smaller component than it was, because of all of the renewables that have gone into the market.”

Cooper explained that in recent years, traditional power resources generated with natural gas, coal and nuclear fuel had dimished. That is because the generation facilities for these resources have gradually been taken out of service.

“Those resources have become so valuable because they are what we would call firm and reliable energy,” Cooper said. “Renewable sources like solar and wind power are not firm because production can vary with the weather.”

Because the remaining firm resources out there have become more limited, they have also become more expensive, Cooper explained.

“People are bidding up the prices to get those firm resources into their portfolios so that they have a reliable energy portfolio,” he said. “So the scarcity is driving up the price. It is just a supply and demand issue.”

Timing the market
Despite the increase in cost compared to the 2016 agreement, the cost of the new agreement is still considered a favorable rate. In the recent past prices have gone much higher.
“When we were looking at power prices at the end of last year, they were getting close to $110 to $115 per MWh,” Cooper said. “That price would have caused a much more dramatic rate increase for our customers. This price is quite a bit better than that.”

Cooper explained that the challenge to entering a power purchase agreement is in the timing.
“It is like investing in the stock market,” he said. “When is the right time to buy a stock? When do it actually hit the bottom for you to buy? Nobody knows until it starts going back up.”

In determining timing of the current contract, Cooper said he talked to experts across various entities and firms in the energy business.
“All the experts said that we want to sign this before the end of the summer,” he said. “Because at the end of the summer, the prices start going up to prepare for winter loads.”

Other than that fairly predictable factor, the other risks involve geopolitical events or other possible system failures that could affect pricing, he said.
“We could wait until later in the summer to enter this agreement,” he said. “But the question is:

What is going to happen in the next four months that could change prices?
“We looked at that and we see how much the conflict in Ukraine has affected prices; and we see what is going on in the Middle East. So we figured prices might go down a little bit, but the real risk is to the upside. So we may not have caught the exact bottom in this contract, but we think that we got it in a pretty good spot and we have eliminated the upside risk.”

Impact on rates
In anticipation of the looming power purchase agreement negotiations, the district commissioned a full rate study to be done by the National Rural Utilities Cooperative Finance Corporation (CFC). The study was completed and presented to the board last month.

It projected that the new power purchase agrement at then-current market prices would cause the need for an across-the-board rate increase of around 6.37 percent.
Such an increase was projected to amount to a change to the average residential ratepayer bill of an additional $8.40 per month.

Cooper explained that when all things are factored in, the new agreement will come in just slightly higher than the market price indicated a month ago in the CFC study.
“So now that we have the agreed-upon pricing, we are going to have them (CFC) rerun their calculations,” he said. “And it is going to change, but I don’t anticipate it being a significant change.

Cooper explained that this increase was tied solely to the increased cost of power brought next year by the new agreement. No other operating expenses have significantly increased at the district.

Contract details
During the meeting, the board delved into some of the details of the Tenaska contracts. Cooper explained that the contract provided a firm resource, just like the Morgan Stanley has been doing for the past eight years.

The contracts set forth certain threshholds and bandwidths of energy usage to be scheduled for each month. The district would need to stay within those bandwidths to avoid paying penalties, Cooper said. These bandwidths were based on an extensive study of past OPD5 loads.
“We went through these with a fine tooth comb,” Cooper said of the bandwidths. “We spent a lot of time there and made adjustments that we all agreed upon.”

The new contract does allow load growth of 2 percent per year, which is also based on past growth rates in the community.
“The only risk in this contract, which we also had in the last contract, is if we grow too fast or if our local economy contracts too quickly,” Cooper said. “We would pay a little bit of a penalty if we go above or underneath the established threshholds.”

Special consideration would have to be given if any large industrial or commercial customers were proposed to be added to the OPD5 territory during the contract term. This could push the district’s demand above the agreed-upon thresholds.

But there were even remedies possible in this scenario. “If something comes in that is bigger than a megawatt and a half, we can negotiate with (Tenaska) to see if it fits in under the current situation or whether it needs to be a new special contract just for that major user. That way it wouldn’t affect the current ratepayers.”

Why not longer term?
During the meeting, board member Bob Bunker wondered why the district shouldn’t lock in a five year term at the current prices rather than just three years.

“I have kind of a struggle thinking that in three years, with all that is going on, we are going to find cheaper power out there,” Bunker said. “I am pretty comfortable with the increase we are going to have in our power bill and if I could set that for five years, I would be happy with that. I don’t want to have to raise it again in three years.”

But Cooper noted that a five year contract would come in at a much higher cost. “We ran the numbers and our customers would be paying a total of about $500,000 per year to buy that price security,” he said. “We didn’t think the extra two years at that price was worth a half million dollars every year.”

In the end, board member Mike Young made a motion to authorize Cooper to execute the contract with Tenaska at a maximum price of $88 per MWh. The vote to approve the motion was 5-1 with Bunker being the only dissenting vote. Board member Jack Nelson was absent at the meeting.