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6.7.ERMUSR 04-17-2008Ji Elk River Municipal Utilities 13069 Orono Parkway • P.O. Box 430 Elk River, MN 55330-0430 Apri14, 2008 To: Elk River Municipal Utilities Commission Jerry Takle John Dietz Jerry Gumphrey From: Bryan Adams Subject: Great River Energy PCA Phone: ?63.441.2020 Fax: 763.441.8099 We are and will continue to see some significant PCA (power cost adjustment) on our power bill from Great River Energy. Attached is an e-mail from John Gasal explaining the expected size and reason for the large PCA's. Further explanation is as follows. • Load growth up in January, requiring additional MISO purchases. Part of this was driven by increased dual fuel sales. This is a polite way of saying Great River Energy's dual fuel rate at 0.02130/KWH September through May is not enough to cover costs. This rate will most likely be raised next year. • Revenue from wind generation down due to MISO price less than budgeted. (Great River Energy pays a fixed price for the wind generation while the revenue is based on the hourly MISO price). Great River Energy's wind purchase price is confidential, but say it is 5¢/KWH. The MISO market pur~:hase price fluctuates hourly.. If the wind blows during off peak hours when the. MISO market is Iow (2¢ - 3¢/KWH) Great River Energy loses money on the transaction which is apparently happening. They pay 5¢ to the wind producer and sell it at 2¢/KWH to MISO • Reti~enue from i~1ISO sales from Great River Energy's peaking stations down due to high natural gas prices. Great River Energy bids their generation into the MISO market. Due to the high gas costs,.their gas turbine price to run is too high. Great River Energy is not getting any revenue from their gas turbine to help offset expenses. Coal Creek forced outage last week of February and first week of March. This outage occurred during record high natural gas prices which drove the cost for replacement power up. When the system requires that we buy and sell into the market and we have no control over the market, this is often the result if one is short on generation. The Elk River Municipal Utilities keeps a separate PCA account that is zeroed out annually. As Great River Energy charges or rebates the PCA, we pass it on to our customers as a positive or negative charge. If Great River Energy's generation revenues exceed the budgeted amount, they pass on a positive PCA. If Great River Energy's generation revenue fall short of the budgeted amount, they pass on a negative PCA. Adams, Bryan m: John Gasal [john.gasal@connexusenergy.com] :...nt: Thursday, March 27, 2008 4:01 PM To: Adams, Bryan Cc: Mike Rajala Subject: Wholesale Power Cost Adjustments Bryan, This summarizes our discussion of GRE's wholesale power cost and as requested will give some of the reasons for it. John Gasal ERMU impact. January actual: $116,315.52 charge, for February bill issued in March February actual: $179,988.80 charge, for March bill to be issued in April March (est'd) $220,000.00 charge, for April bill to be issued in May Key Drivers: Note -The MISO market has a significant affect on GRE's revenues and expenses. All of GRE's generation is sold into the MISO market while GRE's entire load is purchased from the MISO market. • Load growth up in January, requiring additional MISO purchases. Part of this was driven by increased dual fuel sales. • Revenue from wind generation down due to MISO price less than budgeted. (GRE pays a fixed price for the wind generation while the revenue is based on the hourly MISO price). • Revenue from MISO sales from GRE's peaking stations down due to high natural gas prices. • Coal Creek forced outage last week of February & first week of March. This outage occurred during record high natural gas prices which drove the cost for replacement power up. Information courtesy of GRE: _ .per cost adjustment (PCA) Costs in the wholesale power market are higher than expected this past winter due to colder weather than in recent years, and consequently, higher loads. This is affecting the entire market, but has had an increased effect on GRE due to the forced outage at Coal Creek Station Unit 2. Adding to the magnitude of PCA charges is significant growth in member energy sales beyond budget forecasts. Heating loads continue to grow, notably in the dual fuel program. Rates for this program fall far short of incremental costs, so the faster the growth in dual fuel sales, the more upward pressure will be placed on t' general service rate and PCA. We must address this rate issue prior to the next heating season. Please be assured that we are doing everything within our power to control these costs, but at the same time, be aware that much of these costs are uncontrollable due to higher than budgeted member energy usage. Based on what we are seeing, we must put much greater emphasis on our conservation programs. At the senior staff strategy session last week, we concluded that we should regard conservation as our first fuel. We will also continue to maintain plants to assure improved reliability during peak energy usage. With the Coal Creek Station Unit 2 forced outage lasting through March 7, the probability for continued PCA charges through the first quarter of 2008 is high. Natural gas prices, a primary driver of purchased power costs in the MISO market, have been unfavorable during the outage. The graph below shows the gas price trend for the past few months. ib.'4 12 ~6 t0 :24 7 2i 4 id 3 it OCT Oi WCC~vv OEfi .lAf~•08 f~8 MAR As of 03! R ~ R}$ ~ Hu~~troow X15 i~ 105 10 45 85 4 P5 T 65 Coal Creek Station Unit 2 was off line for approximately two weeks (last week of February and first week of March) due to hydrogen leakage in the generator. The leaks were found to be in the clips that attach to the generator bars rather than in the hoses that were a problem a few years ago. GE has identified the problem as a corrosion issue with the brazing material used in the attachment. Five leaks were fixed during the outage. The unit was back on line and is performing well at this time. Additional investigation with GE will be done to determine long term solutions. The effect of the Coal Creek Station outage alone on the February PCA is about $4.SM. We expect the effect on the March PCA to be about $4.9M.