Fuel costs drive rate increases at HEA: Time to explore alternatives, says Association's general manager

Posted: Tuesday, March 22, 2011

Utility rates can sometimes be a confusing set of numbers and formulas, but a recent announcement about an Homer Electric Association rate increase is actually pretty easy to explain. Simply, the rate increase is closely tied to the cost of fuel used to generate electricity.

More than 90 percent of the energy purchased by Homer Electric from its wholesale power provider, Chugach Electric Association, is produced by generators that use natural gas for fuel. The natural gas is purchased by Chugach Electric from suppliers, with contract prices tied to the indexed price of crude oil, heating oil and natural gas.

Those commodities have seen sharp price spikes and the result has been increased fuel costs for Chugach Electric and, therefore, for Homer Electric.

The wild card in this equation is trying to determine what fuel costs will do in the upcoming quarter. HEA submits its Wholesale Power Cost Rate Adjustment (WPCRA) to the Regulatory Commission of Alaska each quarter, based on its best estimate of what the amount and price of energy purchased from Chugach will be.

If those projections are low, as was the case in the first quarter of 2011, the WPCRA must be adjusted to make up for a shortfall in the previous quarter and also recoup the expected costs for the upcoming quarter.

The bottom line is HEA receives a bill for purchased power from Chugach Electric that reflects the cost of fuel. When Chugach's fuel costs go up, so do the rates.

The underlying theme in this situation is the Railbelt's reliance on natural gas to produce electricity. For decades, natural gas has been plentiful and relatively inexpensive. Although that is no longer the case, natural gas remains the primary fuel for power generation because there are presently no other options to replace the reliability of fossil fueled generation.

Both coal and nuclear energy are faced with environmental, technical, and political challenges; wind power is not able to supply base load power due to its variable nature; tidal power is still in the research and development stage; and a large scale renewable project, such as a hydroelectric dam, would take a minimum of 11 years to bring on line if the licensing work started this year.

At a recent public meeting in Kenai, representatives of the Alaska Energy Authority (AEA) told the audience that a proposed hydro project on the upper Susitna River between Anchorage and Fairbanks could supply about 50 percent of the power needs of the Railbelt area. However, the AEA folks cautioned that the dam is far from a "done deal." The Alaska Legislature needs to approve a bill allowing AEA to build and own new power projects and begin the federal license application process. Once the application for preliminary approval is filed, there would be up to 6 1/2 years of environmental studies, public involvement, permitting, design and licensing work followed by a 4 1/2-year construction period.

A large hydro project on the Susitna River would be welcomed by Homer Electric, but again, it wouldn't be providing power to the Railbelt till 2022 at the earliest. I encourage anyone who supports further study of this renewable energy project to contact their legislators and the Governor's office and urge them to allow AEA to begin the licensing process now and avoid any further delays.

Homer Electric is not sitting idly by, waiting to see what will happen. The Cooperative is moving ahead with Independent Light, a plan to expand the Nikiski generation facility by adding a steam turbine on to the existing natural gas turbine and install back-up generation capacity in Soldotna. Under Independent Light, the Nikiski plant will increase its output by 45 percent without any additional natural gas and once the overall conversion is completed the plant will nearly double its current output, producing 77 megawatts of power.

Independent Light will not eliminate the need for natural gas, but by using the fuel more efficiently, Homer Electric members will be well served by the new generation.

Independent Light is not the complete answer, but we look at it as our Bridge to the Future. The days when we could simply rely on cheap, abundant natural gas to keep our electric rates low are over. We need to continue to explore new ideas and I look forward to working with HEA members to find and implement innovative solutions (i.e. renewable resources, conservation, efficiency improvements) to meet our future energy needs.

Bradley P. Janorschke is the general manager at HEA.

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