January 2023

Dustin Tripp

Wholesale Electricity Generation Costs Are Increasing

I hope all of you had a Merry Christmas and a Happy New Year!  As we begin the New Year, I wanted to take this opportunity to review some of the significant events that have occurred in the energy industry over the past few years and how that will impact your Cooperative’s wholesale electricity costs in the next few years.

In 2021, the electric utility industry experienced significant reductions in demand and energy consumption due to the COVID Pandemic and subsequent lockdowns.  With the decreased consumption for coal and natural gas to generate electricity, prices of these fuels remained reasonably stable.  As the United States and other countries started to resume normal operations and increase economic activity in late 2021 and early 2022, the electric utility industry experienced increases in demand and energy consumption.  Then in February of 2022, Russia invaded Ukraine.  Due to Russia’s invasion of Ukraine, many countries banned or placed sanctions on the purchase of Russian natural gas and coal in an effort to deter or penalize Russia for the invasion.  It is important to note that in 2021, Russia was the world’s largest exporter of natural gas accounting for approximately 20% of the world’s natural gas export market and Russia was the world’s 3rd largest exporter of coal accounting for approximately 17% of the world’s coal export market.

As countries began sourcing natural gas and coal from countries other than Russia, the demand for additional exports from other countries increased.  In 2021, the United States was the world’s second largest exporter of natural gas.  The United States continues to increase its export capacity by constructing new, liquified natural gas (LNG) export terminals.  LNG exports have converted the United States natural gas market from a domestic market to a world market.  The price of natural gas in Europe and other countries is soaring and the United States is exporting as much LNG as possible.

As the price of natural gas in the United States increased significantly in 2022, many utilities began switching from natural gas generation to coal generation.  In addition, many utilities around the world also began using more coal for electricity generation.  This increased the demand for coal and subsequently, coal prices began increasing significantly as well.  The spot price for Illinois Basin coal peaked in September 2022 at a price that was nearly 400% higher than contract coal prices just a few years ago.  At the time this article is being written, spot prices have been decreasing some but are still nearly 270% higher than contract coal prices just a few years ago.

Your Cooperative’s power supplier, Southern Illinois Power Cooperative (SIPC), purchases the coal locally that is used to generate electricity at the Marion coal plant.  As we move into 2023, SIPC will be consuming coal at a price that is significantly higher than in previous years due to many of the reasons stated above.  SIPC also has an ownership in Prairie State Generation Campus (PSGC) in Lively Grove.  As a part-owner in this facility, SIPC also owns its share of the coal that is located underground, adjacent to the plant.  Therefore, the coal that is consumed to generate electricity at this plant is not impacted by the increased market price of coal due to the fact that it was purchased many years ago as a coal reserve for the PSGC plant.

In addition to the increases in the cost of fuels consumed to generate electricity, the price of capacity is also increasing.  The Midwest Independent System Operator (MISO) recently announced a significant change in the generation capacity auction in the Midwest.  The change includes moving from an annual capacity construct to a seasonal capacity construct.  This will lead to higher capacity prices for SIPC.  Lastly, generation providers are also dealing with the inflationary impacts just like almost every other industry.  Cost increases are occurring in materials, supplies, contractors, etc. As many of you know, a local investor-owned utility announced that rates to their typical residential customers would increase 54% beginning in June 2022.  Fortunately, your Cooperative still has an ownership share in its own generation resources and did not have to pay the incredibly high market prices for capacity like other utilities customers experienced.  However, SIPC is incurring cost increases as mentioned in this article.  As a result, SIPC has informed your Cooperative that there will be a 4% wholesale rate increase beginning in January 2023.  In addition, SIPC will be consuming some higher priced coal and carbon in 2023 to generate electricity.  This will gradually increase the power cost adder in your Cooperative’s wholesale power rate.  These increases in the cost of wholesale electricity generation will be reflected in the wholesale power cost adjustment charge in the retail rate.  In reviewing these wholesale cost increases; your Cooperative is projecting the increases in wholesale electricity will equate to an approximate 7.2% increase in residential retail rates in 2023.

See you next month and as always, “We’ll keep the lights on for you.”