Fossil fuel prices are higher everywhere, and the effect is hitting electric bills as well as prices at the gas pump.
Utilities that generate power from natural gas and coal face fuel costs two or three times as high as they were just a couple of years ago —and those costs are passed on to customers. Some utilities employ hedging strategies and long-term contracts to reduce the impact of price spikes. But as a general matter, how painful your bill increase will be a function of how much electricity your utility generates from fossil fuels.
Gee, don’t you wish we had more renewable energy in Virginia?
Let’s review the problem. Dominion Energy Virginia, our largest utility, generates most of its electricity from gas and coal, with 29 percent from nuclear and a tiny percentage from solar and biomass. Our second-largest utility, Appalachian Power, derives 85 percent of its power from coal and gas and only 15 percent from renewable energy, primarily wind and hydro.
Both utilities are investing more in renewables now, but for years they lagged other states even as wind and solar became the lowest-cost sources of energy nationwide. Because the “fuel” for wind turbines and solar panels are free, those sources generate electricity at a stable price that looks even better when coal and gas prices go up. (Nuclear reactors are fueled by uranium, so they aren’t affected by the fossil fuel crunch either; even so, most of them need subsides to compete in the wholesale market.)
As previously reported in the MercuryDominion filed a request with the State Corporation Commission in May to increase the “fuel factor” portion of its customer bills, citing the higher prices. In the past year, according to Dominion, the price of the natural gas it bought has gone up 100 percent. High gas prices cause utilities to switch to coal generation when it’s cheaper, so the price of coal also rose by 92 percent. In all, the company said it incurred more than a billion dollars more in fuel costs over the past year than it budgeted for a year ago.
Under Virginia law, Dominion and APCo “pass through” the costs of fuel directly to customers. They don’t collect a profit, but they don’t have to swallow unexpected increases themselves. Customers will have to pay higher rates for as long as it takes Dominion to recoup the extra spending. The only question for the SCC is how quickly Dominion should collect the money.
Consumers in other states are also being hit by higher electricity bills, but the effect is uneven across the country. States that built more renewable energy protected their residents from fuel price increases.
Data collected by the US Energy Information Agency Shows that with few exceptions, states with lower electricity rates than Virginia’s have more renewable energy than we do. Since the EIA data doesn’t reflect all the planned increases due to rising coal and gas prices, the disparity will become even more pronounced over the coming year.
States in the Pacific Northwest with a lot of inexpensive hydroelectric power have especially low rates, but wind and solar are the cheapest forms of new energy. The higher fossil fuel prices go, the better wind and solar look by comparison.
The Great Plains have been wind for years because their rates are low it everything else and outcompetes fuel in building from fossil volatility. South Dakota Residents pay less per kilowatt-hour than Virginians do, and the state gets a whopping 83 percent of its electricity from renewable energy, primarily wind. Even North Dakotaa deep red state wedded to fossil fuels, gets more than 35 percent of its electricity from wind and another 5 percent from hydro. Its rates are already much lower than Virginia’s, and its renewable energy will cushion fuel cost increases.
Investments in solar are also paying off. Take Utah for example, where residential rates are also far lower than Virginia’s. Utah has a coal problem, with 61 percent of its electricity from that one dirty source. But, as EIA reports, “almost all the rest of in-state generation came from renewable energy, primarily solar power.” Moreover, “solar energy powers about 93 percent of Utah’s electric generating capacity added since 2015.” Evidently, Utah spent the past seven years working to future-proof its energy supply, while Dominion kept building more gas plants.
Virginia’s slow start on the transition to renewable energy is the direct result of poor investment decisions by our utilities and a disgraceful myopia on the part of the State Corporation Commission. Environmental advocates pointed out for years that our over-commitment to franked gas meant we’ve been gambling on fuel costs and undervaluing price stability. But the SCC kept approving new fossil fuel projects, and actually urged Dominion to build more gas plants.
Indeed, our situation would be even worse if the General Assembly had not passed the Virginia Clean Economy Act in 2020. The VCEA requires our utilities to transition to carbon-free electricity by 2050 and establishes wind and solar targets for Dominion and APCo to achieve by 2035. The targets are still too low to meet the climate emergency — but until the VCEA became law, Dominion was planning to build even more gas plants.
Now customers have to pay for Dominion’s folly. Dominion’s filing states that if it recovers the entire $1 billion shortfall over the coming year, residential bills would have to go up by 19.8 percent. Dominion instead proposes to spread the higher charges over three years to ease the shock, making the bill increase 12.2 percent. The effect would be further moderated this year by other adjustments the company proposes, like moving the costs of participating in the Regional Greenhouse Gas Initiative into base rates, where they can be absorbed because those rates are so inflated. (On the other hand, the SCC just granted Dominion a separate rate increase for spending to extend the life of its aging nuclear plants—an undertaking projected to cost nearly $4 billion.)
An SCC hearing examiner heard in Dominion’s rate case on July 6 and 7. A ruling is expected later this summer testimony, and the SCC seems likely to approve the three-year plan.
Spreading the cost of higher fuel prices out over a longer time may reduce the shock rate, but there are drawbacks to this approach. First, Dominion will charge customers the financing costs of deferring collection on the full amount, adding to the total cost burden. (What, did you think the company was offering to absorb that cost itself?) The way it works is that ratepayers will borrow money to pay off our debt to Dominion, then repay the loan with interest over the next three years.
The second problem is that if the high cost of fossil fuel isn’t temporary, extending the recovery period will lead to even greater shocks in coming years. If prices stay high and we keep kicking the can down the road, we will pay more financing costs and pile up more debt. Where does this end?
This is not mere speculation. Dominion’s filing already projects that “fuel costs will remain elevated over the next year,” and expert witness In the case notes that Dominion revised its natural gas price projections upwards after it filed its request, without updating the amount it is seeking to collect to reflect the higher projections.
Over at Appalachian Power the situation may not be any better. APCo typically seeks its fuel factor rate increases in September of each year. Last year the utility seek a $3 average increase in residential bills to cover higher fuel costs, at a time when coal and gas prices were still well below this year’s prices. When the company files for its next fuel factor increase two months from now, the rate increase it seeks is likely to pack a much bigger punch.
What of other Virginia utilities? Our smallest publicly-owned utility, Kentucky Utilities (Old Dominion Power, which serves fiveg counties in southwest Virginia), is also heavily dependent on fossil fuels although now planning to build more renewables. ODP filed for a modest rate increase in February of this year, just before Russia invaded Ukraine and sent world natural gas prices to heights not seen since the start of the fracking revolution.
Chris Whelan, vice president for communications and corporate responsibility, told me ODP is able to dampen the effect of fuel price volatility through a “flexible fuel procurement strategy that includes long-term contracts to help hedge against price swings as well as the ability to purchase fuel on the spot market when prices drop.” Still, ODP will have to seek another increase next February unless prices suddenly plummet. The utility recovers excess fuel annual costs (or lowers rates if fuel costs fall) on an basis, so customers would pay off the full amount over 12 months.
Electric cooperatives that buy electricity from Old Dominion Electric Cooperative also face price increases due to high fossil fuel prices and a paucity of renewables. ODEC’s 2021 energy profile shows it generates 38 percent of its electricity from gas, 14 percent from nuclear, and 4 percent from coal. It purchases the rest from the wholesale market (38 percent) and from renewable energy projects (6 percent). Electricity sold on the PJM wholesale market is generated mainly by natural gas, nuclear and coal, so wholesale market prices are also higher now.
According to Kirk Johnson, ODEC’s senior vice president for member engagement, ODEC has had to raise energy prices twice since the beginning of the year, effective May 1 and July 1. Assuming individual distribution cooperatives passed those costs through immediately, residential co-op customers will have seen a 16 percent increase in their electricity rates since Jan. 1. That’s a really steep increase, but Johnson notes ODEC will collect the full amount of the excess cost by Jan. 1, 2023.
ODEC’s increase for six months is almost four percentage points lower than the increase Dominion would impose for 12 months if it were to collect its full $1 billion in the shortest time possible. Johnson said ODEC engages in a hedging strategy that acts like an insurance policy to limit the effect of fuel price volatility, and that this strategy has saved their ratepayers hundreds of millions of dollars.
So hedging and long-term contracts can smooth out fossil fuel volatility, but rates are going up everywhere in Virginia. The lesson is clear enough: “cheap” fraced gas was a bad bargain. Our utilities should have been building wind and solar over the last several years to protect us from fossil fuel price volatility, rather than waiting for the General Assembly to force them to act.
Going forward, the more we invest in wind and solar, the more price stability we will have in our electricity rates, and the less we will have to worry about high fossil fuel prices in the future.
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