Before we get to the reasons that the electric company has been losing money, some definitions and facts have to be established.
If one listens to the discussion by the City Council and City Manager, City Workshop, one hears that the electric company is “long” something. What this means is that the city has contracted for more electricity than there is demand within the city of Georgetown.
To understand why the city is “long” one needs to understand the terms of the contracts that Georgetown has with the solar and wind generator companies. Even though the city will not disclose those contracts to the citizens of Georgetown, generally these contracts require that the contractee takes all the electricity generated by the windmills and solar panels, regardless of the demand.
The owners of these renewable energy plants sold bonds to obtain the money to build the plants. They guaranteed the bond buyers a certain payment of principal and interest that is backed by the contract the generator has with the city. If they do not pay the full obligation on time in the full amount, then they may be in default and subject to legal action and penalties.
The generator receives subsidies from the Federal Government that depends on the quantity of electricity produced. Therefore, the wind generators are incentivized to produce the maximum electricity, even though they can “feather” the windmill blades to produce no electricity. The feathering mechanism is what is used to protect the windmill when winds exceed the design limit of the windmills.
Recent market activity has driven the price of oil/gas down. The generator companies that use natural gas powered turbines to power generators have reduced the price of the electricity that they produce as the price of natural gas has declined. They do this because they have certain fixed costs to pay and they need cash to pay those costs even though they may not be making a net profit.
When the “gas generators” sell electricity into the ERCOT market for less than what Georgetown pays for its renewable electricity, Georgetown has to sell its excess electricity into that market at a loss! This is one of the ways that Georgetown electric loses money. There are other ways that will be discussed in a later post.
So why is Georgetown in this pickle? Because they assumed the oil/gas market price would continue to increase and they never considered the possibility that it could decrease. They entered into 20 and 25 yearlong fixed price contracts for renewable energy. Remember the Mayor telling us over and over that the decision to enter into these contracts was for economic reasons alone. They would save the city money!
There is apparently no mechanism in the contracts to provide the city with any relief in the event the market price of electricity declined. In other words, there is no flexibility built into the contracts.
Bottom line – 20 and 25 year fixed price purchase contracts coupled with a contractual requirement to take all the electricity produced in a declining oil/gas market with concurrent electric price reductions results in a money losing operation.
The city has reported they are going to open negotiations on these contracts to try to get some relief. Good luck with that! These companies have obligations to their shareholders and bondholders. They likely will not give substantial relief to the city because, if they do, then all their other customers will demand relief.
One can almost smell electric rate hikes coming for Georgetown electric customers.
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