Why aren’t electricity rates falling like gasoline prices?

The average price of a gallon of gasoline in the U.S. fell from $4.11 at its peak in July to $1.70 per gallon in December 2008. Prices for natural gas and residential heating oil have also fallen recently with the likelihood of a global economic downturn well into 2009.

Some consumers may be wondering, why aren’t my electricity rates going down as well?

While gasoline was rising more than 105 percent, Indiana electric cooperative rates rose about 10 percent during 2008. This increase was primarily due to cost increases from Hoosier Energy, the cooperative-owned power supplier for 17 co-ops in central and southern Indiana. For 2009, Hoosier Energy has implemented a 2.4 percent wholesale rate and first quarter tracker adjustments. Other electric utilities report similar rate adjustments and U.S. electricity prices in general haven’t followed the downward trend of energy commodities that are directly tied to crude oil costs.

According to the U.S. Energy Information Administration’s short-term energy outlook released in December, residential electricity prices nationally for 2008, which average about 12 cents per kilowatt-hour, were projected to rise about 6 percent with another 5 percent increase expected in 2009.

Current electricity prices continue to reflect cost increases over past years for fuel (coal and natural gas) costs and for commodities such as steel and copper. During that time power prices remained relatively stable with small increases compared to the dramatic price spikes in gasoline and natural gas.

Power cost tracker provides price stability
Hoosier Energy’s power cost tracker is used to recover highly variable costs that are not fixed or predictable. To level or smooth the impact of wide swings in fuel and other costs, the tracker recovers and spreads those costs over a 12-month period. As well, Hoosier Energy “hedges” prices on certain commodities such as natural gas and fuel oil to lessen market risks. Hedging takes place through advance purchasing of products to help avoid price volatility.

Recent tracker increases are driven primarily by increasing costs for coal and purchased power. Hoosier Energy uses 4 million tons of coal annually at two baseload southern Indiana power stations.

U.S. coal markets have been impacted by demand from China, India and other countries and a shift from surface mining to more costly underground mines. While most of Hoosier Energy’s coal supply has been secured under long-term contracts at favorable prices, the power supplier’s coal costs for 2008 were still 31 percent higher than in 2004.

Because of mining and transportation issues, fuel oil is a component of coal costs for power plants. During 2008, the price of fuel oil was more than three times what it was in 2004. That price is projected to decline in 2009 and 2010, but is expected to be more than double the 2004 price.

Several coal contracts are nearing expiration and future coal costs are projected to be even higher. Higher coal costs are expected to add about $40 million per year to Hoosier Energy operating costs by 2010.

Hoosier Energy is adding a third natural gas-fired generating station to its power production resources in early 2009. Natural gas units provide flexibility, especially in times of fluctuating or peak demand. The cost of natural gas to fuel those plants is lower now than it was at its peak, but is still 17 percent higher than in 2004.

Hoosier Energy also purchases power for members in the wholesale market during periods when demand may be very high or power plants are experiencing outages. Average purchased power prices in 2008 were 63 percent higher than 2004 prices. Addition of the new power plant will help to mitigate future purchased power costs.

As well, a cost-based purchased power contract rose about 23 percent in 2008 over 2007 and will increase further in 2009, reflecting overall cost pressures experienced in the wholesale power markets.

The power cost tracker also includes environmental compliance costs. Since 2005, Hoosier Energy has spent more than $80 million to produce cleaner electric power.

The demand for electricity has been increasing steadily until the current recession. Meanwhile the U.S. is looking to build many power plants to meet future demand. One way of minimizing the huge costs of new power plants with their associated fuel and environmental costs is to reduce consumer usage through demand management and energy efficiency measures. Local electric cooperatives are launching new programs in 2009 to help consumers improve efficiency and better manage rising electric costs.

Hoosier Energy and its Indiana member electric cooperatives are aggressively pursuing initiatives to reduce and manage costs and operate more efficiently as we cooperatively produce and deliver power for you. Although electric rates have not increased or fallen like the cost of filling your gas tank, electricity remains a good value in today’s energy market.