IEEFA U.S.: Why are Virginia energy coop customers paying as much as 50% over market?

Customers of a rural electric cooperative in northern Virginia are locked into paying 23% to 50% above-market rates for power under a forty-five year contract, even though the supplier to the coop buys the majority of its power at market rates. That’s the main conclusion of an IEEFA briefing note released earlier this month on the power costs of the Rappahannock Electric Cooperative (REC).

The main supplier of power to REC is the Old Dominion Electric Cooperative (ODEC), which is a generation cooperative that supplies power to multiple rural electric cooperatives in the region. REC’s contract with ODEC does not expire until 2054, and in the last two years ODEC has supplied nearly 90% of REC’s electricity. REC also purchases a small amount of power from the Southeastern Power Administration and from Morgan Stanley Capital Group.

For the past three years, REC customers have been paying 1.4 to 2.4 cents/kWh more for power purchased from ODEC than they would have from purchasing power directly from the regional PJM wholesale electricity market. It’s surprising that ODEC’s power costs so much since it buys between about half and about two-thirds of its power on the open market. That raises questions about ODEC’s own generating costs or whether there are other reasons for the high prices it is charging.

A benefit of long-term power contracts should be stable prices that insulate customers from fluctuations in the market. However, market conditions were very different when REC signed its power supply contract back in 2009, before the boom in Marcellus shale drilling flooded the market with cheap natural gas.

In recent years, electricity market prices in PJM have been low, driven by those cheap natural gas prices, relatively flat demand for electricity, and increasing penetration of renewable energy. In addition, capacity prices in PJM have also been relatively low, due to an influx of new natural gas power plant construction in the region. While utilities that purchase directly from the PJM market have been able to take advantage of these low prices, REC apparently has not, even though, as noted, ODEC is buying much of its energy from the market at those low prices.

What’s more, electricity market prices in PJM are expected to remain low for the foreseeable future, for the same reasons that they are low currently. Natural gas prices are expected to remain low for at least the next several years, new natural gas plants are expected to come online, and availability of low-cost renewable energy is expected to continue increasing. So instead of benefiting from the stability of a long-term contract, REC customers are stuck paying much more than expected long-term market prices.

The terms of the contract at which REC is purchasing power from ODEC are not publicly available. Nor is there transparency around ODEC’s power supply costs.

In light of current market conditions and future expectations, and the current high price of its power supply contract with ODEC, REC would be wise to have an open and transparent process for re-evaluating its power supply options.

Cathy Kunkel is an IEEFA energy analyst. She can be reached at [email protected]. 

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