DEMEC warns of rate hikes if current cost projections to keep the Indian River power plant running are approved
At a recent workshop, Kimberly Schlichting, CEO of the Delaware Municipal Electric Corporation (DEMEC), warned of a possible rate increase due to changes at the Indian River Power Plant. Schlichting began her presentation by apologizing for bringing bad news.
“I wish I was bringing better news, but if anything, misery loves company,” Schlichting said. “We’re not alone in what I’m going to be talking to you about. Tonight, I was asked to come talk a little bit about what is happening with Indian River, so we are going to touch on that a little bit and then I want to talk to you about natural gas prices and how they are affecting power supply rates that you and your customers are ultimately going to be responsible for paying.”
Schlichting began her presentation with a brief overview of what DEMEC’s responsibilities are, explaining that they are a joint action agency that represents eight municipal electric utilities. The biggest service they provide is power supply, but they also provide services for renewables, representation with legislators, training and more. The organization as formed in 1979, Schlichting explained before delving into the issues with Indian River.
“Indian River is an interesting topic right now, located in the southern part of Delaware,” Schlichting said. “It’s provided a lot of ability to live on the peninsula, supplying power that we needed and some other services that come along with that whole plan. Over the years, legislation leadership wanted to get away from coal, clean up our energy portfolio, which is good. However, DEMEC was very concerned years back when the conversation started about closing down Indian River, what would we do? And we had said if it goes out at one point, we were afraid that the peninsula could go blank because we were dependent on it. And while we’re not as maybe dependent on Indian River today as we were, it is still needed. And that was how this all came about was Indian River decided that they were going to file and close. And PJM, who is the regional transmission owner (RTO) responded back and said, ‘no, you can’t shut down, your reliability must run unit. You can’t, we need you there.’ And that didn’t come to a surprise to DEMEC. “
However, according to Schlichting, NRG Power Marketing, which managed the Indian River plant, filed for a cost of service rate recovery which included costs they incurred as far back as 2008 to meet emission standards. The new rates to keep the Indian River plan operational would run for the entire Delmarva transmission zone (DPL) for almost five years, from June 1, 2022, through December 31, 2026.
“When I heard about this, I thought somebody was trolling us at first because it was April 1, April Fool’s Day, that this had to be a joke because it was really kind of crazy, the things that I read in the filing,” Schlichting said. “PJM saw these rates and said ‘okay, we’re going to make you whole, you will receive those payments and, oh, by the way, these are going into effect on June 1 of this year,’ so we had no time to plan. We had already given all of our members, including Milford, a budget for 2022 and now, here we are midstream in the year and we’re seeing some really heavy costs.”
According to the filing, NRG is requiring $5.8 million per month or almost $70 million per year to keep the Indian River plant operational. This means that the impact to DEMEC members will be $460,000 per month or $5.5 million per year. Schlichting explained that what was even more frustrating was that Indian River would not be operating constantly but would only be used in case of an emergency. However, there were no penalties included in the filing should an emergency occur, and the Indian River plant not be able to run. Another option presented was the establishment of a transmission line from Maryland that would only cost $30 million, but the line would not be completed for another four or five years. Mayor Archie Campbell asked why there was no contingency plan if there was a concern that the Indian River plant would close.
“Well, interesting thing, DEMEC does not count on Indian River for power supply. We have no power supply agreements with them,” Schlichting said. “But the way the grid works and is interconnected, it does supply other types of services. So even if it’s not supplying services, there’s other ancillary services that they can receive revenues for and that’s why even though we’re not getting power from them, we will be caught up and asked to keep them able to run and not only supply power, but any other reactive type services that PJM may have agreed to.” The costs would be divided among the eight members based on load percentages.
One of the issues that concerned Schlichting was that there had not been time to dig deeper into the higher rates. She was concerned that the issue was not that the Indian River plant was no longer economical to run but that NRG was seeking to create a new revenue stream. Schlichting explained that she recently met with Senator Tom Carper and provided him with details on what was happening.
“He was surprised and said that this is not what they told me, this can’t be right. And he left rather flustered, and his staff was going to be looking into this too,” Schlichting said. “So I think people are focused on it or beginning to be more focused on it. We are going to look to be on this and hiring consultants do the digging to find out what costs we can challenge and what will be a cost savings to DEMEC if we partner for those consultants. We’re actively working on that as our next step.”
City Manager Mark Whitfield pointed out that DEMEC has a rate stabilization reserve fund that they are using for the next two months to cover the additional costs while DEMEC files to stop the hikes. Schlichting stated that the cost for the average customer could go up about $4 or $5 each month if the higher rates remain.
“The good news for Milford is that when I look at your rates compared to the other members, you’re sitting in a pretty decent place in that you’re at the bottom,” Schlichting said. “You have one of the lowest rates so you really do have good rates. It’s frustrating that you have low rates, and this is almost, in my opinion, money for nothing, a lot of money for very little, in my opinion, because Indian River isn’t running right now. But we need to have it sit and be available. And this is on top of the natural gas prices increasing.”
Schlichting also expressed frustration that no one at PJM planned for a time when Indian River could be closed.
“We’re not in this alone. This isn’t anything that we could have done to prevent this. It’s PJM’s poor planning,” Schlichting said. “I just don’t know who was supposed to do projections on what would this mean. They talked about the retirement, they talked about closing it. And you don’t just wake up one day when you’ve got NRG is filing saying this is what we need you to pay us now to stay on because you’re telling us to be ready.”
Councilman Andy Fulton asked if some of the issue was the push to move toward green energy. Schlichting stated that because Indian River was a coal plant, that was likely part of the scenario. She stated that when renewables are brought into the equation, especially solar, it competes in the capacity market. She pointed out that solar works when the sun is shining but it does not work during the night which means a considerable amount of battery capacity. She stated she was not against solar energy, but that electric generation had to be diversified and should not depend on just one type of power.
“I mean, the sound of 100% renewable sounds really attractive, clean air, no emissions. I mean, who doesn’t want that for your kids, right. But the realities are, the sun doesn’t shine in the night, but you want your refrigerator running through the night and you still want that cold orange juice in the morning. You don’t want stale milk in the morning. We don’t have a shot to make solar 100% sustainable,” Schlichting said. “Unfortunately, PJM was talking about that they saw like 30% level, that once you pass it, that there could be problems within the system and being able to keep that up, to keep the system as reliable as we should. Recently the state just passed legislation that we have a 40% renewable target. I find it frustrating in that I’m more of a purist in that I think that when generation is producing that it should kind of fall in those hours of the load they’re doing.”
Schlichting stated that she felt renewable energy was becoming too political and it was almost like a shell game. However, in order to have a reliable energy grid, shell games were not feasible.
“We don’t have fluctuating electrics, the up and downs like other countries, especially third world countries,” Schlichting said. “We can’t do that, our customer base would not allow it, especially when we have commercial customers. You could say maybe residential will be a little bit more forgiving, but when you have a big customer like Kraft food and lights go down in the middle of the day, even if it is just a blip in the middle, lose a lot of money, they can use lose value. We have a good thing and potentially jeopardizing that is always a concern of ours. I don’t hate solar. I think it has its place, but we have to recognize it for what it is and I think there is just a disconnect on what people think. We also have the solar developers who want the legislation to change because then they can sell more.”
In addition to the issues with the Indian River plant, Schlichting explained that natural gas prices were also rising which was putting an added burden on electrical suppliers to keep costs low. Mayor Campbell asked how DEMEC compared to Chesapeake and Councilman Todd Culotta stated that the comparison was apples to oranges.
“You’re talking about natural gas to your house as opposed to power to your house,” Councilman Culotta said. “Just like if you have natural gas coming to your house and the cost goes up, they are impacted by that rise in cost, too. If their units run on natural gas, it will increase costs.”
City Manager Mark Whitfield pointed out that the cost of natural gas was strongly linked to electric prices. Councilman Jason James agreed.
“I was going to say that natural gas has always been, at least in my business that uses appointive electricity, has always been an indicator of your electric projects, they’re never unrelated. They’re always related because when we would hedge or decide to do block pricing, we would ask those experts out there what should we do? How should we structure the contract?” Councilman James said. “We look at natural gas futures to give us an indication on what the futures are like, and you can pretty much predict what your increases percentage basis would be so you can’t not look at the natural gas to determine whenever strong indication on what your electric rates are going to be and I am not speaking as an expert on this, but they’re definitely linked.”
Councilman Dan Marabello asked if DEMEC had investigated wind power as a way to reduce costs and promote more renewable energy.
“Actually, DEMEC was the first utility in the United States to enter into an offtake power agreement with Bluewater and that was in April of 2007. I’d say DEMEC alone couldn’t make that project go forward. It was with the support of the mayors and councils of the membership that we have to say that we would be partaker in that project. And then it just never happened that over the years, we’ve never got there,” Schlichting said. “And now, we’ve got Maryland looking into it and they have approached us but now we’re looking at the cost of it. There’s still a lot of uncertainty. It is just a very expensive cost in our power supply portfolio. It’s not cheap. So, we do have the Laurel Hill wind farm that’s up in Pennsylvania. That’s a 69 megawatt facility. That’s still not cheap energy from that, although, as the other energy prices go up, it will look better. However, we only get power from it when the wind is blowing. And so that’s variable too. It’s not dispatchable energy, easily power station, we can kick it in and actually do load falling with it,” Schlichting said. “So, while we have it, it’s not it’s not that good for load following. We are working right now and the board just approved at the last DEMEC board meeting to put it into PJM for additional revenues such as getting out capacity payments, and other types of ancillary. So hopefully those additional revenues will help even lower those costs a little bit further. Interesting thing though, is what would have typically been rubber stamped and pushed through really quick because the facilities already up and running is now going to be held up. They’re saying at least two years because of the influx of solar applications at PJM in the interconnection queue.”
Councilman Fulton pointed out that the blades on wind farm turbines were fiberglass which was also not environmentally friendly if they had to be replaced. Schlichting agreed that there were many variables to work through when it came to renewable energy and that some of the decisions being made were done without looking at the future impact of some of those energy sources. She again stated that she supported renewable energy but felt it needed to be managed in a way that would not harm the environment in the future.
“It’s kind of like we were told that using paper bags was bad so go to plastic bags, and now plastic bags aren’t any good, but I just want to make a point because I don’t want the thing that you’ve brought up to be lost,” Councilman James said. “Indian River, we’re talking about coal, we’re talking about tanks for the possibility of production so they can be ready, whether they’re going to be ready. And that’s the way kind of like the way electric works, what we are paying is not necessarily the type of electric being generated. What you’re paying for is what’s being generated today is all inclusive, you’re paying for the possibilities of what needs to be available for generations. And, and I’m not preaching one side or the other. This is not political nor are my comments non-political, but it’s about cost to the citizens of Milford and the citizens of the United States. That distillation that comes about to say, let’s go green, I love it. But the other side of it and we’re bringing this out, what is not being considered at what costs.”
Councilman Fulton stated that failing to recognize problems with renewable energy in the future would then make those types of energy less affordable.
“Or put such a strain on society, that a good attempt turns out to be very bad for people. Thank you, Councilman, for bringing up the point of are you going to create more of an environmental issue later than what you’re getting from the dirty production as it’s called,” Councilman James said. “I’m concerned about the long term, but also long term to what 10, 20 years down the road, if all of the legislation from the clean side of things go through, we’ll even be able to afford energy or what damage are we doing later, so we have real concerns. Lou is going to go into it when it gets to this budget. He’s going to try to tell us what effect this has on our books. If you look at the budget, you’ll see that there’s where we have some issues to be concerned about in our budget this year, and maybe going forward.”
Councilman Brian Baer stated that there are options available for renewable energy waste, such as a company that would recycle electric car batteries.
“I look at the Indian River power plant like I do public safety,” Councilman Fulton said. “You don’t always have a policeman at your door guarding it, or the ambulance at your door picking you up, but you darn sure want them there when you need them.”
Sclichting again reiterated that this meant better planning. She felt that members of DEMEC should not be paying exorbitant rates just to have the plant ready in case it was needed because no one planned for its retirement when there was significant warning that the plant would eventually close.
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