City considering amended energy contract
City Commissioners will consider amending their energy contract during the Feb. 7 meeting in an effort to keep costs more stable.
The city retained a consultant, Jim Morin, in October and again in January to review their energy contract and options.
In November 2022, commissioners renewed their natural gas supply contract on a two-year first of the month index price with Energy West Resources.
The current five-year electric power contract with Energy Keepers Incorporated is up for renewal on Nov. 1. The current price is $29.25 per megawatt hour.
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“In the last five years, and more particularly the last two years, power prices have become extremely volatile. The price index for Montana based resources generally is priced against the Mid C power price hub which governs Pacific Northwest power pricing,” according to the city.
A number of factors impact pricing, including transmission availability, NorthWestern Energy’s generation assets/portfolio and now short-term impacts from California Independent System Operation, to which NorthWestern now belongs, according to the city.
Those factors, coupled with regional drought conditions impacting dams, retirement of coal plats and natural gas pipeline constrains have caused a dramatic increase in energy costs, according to city staff.
“Over the last five years, energy consultants have witnessed indicative term pricing climbing above $100/megawatt hour,” according to staff.
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Morin, the city’s consultant, told city officials that since January, indicative prices from the current supplier and other market resources show long-term high prices.
“It is possible that if future east to west transmission constraints in Montana were to occur, Montana based resources could become stranded and as such see a price softening from the regional pricing curve. While this could occur, there is no present indication of a long-term scenario that would support this premise,” according to the city.
The CAISO electric market imbalance has provided opportunities for certain utilities and generators to manage their positions to mitigate certain transmission constraints in some cases, according to the city.
As of Feb. 1, the forward indicative price curves indicate a one-year product, from Nov. 1 to Oct. 31, 2024 at $128 per megawatt hour and a two-year, from Nov. 1 to Oct. 31, 2025 at $125 per megawatt hour.
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The city’s consultant has recommended that the city negotiate with its current supplier, Energy Keepers, to blend the remaining months of the existing contract into a new higher prices contract using the remaining value in the existing contract to average down the price relative to the forward price curves, according to city staff.
One option is to blend and extend the contract for 20.5 months from Feb. 15 to Oct. 31, 2024 or a 32.5 month contract from Feb. 15 to Oct. 31, 2025.
The current indicative price for both is $90 per megawatt hour.
“There is value remaining in the balance of the current contract. Considering that the market is influenced by weather, economic conditions, and issues involving supply delivery associated with changing generation portfolio’s, the picture could look different in a year or two,” according to city staff.
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Staff is recommending the 20.5-month contract since there may be some “future market softening without a longer-term commitment while still allowing the city additional time to evaluate changing market conditions,” according to staff.
The new contract would be about a 200 percent increase in electricity supply costs, or about $2.1 million, with the largest impacts to the water, sewer and street light funds, according to the city.
The change will be an increase of about $900,000 to the water fund; about $540,000 to the sewer fund; and $230,000 to the street lights fund, according to city figures.
The city had significant savings in the prior years with the fixed rate contract and it’s estimated that saved the city about $1.5 million over the last year, according to staff.
“There is no ‘good option,’ but only to preserve a predictable rate for the short term and hope that the electric market softens when it is time to renegotiate,” according to staff.
Another option is to allow the current contract to expire, get rates from energy suppliers and consider a future price contract in the fall before Nov. 1 in the hope that prices drop more than $35-$38 per megawatt hour.
Staff wrote that forward prices in this timeframe are significantly higher than the blend and extend option and “power supply rates at this level is very unlikely in the foreseeable future.”
Commissioners could also default to NorthWestern Energy when the current contract expires with a $83.41 per megawatt hour price as of January.
According to staff, though that rate is less, once the city returns to NWE territory, it would no longer be able to solicit electric proposals and would default to NWE permanently.
The city has had “an extraordinarily favorable MWh rate” with Energy Keepers since November 2017, “which resulted in significant savings for taxpayers and lighting district assessments,” according to staff.