City approves new energy contract as costs rise

City Commissioners voted unanimously during their Feb. 7 meeting to amend the existing energy contract in an effort to stabilize costs.

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.

City considering amended energy contract

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.

“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.

City awards electric contract to Energy Keepers [2017]

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.

City’s new electric contract estimated to save $285,000 annually for five years [2017]

Commissioners voted to approve the staff recommendation of a 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.

City Manager Greg Doyon told commissioners during the meeting that the current market is very different from when they negotiated energy contracts five years ago.

The difference in costs, he said, is “jaw dropping.”

Doyon told commissioners they could wait for the contract to expire and get bids, which they expect costs to rise to at least $125 per megawatt hour by the end of the year, or default back to NorthWestern Energy.

Doyon said he didn’t recommend defaulting to NWE since if they did, the city could never be able to go back on the open market to negotiate energy contracts.

GFPS board approves extended energy contract [2022]

In recent years, the city has been able to negotiate lower energy costs for a substantial savings to the city.

Melissa Kinzler, fiscal director, said the rate change will have a “very significant” impact to the city budget with a 200 percent increase in energy 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 increased energy costs will likely cause increases in the rates for the users of city water and sewer, as well as the street light assessment, according to staff.

Kinzler told commissioners that in November 2013, the city had a contract with Electric City Power, the city’s failed energy venture, the city rate was $72.96 per megawatt hour. At that time, NWE’s default rate was $63.77.

The city extricated itself from ECP and paid a $3.25 settlement in 2013. The city spent years rebuilding the general fund reserve and city finances after the settlement.

After that, Kinzler said, the city contracted with Talen for $41.20 per megawatt hour and when that contract expired, the city contracted with Energy Keepers in 2018 for $29.25 per megawatt hour. At that time, the NWE default rate was $64.66.

Kinzler and Doyon said those negotiated contracts were significant savings to the city. Over the last year, the city estimates it saved $1.5 million in energy costs under the Energy Keepers contract.

During commission discussion, Mayor Bob Kelly said, “we’ve all learned in our community not to consider ourselves any kind of expert in the energy field.”

To which, Commissioner Rick Tryon joked, “have we considered starting our own energy company?”

At that, Doyon stood, threw his hands in the air and pretended to walk out saying, “I’m out.”

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.

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.

City to consider natural gas contract extension [2017]

“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.