A balancing act

November 2010

A friend recently commented he was surprised to read that an electric cooperative such as Nodak would be putting ourselves at risk relying on market forces. The comment was in response to articles we have written recently about low market prices for excess energy and how this has cost Minnkota and Nodak cooperatives millions of dollars. His comment was that member-owned cooperatives had no business messing around with market driven sales and purchases.

Minnkota represents the side of our business that ensures we will have enough power available to meet our members’ needs every hour of every day. They can do this by building and owning power plants, by entering into contracts with other utilities to deliver energy needs, or they can rely on available power from the regional market at prevailing market rates. In reality, they always have, and probably always will, use all three of these options to balance the hour-by-hour availability and demand for electricity.

Whether Minnkota builds their own power plants, or they contract with someone else to deliver a specific amount of power, they will always have an imbalance between the amount of electricity available and the amount needed to serve your needs. When they have too much electricity, they sell the excess to the market at whatever price is available. If they have excess energy at 3:00 a.m., it is unlikely their power will have much value. If they have excess energy at 9:00 a.m., a normal peak usage time, their excess electricity may have value much higher than their cost.

When Minnkota is in the position of having excess electricity, they really have very few options. They can’t store it, and with mostly fixed costs associated with the generation, it does little good to reduce the amount generated. The only real choice they have is to sell the excess. Similarly, when Minnkota does not have sufficient generation to meet your needs, their options are few. Thanks to a very effective load management program, they can relieve some of the pressure by implementing load control; however, they still may need to rely on the regional market where some of the immediate needs are purchased regardless of the price.

On an annual basis, the net effect of buying and selling electricity through the market had little impact on Minnkota’s overall cost prior to 2009. Two things changed that year. First, Minnkota completed their plans to secure enough wind generation to satisfy existing renewable energy mandates and objectives in both North Dakota and Minnesota. They did this by entering into long-term contracts with NextEra Energy to purchase all of the output from wind farms near Langdon, North Dakota and Luverne, North Dakota. Second, the severe recession in 2008 and 2009 created a big drop in the demand for electricity in the entire Mid-west resulting in a depressed market for excess energy from the regional grid. Minnkota and many other electric utilities found themselves with more excess energy than normal and market prices that were less than half of the amount before the economic downturn.

The light at the end of the tunnel will come from continued growth within the Minnkota system, which will result in less excess energy to sell each year and a recovery of the energy market, which will come from an overall recovery of the economy. Each year, we expect the adverse impact from excess energy sales to be less than the previous year, and in fact, the situation could reverse such that the sale of excess energy becomes a positive impact on the cooperative.