We likely don’t need to tell you that electric rates have been on the rise the last couple of years and will continue to rise over the next couple of years. These increasing costs have been, and will continue to be, primarily from the generation side of our business. On the graph below, each bar represents the average price per kilowatt-hour for electricity purchased from Nodak over the past 15 years. The graph also shows each year how much of the revenue from each kilowatt-hour is used by Nodak and how much is sent to our power supplier, Minnkota Power Cooperative. Minnkota is owned and governed by 11 distribution cooperatives for the purpose of generating our electricity and providing the transmission lines from the power plants to our cooperatives. Nodak is one of these 11 distribution cooperatives.
The blue section of each bar reflects what is needed from each kilowatt-hour sold to pay Nodak’s expenses that particular year, plus margins. As you can see, this amount has remained remarkably stable. This doesn’t mean our operating expenses have not increased. Actually, our total expenses in 2010 are about 40% higher than in 1996; however, we have been blessed with kilowatt-hour sales growth, so we can spread these expenses over more kilowatt-hours.
The alarming part of this graph, and the part that reflects the upward pressure on your electric rates, is the red part. This section of each bar represents the wholesale cost of each kilowatt-hour sold. As you can see, we enjoyed relatively stable wholesale cost of power during the period from 1996 through 2008. Our average cost of a kilowatt-hour in 2008 was in fact only 25% higher than 12 years earlier in 1996. That computes to an average of about a 2% increase per year.
After 2008, our average wholesale cost of power began to rise dramatically. Based on the recent budget from Minnkota, we expect our average cost of each kilowatt-hour sold in 2011 to be around 6.1¢ per kilowatt-hour, which will be 50% greater than 2008. This computes to an annual increase of nearly 17% per year.
The reason Minnkota’s generation costs are escalating so rapidly are many, but are mostly related to environmental issues. Over a five-year period, Minnkota has invested over $420 million in environmental upgrades to meet new EPA emission standards. By the end of 2012, Minnkota will have spent an additional $400 million on new transmission lines necessary to deliver both wind and base-load generation into the Minnkota service area. These investments carry large debt service payments, which are driving up the cost of our wholesale power. Also, the new environmental equipment is more expensive to operate, further increasing Minnkota’s overall operating expenses.
Minnkota has also entered into long-term contracts for wind energy to meet future North Dakota and Minnesota renewable energy objectives. When these wind farms were built, it was anticipated the excess generation could be sold into the regional market at a profit, or at worst break even. Decades of historically market conditions made this a reasonable assumption. The severe downturn in the economy has resulted in power market conditions for the sale of excess energy. The sale of excess energy has become an economic burden for Minnkota, which will not be relieved until economic conditions improve in the regional power market.
The wholesale part of a kilowatt-hour sold has always been big, and it is getting bigger. In 2011, the Minnkota share will be about 78% of the cost of each kilowatt-hour we sell. Another alarming statistic is that Nodak will pay Minnkota more for a kilowatt-hour in 2011 than we actually charged for that kilowatt-hour only three years earlier in 2008.
Obviously, this article is about escalating electric rates. We increased our retail rates in 2009 and 2010 to offset our increasing cost of wholesale power. Our cost of generation through Minnkota Power will continue in 2011 and 2012. At that point, Minnkota will have adequate transmission facilities and adequate generating capacity, including recently contracted renewable energy through wind, and we have optimism we will return to a period of stable electric rates. This, of course, assumes there will not be severe federal legislations such as Cap and Trade or carbon reduction legislation that will place additional upper pressure on the cost to generate electricity.