Since Texas electric deregulation began in January 2002, the City of Allen has contracted to meet its deregulated electric power requirements through the Texas Coalition for Affordable Power (TCAP); and its predecessor organization, the Cities Aggregation Power Project (CAPP). TCAP is an electric aggregation group. The State's electric deregulation legislation authorized the creation of electric aggregation groups to consolidate city electric procurements. TCAP now aggregates the electric needs of 165 member cities. Aggregation can lead to favorable electric rates based on the significant aggregated electric need of its members. Additionally, a typical city's load profile shows lower electric use than during peak afternoon use periods; and higher than normal use during off-peak evening and night hours. The fact that a city electricity usage is more "level" also makes them a desirable customer.
The City's current deregulated electric supply contract that TCAP negotiated is with Next Era Energy Resources (NextEra) and runs through December 31, 2022.
When deregulation first began in January 2002, CAPP contracted for the electric cost component (the "commodity" cost) of our deregulated electric bill for a cost of about $0.04 per kilowatt-hour (kWh). Added to the commodity cost are many other costs, the largest of which is transmission and distribution (T&D) charges. The total cost paid for power is actually the commodity cost plus the T&D and other cost adders that are not negotiable. Commodity prices increased significantly the years after deregulation due to natural gas cost increases. However, the advent of natural gas extraction from shale formations by the process of hydraulic fracturing resulted in the current abundant supply of natural gas that has dropped natural gas prices significantly. Since a large part of Texas' electric generation uses natural gas as its energy source, the cost of generation has also dropped significantly. This cost savings has flowed back to wholesale customers in the form of reduced rates for customers. The increase of generation through natural gas also brought the early demise of many coal-fired power plants with a higher operating cost than natural gas plants. These plants were much more adverse to air quality than natural gas generation so their closures were positive from an environmental perspective. Based on the fracking-related drop in natural gas costs, the City's current cost for the electric commodity from GEXA is now about eleven percent under the $0.04 per kilowatt-hour commodity cost that the City first paid when deregulation began in 2002.
In previous TCAP contracts, the aggregation group looked for an electric purchase with one generator for up to five years duration. The challenge was always when to lock-in for the next contract term. Electric costs are directly tied to present and future natural gas costs in the commodities futures markets. A weather event like a hurricane in the Gulf of Mexico or international tensions in the Middle East can affect oil and natural gas prices and make finalizing an electric deal at the wrong time significantly more expensive.
With hope of reducing future electric costs, TCAP studied past natural gas cost trends to seek an opportunity to take advantage of trends in the natural gas futures market. This led to a new contracting proposal that is termed the TCAP "Strategic Hedging Program" (SHP). The program aims to look forward for advantageous future natural gas costs and over time and award shorter term electric supply contracts to up to five highly qualified generators rather than just award the contract to a single vendor for many years at one point in time. TCAP will solicit these competitive contracts as frequently on a monthly basis and will allow TCAP to fill its total electric needs in a series of contracts with multiple qualified vendors. Should an adverse weather event or international tensions cause a temporary increase in future commodity costs, this procurement method allows TCAP the time to ride out the increase before going back into the electric market. TCAP looks to be purchasing electricity for future needs that are a year and a half to two years looking forward.
The TCAP Board of Directors believes that if at least 30 percent of its members endorse this strategy, it will be cost effective to administer. Twenty-one cities that represent 13 percent of the 165 TCAP members have already signed agreements to participate in SHP. TCAP looks to easily achieve the thirty percent participation by early fall of 2020 to proceed with this initiative.
For cities that do not desire SHP, TCAP will still conduct its traditional bid solicitation to select one vendor that will likely be contracted for a three to five-year period. However, back checking the SHP process in time, the program does help secure consistently low comparative prices when compared to past market trends.
For cities than transition to SHP, TCAP is providing two "off-ramps" per year to allow these cities the opportunity to go back to the traditional type contract. Of course, these cities will still have to use the electricity purchased under SHP, but their future contracts will be for a fixed-term at a fixed cost.
TCAP offered to solicit member city participation in a solar generation component for a portion of their electric need. This would be a separate electric supply contract between the City and a selected solar vendor that is arranging financing to build a new solar generation site. TCAP had suggested that cities interested in this green procurement to go this way with perhaps 10 percent of their electric load. GEXA, TCAP's Retail Electric Provider (REP), would schedule this production for grid delivery like the rest of the city's power. These solar contracts would be fixed price contracts for perhaps 10 years.
However, recent new solar facility cost trends are increasing to reflect the upcoming phase-out of federal tax subsidies for renewable energy. In the past, these subsidies made solar/wind energy very competitive in cost compared to other generation sources. However, as the tax subsidies phase out in the next few years renewable generation is appearing to shift to be at a greater cost than natural gas generation. Based on this information, none of the 21 cities signing up for SHP thus far signed a solar contract addendum. Staff is no longer recommending that City Council sign a "Project Addendum for Participation in a Solar Project" based on recent developments.
As a "green" alternative to a TCAP solar agreement, TCAP is investigating the purchase Renewable Energy Credits (REC) that ERCOT auctions. RECs have been for sale for some time and are tradable, non-tangible energy commodities that represent proof that 1 mega-watt hour (MWh) of electricity was generated from a renewable energy resource in the ERCOT grid. Essentially, it is a way for entities that are not purchasing only renewable energy, to claim rights to environmental, social, and any other non-power attribute because through the REC purchase their energy purchased "converts" to renewable status. RECs are selling at ERCOT bid for about $0.001 per kilowatt-hour. At this bid cost, Allen's entire deregulated electric load would cost about $27,000 to "qualify" as renewable with RECs. ERCOT allocates funds collected from REC purchase to support the development of new renewable energy generation. A short TCAP SHP video that will be shown during the City Council meeting makes a comment on RECs. Recent discussion with TCAP indicates that they are now considering REC purchase as an option for member cities to request as part of the SHP.
There are three documents that TCAP circulated for City Council consideration. These documents have all completed legal review by the City Attorney.
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A Professional Services Agreement between the City and TCAP. Under the contract TCAP will perform among other things: electric commodity contract negotiations with generators; interface with our REP GEXA on TCAP member billing and scheduling of purchased electricity on the ERCOT grid, and settlement of the electric market with ERCOT; performing legislative advocacy; coordinating member city activities at ERCOT, advising cities on completion of various state reports; and assisting member cities with electric budget preparation.
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A Commercial Electric Service Agreement (CESA) between the City and GEXA, the current Retail Electric Provider (REP) of the Texas Coalition for Affordable Power (TCAP).GEXA schedules the purchased electricity on the ERCOT grid to meet member demands, bills member cities, settles the market at ERCOT, assists with new individual account establishment and account termination, and interfaces with Allen'sTransmission and Distribution Company, ONCOR electric.
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A Project Addendum for Participation in a Solar Project. In January 2020, staff discussed at Council Workshop perhaps seeking solar contract participation with ten percent of our electric needs.Council expressed concern that Solar Project costs might exceed the SHP electricity cost. Given developments concerning expiring federal renewable energy subsidies, staff now believes that City Council should not execute this project addendum. We can instead work with TCAP on the Renewable Energy Credit (REC) option and see how that option matures. The REC option will mean we are offsetting all or a part of our nonrenewable energy procurement with RECs to "convert" all or a portion to renewable status. If the cost of RECs is objectionable, we could indicate no interest in participation.