We have had many questions with regards to the impact on Energy Cost due to the recent weather.
The “Perfect Storm”:
As you likely experienced, Austin had 144 hours of consecutively being below 32F for the first time in recorded history (1890’s). The Arctic Blast did not just impact Austin, but in fact all of Texas. The grid operator for most of Texas is called ERCOT. Please note that ERCOT is charged with balancing the grid and that ERCOT does not own nor control any generation capacity.
At some point during last week, ERCOT lost 40% of generation capacity resulting in massive black-outs throughout the state. This lack of generation capacity was further compounded by snow and ice covered trees succumbing to the weight taking out power lines everywhere and as such last week’s Arctic Blast became the “perfect storm”.
Energy Cost:
Austin Energy (AE), like all other utilities in the US, have generation capacity that covers electrical demand for the majority of the time. When local demand outstrips local supply, Austin Energy, again like all other utilities, will enter the whole-sale electrical market to purchase power to balance supply and demand.
ERCOT has a state mandated price cap of $9,000/MWh, which prior to last week, had only been reached a few times in the past decade. During the winter storm the whole sale electricity price in Texas stayed at $9,000 for several days. The immediate implication of this is that any residential or commercial customer located in a DEREGULATED MARKET, who had chosen an index (floating) price option for procuring electricity , will incur very high energy cost on their next utility invoice. This is NOT the case in Austin as our market is a REGULATED Market and NO Austin Energy customers are on a floating price as far as we know..
Austin Energy has as a part of their overall rate structure a component called “Power Supply Adjustment” (PSA) sometime referred to as the “fuel charge”. This item is meant to cover the volatility in fuel cost for AE’s generation plants. Typically, the PSA is adjusted once a year. As can been seen in the image below, the PSA was last updated in November of 2020, where is was lowered by some 2%. Last time AE changed the PSA twice in one year was in 2016.
Please note that Blue Ocean does not have any “inside” knowledge of AE’s hedging strategy nor do we know how much power, if any, was purchased from the electrical whole-sale market by AE last week. We do anticipate, however, that AE will increase the PSA later this Spring, as AE likely did purchase some whole-sale power and as Natural Gas Prices have spiked due to the winter blast. A conservative guesstimate would be a 5%-8% increase in the PSA unit cost which should translate to an overall increase in energy cost of 1%- to 2%.
As you know, most commercial buildings in Austin are heated with electrical strip heat. The very nature of this kind of heat generation is that it causes high peak demand (kW). If the energy cost seems high on the next utility invoice, please note that it is likely caused by a spike in heat load and not as a result of rate changes.
Summary:
We do understand that many tenants are concerned about the impact on energy cost as result of the Arctic Blast.
