Learning from winter 2021, preparing for winter 2022:
Sunflower makes hedging purchases to protect against energy market blowouts
It was Winston Churchill who said, “The farther back we can look, the farther forward we are likely to see.” In February 2021, the central part of the U.S.—from the northern border down into Texas—experienced frigid temperatures for an unusual amount of time. Among other challenges, a lack of natural gas supply during this period of high demand resulted in extremely high prices for natural gas during the event. Because natural gas is used to generate electricity, market prices for electric energy also rose to historic highs.
Storm Uri was an historic event, but now that it has occurred, we would be foolish to think it could never happen again.
In fact, there are indicators that we could be heading towards higher energy prices in 2022. After the extremely high prices last February, natural gas prices recovered to $2.60/MMBtu in March 2021, but they have doubled since then. Current natural gas price projections for January and February 2022 are approximately $6.00/MMBtu. The increase in natural gas prices has led to a corresponding increase in market energy prices. In May, projected market electric prices for January and February 2022 (7x24 average) were $29.50/MWh. Current projections for the same time period are $55.50/MWh. If these prices play out, the Energy Cost Adjustment (ECA) paid by electric consumers will increase even without a weather event.
Sunflower’s existing generation resources—dispatchable capacity from the Holcomb unit, plus fixed-price Power Purchase Agreements—will continue to insulate its Members when energy prices rise. In late September, the Sunflower Board approved additional hedging strategies. A fixed price 150 MW energy block was purchased to cover the portion of Member load above Holcomb’s dispatchable capability. Additionally, a financial natural gas swap was purchased to lock in the price of natural gas for the quantity of natural gas expected to be consumed by Sunflower’s gas-fired units.
Factoring in the increase in projected market energy prices, the mitigating impact of Sunflower’s current hedge policy and the additional mitigation of the fixed energy block and the financial gas hedge, Sunflower is projecting the January and February ECA to be approximately $0.006/kWh higher than previously projected. Monthly ECAs during the remaining months of 2022 are also projected to be higher than previously projected due to the expected long-term duration of the increased natural gas prices.
When utilities develop strategies to hedge against the market price of energy, the concept is similar to purchasing an insurance policy. The more you’re willing to spend on an insurance premium, the more protection you will get. The additional hedging products that Sunflower purchased for January and February 2022 will reduce the risk of high market energy price spikes (insurance protection), but it will also add cost if market energy prices don’t spike (insurance premium).
“Nobody can predict what will happen next winter, but Sunflower has taken additional reasonable steps to protect against market energy price blowouts like we experienced last February,” said Stuart Lowry, president and CEO of Sunflower.