Will Lower Fuel Prices Mean A Lower Power Rate?

December 1, 2008

Will lower fuel prices mean a lower power rate? Escambia River Electric Cooperative says not just yet.

The following was submitted by EREC.

The decline in gasoline prices comes as a welcome relief for Americans. As crude oil costs continue their downward trend, consumers feel less pinch at the pump and more pennies in our wallets.

The reduction in oil costs has prompted questions from our members about whether electricity prices will follow suit. Unfortunately, in the short term, they will not.

You might be surprised to know that crude oil plays virtually no part in electricity generation, which for us comes primarily from coal (67 percent) and natural gas (29 percent). Despite lower prices in today’s natural gas market, Escambia River EC is subject to fuel contracts executed months ago at higher prices.

Our budget is similar to your household budget.

Say you buy a new car. You go to the bank to borrow money to pay for it. You make payments to the bank whether you drive that car or not, and your payment stays the same, whether the price of that particular model of car goes up or down on the market. This is your fixed cost.

You also have variable costs – fuel and maintenance – that depend on the number of miles driven. You try to manage variable costs as best you can. When you pass by a station with a high price for gasoline, you might try to put off filling up until you see a lower price. If you drive by a station with a seemingly low price, you might fill up right then, gambling as to whether you could have gotten a better price had you waited a day more.

Our power plants operate much the same way. We borrow money to build and operate our power plants, and we have long-term and short-term contracts for fuel used to make electricity. We also purchase electricity other utilities in addition to our own generation.

We also have variable costs. If we “drive” our power plants more because consumers demand more electricity, we have to buy more fuel to make that electricity. Like you at the gas station, we do our best to buy fuel when the price is low. We buy much of our fuel in advance, to make sure we have enough when it is needed. These long-term contracts give us the benefit of stable costs, even when the market skyrockets or plummets. This is why your electricity bills don’t double or triple during times of high fuel costs, such as when a hurricane enters the Gulf of Mexico.

One reason gasoline prices have fallen lately is due to the economy. Consumers have taken steps to conserve gas by driving less and carpooling. Basic rules of supply and demand dictate that when demand lessens and supply increases (or even remains the same), prices drop.

We encourage our consumers to conserve electricity in the same way. Not only will using less energy keep your electricity bills more affordable now, but it will also benefit us all in the long run.

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Written by William Reynolds · Filed Under News