The Naperville City Council, as well as city staffers, are continuing a months-long deep dive into different energy procurement options for the local electric utility this summer.
The big-picture reviews got underway this spring and came on the heels of a majority vote on the city council to pause contract extension talks beyond 2035 with the current provider, the Illinois Municipal Electric Agency.
Market participation without asset ownership
At the council’s Tuesday, July 21, meeting, City Manager Doug Krieger provided a high-level overview of one of multiple energy procurement options: market participation without asset ownership. Prior presentations late this spring and earlier this summer delved into market participation with asset ownership and joint action agencies.
Power purchasing through an entity such as PJM Wholesale Market is one option for supplying the energy and capacity necessary to fortify the electric utility, Krieger noted during his presentation.
“As a market participant, we are going to be responsible for functions, some of which are currently being executed by IMEA,” Krieger said in illustrating the impact this option would have on the local electric utility.
Out of the gate, if Naperville were to pursue this energy procurement method in the future, Krieger said the city would have to meet a number of prerequisites, such as collecting and providing PJM with a direct deposit, initially estimated at $12 million.
Building and creating cash reserves also would be a key part of the process. The city also would be tasked with staffing or outsourcing an energy management office.
“Purchasing energy costs without owning generation, transmission, storage, or assets means that instead of investing capital and physical infrastructure, participants are using contracts, markets, and service providers to secure our electricity supply,” Krieger said.
The pros and cons of this specific option
In his presentation, Krieger said there are a number of pros and cons to a market participation without asset ownership energy procurement option.
This specific scenario could provide the city and the local electric utility with more nimbleness for long-term decision-making and strategizing.
“There are no long-term assets, and, therefore, no long-term liabilities associated with this,” Krieger said.
But switching gears and focusing solely on a market participation model could also bring risks, such as the potential for consistently ebbing and flowing rates.
“Really, the main one is price volatility, which can provide significant adverse financial risk,” Krieger said in pointing to a con. “Communities are exposed to market spikes and fluctuations.”
From a financial perspective, Krieger added, “The city council would likely need to review and evaluate rates on a quarterly basis with this option, just due to the volatility.”
In his research, Krieger said he was able to find one city that has closely adopted this model in the Nebraska community of South Sioux City.
“There’s not a lot that are straight-up market,” Krieger said. “What they did is they hired a private commercial entity to act as their direct market manager and scheduling agent.”
Council members weigh in
Several council members weighed in on the first-blush look at the market participation without asset ownership option at the recent meeting.
Councilman Josh McBroom asked about the anticipated 2028 rate increase discussed in the presentation of this model to help build up the rate stabilization fund needed, and what the estimate of the fund would be.
Krieger said the deposits PJM require are “kind of like a first and last months of rent,” and that they are based on the “highest rent.”
“The $12 million figure was for one month, but typically they would require two months of your highest electric use. So for us it would be about $24 million,” Krieger said. “From a rate stabilization fund standpoint, if we utilize the same methodology that IMEA utilizes, that would be about $15 million in additional funding.”
Krieger noted the city would use a rate consultant and consider those factors in next year’s rate study, should this option be pursued.
With regards to a needed energy management office in this scenario, Councilwoman Mary Gibson said there already is an inherent cost to Naperville for this critical resource through membership into the IMEA.
“Right now, IMEA does this for us, but it’s also part of the package that we’re paying for … so it’s a cost that we’re paying now,” Gibson said. Speaking to the prospect of switching to this procurement method, Gibson added, “It would just be redirected to a different entity doing that for the same service.”
Councilman Patrick Kelly requested Krieger and other city staffers provide local example communities and the manner in how they purchase from the market and hedge in the areas of process and cost.
“I would hope nobody’s just thinking about straight market purchase with no hedge at all,” Kelly said. “That would not seem to make sense.”
Presentation links:
PDFs with the slideshow for each presentation are available through the city at the following links:
Market participation without asset ownership
Market participation with asset ownership
Joint action agency participation
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