High Price of Peak-Time Power Scorches Indiana Businesses

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High Price of Peak-Time Power Scorches Indiana Businesses Source: Knight Ridder/Tribune Business News Publication date: 2000-03-28

Mar. 28--If a heat wave produces a prolonged blackout this summer, Robert Kersey is in trouble. Kersey, the CEO of Rochester Metal Products Corp., a foundry in Rochester, has molten iron sitting in electric furnaces. If they go cold, the iron could solidify.

"That would be a disaster," he said.

Rochester Metal, which sells iron mostly to automotive firms, gets its electricity from Cinergy.

Kersey knows the problems Cinergy had keeping four of its power plants running last summer because of low river levels and high water temperatures, which make it difficult to cool generators.

He knows about soaring spot market energy prices during peak periods the past two summers.

Kersey has heard about the mounting opposition to building peaking power plants in rural areas.

And he's aware of the long-range forecast for another hot, dry summer.

Last year, the foundry entered into a utility rate agreement that involved shutting down half its plant from noon to about 8 p.m. each workday from mid-June through mid-September.

That's the summer peak electrical usage period.

In return, Rochester got lower rates. And Cinergy shaved load from a major consumer during peak demand periods.

This summer, Kersey said, the entire plant will shut down at those times.

It also entered into a "call option" program, in which the entire plant can be shut down -- except for enough electricity for critical functions such as keeping furnaces hot enough to prevent iron from solidifying -- up to 12 times this summer, if asked.

Rochester's summer schedule requires adjusting hours for its 400 employees, who normally work shifts of 6 a.m. to 2 p.m. and 2 p.m. to 10 p.m.

On interruption days, some production will be lost. But Kersey said the plant will try to make up for lost production and avoid lost wages by working Saturdays or having people do maintenance work.

This will take about 9 megawatts of power off line -- enough electricity to power about 2,500 homes.

The foundry will get an even bigger break on its bill. Cinergy will get a little leeway during a heat wave.

Rochester, as is the case with many other large industrial users, purchases power on what is known as "real-time pricing."

It means much lower rates than fixed-rate customers pay most of the time.

But when temperatures soar, so do real-time pricing rates.

Steel Dynamics learned that lesson the hard way two summers ago when spot-market energy prices hit upward of $7,500 a megawatt hour.

A DeKalb County firm, Steel Dynamics takes scrap metal and melts it in electric arc furnaces, turning it into steel coils and flat rolls. It complained to state regulators about the high utility prices it was hit with in 1998.

To no avail.

As a not-so-sympathetic utility official at American Electric Power said of its agreed upon rate structure, "They bet on the market and lost."

Because the Rochester foundry also has a real-time pricing clause, Kersey doesn't mind shutting down operations from noon to 8 p.m. on hot summer days, when the price of electricity increases. Nor are possible interruptions up to a dozen times a year much of a problem if electricity would be unaffordable then anyway.

But he acknowledged it's a gamble.

"We don't know for sure if the power savings will offset the cost of our loss of production," Kersey said. "We don't know what the price of electricity is going to be on those other hours. But we think it will go a long way to help us operate profitably during the summer."

He added, "We're hoping to at least break even on it."

Kersey said the foundry has explored buying its own generator.

He said, "The capital equipment is pretty expensive, and the power rates here in Indiana for the most part have been pretty attractive. It's not something we can cost-justify."

Kersey thinks peak power plants are needed. The plants provide power during periods of intense demand.

"If peakers were there," he said, "it would kind of cap the top rates. Now the speculators can tie everything up with power sold on the ... (wholesale market), and you really have problems with speculation. I'm not sure anyone really understands electricity as a commodity."

For Good Samaritan Hospital in Vincennes, having dependable power literally is a life-and-death proposition. It cannot afford a blackout during surgical procedures or when a patient is on a respirator.

Scott Kaminski, vice president for professional and support services, said the hospital is required to have emergency backup generators to maintain certification and accreditation.

With its existing diesel generators, much of the hospital can function during a power failure.

"The business office folks may have to go home because the lights are out," Kaminski said, "but we still could perform surgery, take X-rays, cook food and that sort of thing."

During last summer's heat wave, Cinergy warned Good Samaritan that it might experience voltage fluctuations.

It suffered one power interruption last summer during the heat wave and another resulting from an accident at a construction site.

Kaminski said both outages happened at critical times during surgery and when radiology equipment was running.

Good Samaritan also is on a real-time rate structure. But it has a noninterruptible service clause.

Because of problems with soaring prices the past couple of summers, the hospital began retooling its emergency power operations.

It is adding a diesel generator, not for emergency backup but to operate during peak demand periods to shave the amount of electricity it has to buy.

"It was done long-term with the anticipation that energy costs will continue to go up, and for what we can do to reduce some of that annual expense for years to come," Kaminski said.

As for Steel Dynamics, it, too, has renegotiated its contract.

Robert Soden, manager of engineering services, said the company has negotiated two separate rate agreements with AEP.

For part of the plant, there is an agreement for a fixed amount of noninterruptible power that enables water pumps and a few other critical functions to continue operating. But for arc furnaces, rollers and other high-energy equipment, it can undergo varying degrees of power interruption.

"We have to make a business decision," Soden said. "We have to decide when to shut down if we've reached a point that it's not worth running any more."

He added, "When it normally costs $25 a megawatt hour, and the price of electricity is going to $5,000 the next hour, the decision is pretty well made for us."

Ed Roberts, vice president of governmental services for the Indiana Manufacturers Association, said some larger companies have been building their own generating plants.

But the costs of equipment and storing fuel are enormous.

"When these companies need money for known expenses, such as hiring more people or buying machinery that will produce known profits, do they want to spend it on electrical generation that has very uncertain profits?" Roberts asked.

He said some firms can make energy usage adjustments during power shortages. "But it is hard to find a time to do that if you're running three shifts," he added.

Roberts said of difficulties that utilities and industry face in having enough power -- or cheap enough power -- during peak demand times, "The opposition to peaking plants out there in the local neighborhoods is probably going to keep this problem from being fixed.

"I guess I don't understand this not-in-my-backyard sentiment."


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-- Martin Thompson (mthom1927@aol.com), March 30, 2000

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