The past and future of high energy costs
by Reed Karaim
Gasoline prices have soared. Heating oil and natural gas prices are taking flight. The last thing consumers want to hear is more bad news about energy costs. But despite the best efforts of electric co-ops to hold the line, monthly electric bills may also be on the way up for many Americans.
The good news for co-op members is the increases they may experience, on average, shouldn’t be as severe as those at the pump. The bad news is we could see several years of upward pressure on electric rates.
That’s because of a complicated set of factors, from fuel costs in the United States to economic growth in the Far East.
There are steps the power industry, the government, and every consumer can take to help keep costs down.
The new reality starts with natural gas, the fuel used to generate more than 17 percent of the electricity in the United States. The U.S. government’s Energy Information Administration estimates that will grow to 20 percent by 2010. Almost all the new power plants built during the last decade in the United States burn natural gas to generate electricity. The reason is simple: when the plans for those plants were on the drawing board, natural gas was one of the great energy bargains, costing about $2 per million Btu as recently as 2002.
But in 2005, natural gas went as high as $14 per million Btu. Analysts project that prices will stay at least in the $6 to $8 range, an increase of as much as 400 percent in only a few years.
In other words, the fuel that seemed to be a bargain was always subject to the basic laws of supply and demand.
“We’ve been living on this razor’s edge where any change in supply, any change in demand—any significant weather event—makes a difference,” says Chris McGill, managing director of policy analysis for the American Gas Association. “We had a summer this year that was 19 percent warmer than normal. That’s a huge deviation. We had much more natural gas going to power generation.”
And 2005’s devastating hurricane season will dampen the outlook for oil and gas production well into 2006. In a tight market, that can send prices skyrocketing. Some consumers have already seen fuel cost adjustments added to their electricity bills.
Countries such as India, China, and Brazil are rapidly industrializing, and their needs are changing. World energy consumption is projected to increase by 57 percent from 2002 to 2025, according to the Energy Information Administration.
Leading this charge is China, which recently announced another year of sharp economic growth above 9 percent.
Here in the United States, which still uses the most power of any nation in the world, the demand for electricity is growing more modestly. Rising natural gas costs here could be partially offset by an increased investment in nuclear or coal-fired plants—although both face regulatory and environmental hurdles—and by increased conservation by consumers.
The importance of conservation is one of the reasons it’s so important for consumers to be aware of what’s happening in the electricity markets, says David Mohre, executive director of the National Rural Electric Cooperative Association’s energy and power division.
“If they know this is coming, they may choose to purchase a substantially more efficient air conditioner,” Mohre says. Even small steps, like installing a programmable thermostat or changing to higher-efficiency fluorescent lighting, can shave valuable dollars from an electricity bill.
Efficient homeowner choices, along with more investment in alternative energy sources such as solar and wind generation, can help reduce U.S. dependence on world energy markets. Unfortunately, another problem remains: the nation’s high-voltage electricity transmission network needs some updating.
Many analysts agree that state and federal attempts to deregulate the electric industry during the past 10 years contributed to the reluctance to invest in transmission. To complicate matters, power plant construction in the last two decades and new businesses in the power market have resulted in more than a 100-fold increase in activity on the transmission grid.
“Throughout the 1990s, there was a significant slowdown in investment in transmission,” says Alan Beamon, director of the coal and electric power division of the U.S. Energy Information Administration. “Utilities are going to have to invest in updating their transmission as new generation comes on line.”
So even with increased conservation and the pursuit of alternative sources of power, the price of electricity is still going up for many Americans.
Luckily, the equation doesn’t look as bad for co-op members as it does for most consumers. For one thing, most of the power used by the nation’s electric cooperatives comes from coal-fired generating plants. In Kentucky, coal-burning power plants generate more than 90 percent of the electricity. The United States has plentiful amounts of coal, and the price is less susceptible to the sharp ups and downs of oil and natural gas.
The generation and transmission cooperatives that supply much of the power to the co-op network generally have access to federally guaranteed loans for construction projects. Most are also highly rated by Wall Street. This means they can raise money for needed improvements more affordably than many utilities.
Historically, electric cooperatives have not been as dependent on the spot trading market for purchasing electricity, where prices can be highest. Cooperatives have tended to take a long-term view and build solid systems that provide stability for their consumer-members. They’ve long been industry leaders in finding innovative ways to hold down costs.
Electric cooperatives hold one final advantage. They’re owned by and run for the people they serve. Mohre puts it succinctly: “Co-ops are not for profit. They don’t try to get the highest price from their members, but the lowest price for their members.”
Home repair help
For families and individuals with very low incomes, the U.S. Department of Agriculture Rural Development makes loans for repairs to improve or modernize a home, make it safer or more sanitary, or to remove health hazards.
The most common types of repairs financed by the Section 504 program include fixing or replacing roofs, modernizing heating and wiring systems, and making houses accessible to people with disabilities. You can also apply for funds to install insulation and storm windows, put in a septic system, and install or repair a bathroom.
The maximum amount you can borrow under the Section 504 Home Repair Loan program is $20,000. The interest rate for these loans is 1 percent and is limited to very-low income rural residents whose incomes fall below 50 percent of the area’s median income.
For very-low income homeowners 62 years old and older who cannot afford to borrow the full amount required to make necessary repairs, grant funds are available. Grants may be used to remove health or safety hazards or to remodel dwellings to make them accessible to household members with disabilities. Grants are limited to $7,500. They are often combined with loans to increase the amount available for repairs.
For more information, contact: USDA Rural Development State Office, 771 Corporate Drive, Suite 200, Lexington, KY 40503, phone (859) 224-7300.
Racing with the horse industry
by Nick Nicholson
As the state’s number-one agricultural segment, the horse industry is big business in Kentucky. A recent study shows that the Kentucky horse industry produces goods and services valued at $2.3 billion. It also shows that:
- the national horse industry has a $3.5 billion impact on Kentucky’s economy;
- more than 194,000 Kentuckians are involved as horse owners, service providers, employees, and volunteers; and
- the Kentucky horse industry directly provides 51,900 full-time jobs.
Beyond these numbers are things you cannot quantify. We are the only state that boasts the horse as a major tourism draw. How do you put a value on the link between the horse industry and our state’s identity? That’s why Kentucky’s thoroughbred industry is working hard to maintain its status as Kentucky’s signature industry.
Among the many things we are doing is recruiting new owners and fans to the thoroughbred industry. Like any major business, new investors and players are vital to our growth. Keeneland and the Kentucky Thoroughbred Association have formed a partnership in which we travel all over the world talking about Keeneland’s prestigious racing and sales programs. It’s working, too: we’ve seen tremendous interest and growth in emerging markets like Chile and Mexico.
As an industry, we’re placing an emphasis on working with federal, state, and local officials to present a cohesive legislative agenda.
Statewide, our industry is working closely with Dr. Lee Todd for the University of Kentucky’s new Equine Initiative aimed at ensuring that UK is working with our industry’s growing needs. Our industry successfully lobbied to create a breeders incentive program aimed at encouraging broodmare owners to breed their mares in Kentucky.
At the national level, Senator Mitch McConnell introduced the Equine Equity Act to provide a more level playing field regarding how thoroughbreds are taxed and depreciated compared to similar investments.
All of these factors matter because the Kentucky thoroughbred industry is the setting for an extremely competitive global marketplace. Kentucky continues to dominate because we are breeding and racing champions here. However, none of us can rest on our laurels because the only way to ensure continued success is to win the top races.
Kentucky’s horse industry is something we should all be proud of, but certainly one that we never take for granted. With that in mind, we’ll continue moving forward for the betterment of the horse for the Commonwealth of Kentucky.
Nick Nicholson is president and CEO of Keeneland Race Course in Lexington.
Controlling farm costs
As farmers begin planning for 2006, making careful spending decisions should be a part of the process as costs for everything from nitrogen to health care continue to escalate.
“Costs have gone up so that 2006 costs look to be substantially higher,” says Craig Gibson, farm management specialist with the University of Kentucky Farm Business Management Program. “Producers need to think about cutting spending as margins are going to narrow.”
He says that if spending isn’t adjusted, projections for expenditures in 2006 for interest, farm operating expenses, and family living could increase as much as $47 per acre or $30,000 per family farm.
Gibson says it is doubtful farm profit margins are sufficient to maintain current spending patterns. Profit margins likely will tighten due to higher energy costs. Those higher costs will also result in higher fertilizer costs, especially for nitrogen, which is a major cost in corn production. It is unclear yet how high nitrogen prices may rise, he says. Pesticide costs and seed costs are also likely to creep up.
In addition, many farm families are struggling with the high costs of health insurance. Sole proprietorships with supplemental health insurance coverage paid an average of $3,438.97 in 2004, and where neither spouse has medical insurance from off-farm employment, premiums averaged $7,555.67, which was 16.8 percent higher than in 2003.
Cost-cutting measures to consider:
- adjusting inputs based on soil type;
- testing the soil and discussing the results with county Extension agents or state agronomists;
- carefully timing pesticide applications;
- eliminating cosmetic spraying;
- using variety trial recommendations for seed selection;
- adjusting plant populations for soil type;
- purchasing necessary items and only tilling where necessary, such as in compacted areas.
—Laura Skillman, UK Extension