The size of Basin Electric’s service territory and scale of our generation and transmission assets make the cooperative unique and allow us to deliver value to our members and communities in a variety of ways.
Basin Electric’s service area stretches through the heartland of the United States and has generation and load in both the Western Interconnection and the Eastern Interconnection. The cooperative has firm access to DC ties and the ability to move the electricity as it is generated to where it’s needed at the most optimal prices. Basin Electric also owns and operates facilities across different regional transmission organizations (RTO), participating in Southwest Power Pool (SPP), Midcontinent Independent System Operator (MISO), and the western bilateral markets. In the West, Basin Electric also participates in SPP’s Western Energy Imbalance Service Market.
Expanding the SPP RTO into the Western Interconnection remains a possibility as prospective participants continue conversations and studies into the venture.
Basin Electric continues an internal evaluation of the economics of joining the full RTO in the Western Interconnection.
Volatility and Opportunity
All of the markets Basin Electric operates in are experiencing tightening capacity positions, meaning while market participants have enough generation capacity to serve their loads, the ample surplus that was previously available is shrinking. More and more, dispatchable generation is being replaced by non-dispatchable, intermittent resources like wind. In addition, given recent events that have emphasized the need to have a reliable grid in adverse weather conditions, all of the markets Basin Electric participates in are working on new guidelines that will increase capacity requirements.
Dispatchable generation continues to show its value. SPP reached progressively higher peaks five times during a stretch of hot weather in July 2022 until it reached an overall record peak that month. At the time of the final peak load, dispatchable resources made up 85% of online generation.
While severe weather events are not a new occurrence, power markets’ increased reliance on non-dispatchable resources can result in volatile market prices and reduced reliability when the severe weather occurs. Basin Electric’s dispatchable resources help insulate our members from volatile energy markets. In September, the cooperative’s dispatchable resources in the Western Interconnection experienced a record month for surplus sales.
Hedging to Protect Our Members
Higher natural gas prices typically mean higher energy prices in the power markets. For example, average annual power prices in SPP over the past two years have more than doubled.
To protect the Basin Electric member load from this volatility, energy prices can be hedged in the forward power markets. The cooperative has implemented procedures to govern participation in these transactions, and Basin Electric’s Risk Management Steering Committee is responsible for overseeing the hedging program.
In a power market such as SPP, the market objective is to dispatch generating facilities in a manner to meet the demand for energy in the most reliable and cost-effective way. When SPP cannot dispatch the most economical generating facilities due to transmission constraints, SPP will dispatch more expensive generating facilities to meet the required power requirements. SPP members whose power requirements cause the redispatch are obligated to pay the additional costs to dispatch more expensive generating facilities. These additional costs are commonly referred to as congestion costs. Utilities protect against these price differences through congestion hedging, and Basin Electric did so with positive results in 2022.
Through fuel hedging, Basin Electric’s experienced and knowledgeable team of employees has developed strategies that have held down the cost of fuel for electricity generation. In 2022, many utilities were forced to raise rates because of higher natural gas prices. Through Basin Electric’s all-of-the-above energy strategy, many different kinds of fuel contribute to the total generation mix, meaning the high cost of natural gas is just one factor of many in the price of delivering electricity.
Value of Dakota Gas
Basin Electric is also home to a very unique natural hedge for the pricing of natural gas — Dakota Gasification Company’s Great Plains Synfuels Plant. Dakota Gas is Basin Electric’s largest subsidiary and turns coal into synthetic natural gas that it transports on the Northern Border Pipeline using a firm pipeline capacity agreement. Because Basin Electric and Dakota Gas are producing, transporting, and consuming the natural gas, the cooperative can serve some of our own natural gas-fueled generating units using the natural gas we produce ourselves.
And, in yet another way Basin Electric and Dakota Gas are able to keep costs within the cooperative, Dakota Gas buys electricity from Basin Electric to operate its facility that produces synthetic natural gas and 12 other products.
Fertilizers, chemicals, fuels, and liquefied gases comprise the products at the Synfuels Plant, a highly diversified portfolio that today derives approximately 32% of its revenue from synthetic natural gas and 44% of its revenue from fertilizers, with the balance coming from other products.
The facility saw some firsts and records in production in 2022. Anhydrous ammonia production at the Synfuels Plant was the highest on record. A new product, 40% diesel exhaust fluid (DEF), was sold for the first time in January 2022 and is used in large combustion diesel engines, predominantly for marine applications. In addition to the 40% DEF blend, Dakota Gas also sells 32.5% and 50% DEF blends.
A diversified customer base has proven valuable for the Synfuels Plant as well. Beverage-grade carbon dioxide (CO2), first produced at the Synfuels Plant in 2020, is used in water treatment plants, as carbonation for beverages, and for refrigeration and preservation for food processing. The Synfuels Plant team also earned a certification — ISO 9001 certification for cresylic acid — that allows sales into the automotive industry to continue.
New Opportunity Through Legislation
The United States Congress passed the Inflation Reduction Act (IRA) in 2022 which includes extensions and expansion of incentives for renewable energy, CO2 capture and sequestration, the production of hydrogen, and other clean energy technologies. The act also created a new tax incentive for zero-emissions electrical generation.
The direct-pay provision of the IRA provides opportunities for Basin Electric and its members. Prior to the IRA legislation, monetization of renewable energy tax credits was limited to for-profit entities, but the new legislation provides for cooperatives and other not-for-profit entities to receive these benefits directly.
The Section 45Q tax credit is a significant opportunity with direct pay eligibility for Basin Electric. Dakota Gas’ Synfuels Plant has more than 20 years of experience capturing CO2 for enhanced oil recovery in Canada. Through the Great Plains CO2 Sequestration Project, the plant plans to capture and sequester additional tons of CO2 via a permanent geologic storage reservoir adjacent to the plant.
In addition, the IRA provides opportunity in the near-term for increased renewable energy deployment. The extension of current renewable production tax credits provides opportunity for repowering of existing projects and incentive for building battery storage.