Value during volatility: Protecting the membership in times of uncertainty

In recent years, the energy industry has been challenged by market price volatility. Power markets, natural gas markets, and commodity markets have all seen their ups and downs. There are several primary causes for this volatility, including more renewable generation, an increase in natural gas prices, and more coal generation retirements.

Because Basin Electric is dedicated to providing reliable, affordable, and responsible electricity to its members, there are several ways the cooperative is working to protect its members from this volatility.

All-of-the-above energy strategy

The cooperative’s all-of-the-above energy portfolio, which includes several different types of generation sources, including coal, natural gas, wind, waste heat, and others, is one of the most effective strategies.

Valerie Weigel, Basin Electric vice president of Asset Management and Commodity Strategy, says the various types of resources Basin Electric utilizes have different physical parameters associated with them.

“We have resources that when they run, they need to run for a long period of time, and we also have resources that we can start up very quickly,” Weigel says. “All of these resources work together very well to protect our membership from price volatility in the market.”

Market purchases

Being a part of a regional transmission organization (RTO) also allows Basin Electric to continue serving its load reliably and affordably. Basin Electric is a member of two RTOs: Southwest Power Pool (SPP) and Midcontinent Independent System Operator (MISO). Basin Electric also participates in SPP's Western Energy Imbalance Service (WEIS). 

“Once you become a market participant in an RTO, all of your resources become pooled with other market participants' resources. The RTO can look at the market demand and determine the most economic and reliable way for all the available resources and transmission to serve the load," Weigel says.

Basin Electric’s membership is spread across a nine-state service territory, giving it the opportunity to participate in four primary market areas.

“These primary market areas all typically have different weather conditions, different wind conditions, and different resource bases, all of which provide a different price opportunity to serve our member loads day in and day out,” Weigel says. “Because of that wide, diverse membership, we are afforded many different opportunities to serve our load at the lowest cost and most reliable way possible on any given day.”

Hedging

When it comes to power markets, higher natural gas prices in the market means higher prices for electricity. Another strategy to protect Basin Electric members from this volatility is through energy prices being hedged in the forward markets, meaning the cooperative buys electricity in advance at a fixed price.

A longer term or higher dollar value hedge proposal must go through an internal vetting process with Basin Electric’s Risk Management Steering Committee for appropriate review and approval and then to the chief executive officer. When the size of the transaction reaches the threshold of $50 million or greater, it requires board authorization.

Kerry Kaseman, Basin Electric manager of Commodity Risk, says his team reviews the agreements, ensuring the risk to Basin Electric is minimized.

“With each trade comes a level of counterparty credit risk. Our team is responsible for reviewing the counterparties to make sure they have the long-term wherewithal to fully deliver on their obligations of the agreement,” Kaseman says. “We also take part in reviewing the agreement to make sure they reflect the terms that were agreed to.”

Financial strength

Basin Electric’s financial strength and stability has carried the cooperative and its members through a global pandemic, historic winter weather events, and now record market prices.

Over the next 10 years, Basin Electric’s membership load is forecasted to grow at an incredible pace, and the capital needed to fund the assets necessary to meet those growth projections is significant.

The cooperative’s management team and the board are working to develop a margin philosophy that will enable Basin Electric to add the generation and transmission resources needed to reliably, affordably, and responsibly serve the growing needs of the membership and to maintain financial strength and agility.

Cooperative family

As the cooperative looks to the future, there are sure to be impacts that will continue to change the markets. Like any utility, Basin Electric is not immune to risks. Through strategic decisions made by the cooperative and using these strategies, Basin Electric is in a strong position to mitigate risk for its membership.

Weigel says being a part of the cooperative family is key to stability.

“We have experienced team members who operate and maintain our facilities, a strong financial position that we can lean into, a great team that identifies marketplace opportunities, strong relationships with counterparties, and a very engaged membership who continue to support us,” Weigel says.