Hydropower cost inflation and volatility
Hydropower cost inflation and volatility as compared to other fuel sources is an important consideration in deciding whether to make capital investments to switch from one fuel source to another for Juneau home or business heating needs. Inflation and volatility comparison between fuel sources allows a decision-maker to better understand how much and how fast a particular fuel source has increased in the past to speculate the risk of how fast and how much a fuel source could increase in the future. Understanding the risk associated with fuel inflation and volatility is important in making expensive long term investments in boiler and heating systems which could have an operating life of two or three decades.
Some fuel source costs have recently increased significantly. Since June 2009, home heating #1 diesel fuel in Juneau has risen from $2.99 to $4.06 a gallon. This $1.07 increase over three years represents a 36% cost inflation or 12% per year. The table below represents the cost and volatility of home heating fuel in Juneau for the last three year period of 2009 to 2012.
Juneau Fuel Costs 2009 to 2012
Table 3 Juneau Diesel #1 Fuel Costs for 3 years
It is difficult to predict where an economic tipping point in the Juneau market exists from current heating fuel sources to a substitution of other energy sources. However, economic substitution will occur based on fuel comparison prices and the barrier cost (initial investment) to convert or add new fuel sources. A barrier cost being defined as the initial capital cost plus installation to supplement or switch from one heating system to another. Volatility of the cost from one fuel source to another fuel source impacts the investment risk and the decision to spend money to switch from one fuel source to another. However, it is relatively low cost to supplement a current oil based heating system with plug-in heaters (resistance heat) which are virtually 100% efficient. At times (depending on fuel price and oil burner efficiency), it is more cost efficient to use plug-in heating systems which have a low barrier cost.
The Juneau Commission on Sustainability Website offers a Juneau Fuel Cost Comparison Chart for Juneau households and businesses to determine their heating costs and options based on fuel costs and efficiencies of heating systems. (To understand and compare how home heating fuel, propane and pellet fuel cost percentages have increased over the last decade, please see the Figure below. Juneau based electricity costs for Juneau has risen 27% in the last 11 years representing an annual inflation growth cost of 2.45% a year. Juneau’s electrical cost inflation and volatility compare favorably to local Juneau oil cost inflation average of 12% per year for the past three years and pellet fuel national cost inflation that has averaged 8% per year over the past 10 years.
Fuel Cost Inflation Percentage Comparison 1999-2010
Figure 7. Fuel Cost Inflation Percentage change comparison 1999 to 2010
Fuel Oil Cost Growth 1999 to 2010 226%
Propane Fuel Cost Growth 1999 to 2010 209%
Pellet Fuel Cost Growth 1999 to 2010 89%
Juneau Electricity Rate Growth 1999 to 2011 27%
Past demand growth, volatility and oil cost inflation are not a prediction of future increases. However past trends offer a reasonable scenario of what can be expected in the future.
Figure 8 Annual Residential Electricity Price Chart. http://www.eia.gov
Based on the national annual residential electricity price, Juneau’s electrical price is near the national average. Juneau’s electrical cost inflation compares favorably to the national average cost of power.