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2023-040 DME DEC Outage Insurance June 9,2023 Report No. 2023-040 INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: Denton Energy Center Summer Outage Insurance EXECUTIVE SUMMARY: Denton Energy Center (DEC) is a valuable resource within Denton Municipal Electric's (DME) energy portfolio. DEC helps to provide mitigation to the financial risks of the DME portfolio and exposure to high market prices for DEC's proforma, DME's budget, and potentially to the customers and customers via a need for ECA adjustment. Although DME uses best practices to maintain the mechanical equipment and systems of the plant, there is a risk of forced outage—loss of generating output capability. This is typically due to unforeseen equipment malfunctions. Such forced outages are often short in duration, but often occur when equipment is operating for extended periods in response to high market prices. To reduce the financial cost exposure to potential forced outage, insurance can be taken out that covers DME financially for lost generation output should DEC be forced offline. This insurance can and has been purchased for seasonal (winter and summer)time periods when financial risks to a loss in DEC's generation output capability are at their highest. The highest potential causes of DEC forced outages are shown in Table 1 below. Table 1 - Seasonal Forced Outage Risks Winter Summer Loss of Fuel Tornado Fire or Explosion Fire or explosion Ice Stom impacting transmission lines Mechanical Failure Mechanical Failure 1 Loss of transmission interconnection DME first purchased such insurance for the summer of 2020. The insurance premiums provide coverage up to a predetermined maximum claim amount, subject to deductible parameters, similar to other types of insurance. There are very few insurance companies that provide this type of insurance as it is a highly specialized insurance, underwritten by 2-3 entities globally. In review of the outage insurance response and price quotations received for summer 2023, the quoted premiums relative to the maximum claim coverage, is extremely high when considered against the current power market forward prices. DISCUSSION: On June 6, 2023, the City Council provided transactional authority to the City Manager to bind DEC Outage Insurance under consent item U, 23-1092. DME staff provided an analysis of the outage insurance prices provided for the summer 2023 to the DME Risk Management Committee June 9,2023 Report No. 2023-040 held on June 7,2023. DME staff presented the following table(Table 2) showing the value erosion that has taken place in this specialized insurance space and recommended that for the summer 2023 no forced outage insurance should be purchased. Table 2-Seasonal Insurance Trend Season Premium Amount Limit of Coverage Summer 2020 $ 493,500 $ 12,500,000 Summer2021 $ 682,013 $ 18,500,000 Winter 2022 $ 472,163 $ 12,500,000 Summer2022 $ 996,788 $ 18,500,000 Winter 2023 $ 472,163 $ 10,000,000 Indicative Sum me 2023 $ 807,923 $ 9,250,000 The rationale for this recommendation included: • Since the DEC consists of 12 separate engines, any insurance claim for the entire plant would need to result from the same malfunctions or mechanical failures on all 12 engines simultaneously. • The probability of such a failure is extremely low. • The current market prices for energy are significantly lower than they have been in many previous seasonal insurance purchases. This further reduces the financial risk exposure from losing output capability from a portion of DEC's engines. • The premium amount could be deployed more effectively,if necessary,to provide financial protection. • The increase in the premiums versus the limit of coverage is no longer a good risk reward trade-off and is not reflective of the current market conditions or the specific forced outage potential of the DEC. CONCLUSION: As a result of the discussion, staff recommended not to purchase the insurance for the coming summer 2023 season and the DME Risk Management Committee voted 5-0 in agreement not to purchase the coverage for this summer 2023. STAFF CONTACT: Antonio Puente DME General Manager, Chair of Risk Committee Antonio.Puente@cityofdenton.com