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