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Key Project Decisions
Key project decisions overview
Once a utility has decided it will
proceed with a plan to integrate renewable energy, the next step is to
consider the key project decisions for procuring and integrating these
resources. The most important - and difficult - project decisions, broadly
defined, include:
In many cases, however, these decisions need to reflect utility goals and preferences on the following topics:
- Utility aversion to certain types of project risk
- Quantity of renewable energy desired: many or few megawatts
- Willingness or ability to pay more for renewable energy resources
- Level of desired project control
- Willingness to develop a marketing program for a differentiated energy product
Risk assessment
These topics are largely self-explanatory, but risk deserves a brief discussion. Each project decision carries a certain amount of risk – technical, delivery, financial, project control, etc. The risks, like the benefits, need to be weighed against one another and against the utility's ability and willingness to bear these risks. For example, utilities aggregating demand may be able to contract with a developer, power marketer or joint operating agency for less expensive generation but are giving up a degree of project and resource control and are gaining management complexity. For example, buying wind generation from a developer may cost more per kWh than building your own, but is less risky because it pushes the technical and wind resource risk on to the developer.
The risk of purchasing power generated
from renewables can be managed (although not completely eliminated) in
contract designs similar to those for the purchase of conventional power
generation. For example, a power purchase contract for fixed price geothermal
power guarantees that price even if equipment failure causes the developer's
unit costs to rise. Similarly, a wind power contract for "firm"
power delivery guarantees the wholesaler will supply the contracted amount
of power from other resources in times of low wind availability; this
contract may include a supplementary contract to provide ancillary services
– shaping, integration, transmission reservation and redelivery -
that reduce the risk of burdensome regulation charges that stem from wind's
intermittency.
But what's the value of this
fuel diversity? It's a difficult figure to pin down. One recent
study [ http://eetd.lbl.gov/ea/EMS/reports/50484.pdf
] from the Lawrence Berkeley National Laboratory estimated that natural
gas purchasers pay a premium of about 0.5 cents/kWh for long-term natural
gas contracts, relative to spot natural gas prices. In other words, the
market value of long-term price stability for natural gas is about 0.5
cents/kWh. Wind, however, doesn't come with an explicit stability surcharge,
but one could argue that it provides a benefit that the market values
at roughly 0.5 cents/kWh. Another study from Platts Research and Consulting,
The Value of Renewables As A Hedge Against Gas Price Movements,
using natural gas cost projections, estimates the hedge value of renewables
to be about $5.20/MWh.
To minimize the risk exposure
of any single project decision, utilities may choose to meet its renewable
energy generation portfolio using combinations of procurement methods.
For example, a single utility might get some power through a purchase
contract for a green-pricing program while constructing its own facility
for rate-based power.
Buy or Build/Own the Generation
A primary – and difficult – project decision utilities need to make is whether to buy renewable electricity from a marketer, generator, or other third party; or to build and/or own their own renewable generating facility. One of the key determinants of whether a utility chooses to own or buy its renewable energy generation may depend on which option provides the least-cost delivered power. In Utility Case Studies you will find descriptions of utilities' experiences buying or building generation; contact information is also provided.
Pros of Buying renewable energy generation
- The owners of privately held plants can benefit from tax credits and accelerated depreciation, reducing the price at which they can sell power. The amount of the tax benefits that is passed on in the final price partly depends on how many entities are involved in the power transaction, as each additional entity will take its share of these benefits. By comparison, municipal utilities, because of their tax-exempt status receive no tax benefits.
- Utilities may be able to get low cost power in contracts with third party power marketers. These marketers, with the ability to purchase large amounts of power, give developers the incentive to construct larger plants which results in greater economies of scale and lower unit costs.
- Utilities purchasing power have no responsibility for the project development and generation assets and can thereby minimize some types of project risk.
- Project risk: especially for a utility without experience in the development of renewable energy projects [and not contracting with turnkey project construction or development services], there is the risk that plants will not be available on schedule, will be over budget or will not perform as expected; resulting cost overruns can erode the financial advantage utilities have in building generation.
- Technical risk: in fixed price contracts, utilities do not have to incur increased power costs that result from equipment failure.
- Delivery risk: contracts for "firm power" (which may include packaged ancillary services for the delivery of a guaranteed amount of power) reduce the risk of power shortages due to the intermittency of wind and solar resources. These contracts are typically more expensive, and a utility with access to its own alternative cost-efficient reserves may prefer a contract for contingent, "as available" power.
- Financial risk: a utility does not bear any of the financial responsibility of a failed project owned by a private developer [although it will have to go through the process of acquiring replacement generation].
- Price risk: in some control areas there may a third party willing to supply a contract for services, such as load shaping and transmission services that can reduce ancillary services costs. These contracts would be available to both owners and purchasers of renewable energy generation.
- Utilities that buy power will not have to devote staff resources to the construction and operation of their own facilities.
- Utilities can purchase small amounts of power incrementally, increasing purchases to meet greater renewable energy demand or portfolio goals.
Pros of Building/Owning renewable energy generation
- Municipal electric utilities have access to low interest, tax exempt
financing for the construction of capital projects, reducing the total
cost of capital. Private developers and plants owners, by comparison,
will typically pay higher financing rates. While the Federal Renewable
Energy Production Incentive does reduce the costs of municipally
owned generation, it is dependent on annual appropriations and therefore
not guaranteed.
- Owning a renewable energy facility
can be a more visible demonstration of a utility's commitment
to renewable energy development. The customers for a utility's
green energy product might prefer this level of commitment
- Utilities have a greater level of control over the project and generation
assets and can minimize certain types of risk:
- Project risk: utilities building their own generation may
have more confidence that the project will be completed, that it
will be operated in the utility's best interests and that the facility
will not cease operations because of financial difficulties. Having
control over equipment maintenance and upgrades can make the utility
feel more secure in the future productivity of the facility.
- Price risk: utilities have more control over facility costs,
the lifetime of the equipment, and other cost factors that impact
present and future unit costs.
- Utilities can use internal construction and management expertise in
constructing, owning and operating renewable energy facilities. Or a
utility can gain experience in renewable energy plant construction if
this expertise was previously unavailable.
- In the long-term utilities can benefit from very low cost power from
the renewable energy facilities it owns. Depending on the duration of
the project debt, the quality and expected lifetime of the equipment,
and the vigilance in maintaining and upgrading equipment, unit costs
can be very low once the plant debt has been retired.
- Similarly, utilities owning their own generation don't have to pay
for marketers' or other generators' profits, management, or other costs.
- Municipal utilities may be able to sell surplus generation into other
green energy markets.
Weighing the build/buy option
It seems logical that the build or buy decision should hinge on which option yields the lowest cost renewable electricity. Recent research, however, suggests that the cost differences in many cases may not be that great. A report from the Lawrence Berkeley National Laboratory, Revisiting the "Buy versus Build" Decision for Publicly Owned Utilities in California Considering Wind and Geothermal Resources, provides a model for comparing generation prices based on the cost effects of various incentives and economic advantages unique to publicly or privately owned generation assets. For example, municipal utilities can take advantage of the low cost of capital financing for the construction of facilities, while private plant owners are eligible for federal production incentives (such as the production tax credit) and accelerated depreciation, the savings of which can be passed on in purchase contracts. Alternative models also give cost data taking into account possible future scenarios: power plants bonds become taxable; geothermal generation becomes eligible for the production tax credit; and public utilities take advantage of lower property taxes.
The authors conclude that in the most likely scenario, purchasing wind is slightly less expensive than building, but utility ownership of geothermal is less expensive than buying it. The authors also note, however, that the price margins in the models are not often large and that changing a few of the assumptions can produce the opposite results. Although the models are specific to municipals in California, the models can be altered to fit other states and situations.
For utilities interested in building small amounts of wind power, the National Wind Coordinating Committee has published the Distributed Wind Power Assessment. Taking its lessons from Denmark and Germany, this report explores the prospects for deploying small-scale distributed wind of a few megawatts in the United States; it details the benefits, costs and technical requirements associated with building and operating wind plants, and integrating distributed wind into local electrical systems.
Joint Projects
A second essential project decision is whether to 'go it alone' – that is, build or buy your own generation, or to join with others in acquiring generation. In Utility Case Studies you will find descriptions of utilities' experiences acquiring generation alone or in aggregate; contact information is also provided.
Pros of internal acquisition
There are some distinct benefits of a utility acquiring its own renewable energy generation, through ownership or a purchase contract, without the assistance of other utilities or utility agencies.
- Utilities with complete control over a project do not have to negotiate with partners. Getting all parties to agree on project details can be a large time and resource commitment, possibly delaying project initiation or completion.
- If projects do not deliver the expected power output, utilities do not have to engage in disputes over the allotment of the limited available power.
Pros of aggregated acquisition
And of course there are benefits of utilities acquiring renewable energy generation, through aggregated ownership or purchasing, as well.
- A municipal utility that aggregates its power demand with other utilities can pursue larger projects for mutual ownership or purchase contracts and achieve economies of scale not achievable with a smaller project for a single utility.
- The risk of an individual project or purchase contract can be shared among the multiple entities rather than be borne by a single utility.
- With the creation of a third-party entity to represent each utility's actions and interests in either a purchase or ownership situation, a utility can reduce the amount of internal resources required for soliciting proposals, overseeing project development or operating and managing the assets.
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