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Referral #110210October 10, 2011
#110210 – Update:
At the July 7, 2011 City Commission meeting, Commissioners requested that the RUC hear an update on the changing factors affecting Gainesville Renewable Energy Center (GREC) costs and projected costs.
10/10/2011 2
Balancing Policy And Business ObjectivesWhat brings us to today
Policy & business objectives Previously provided pricing analyses Change in market and regulatory environments Resulting cost considerations Strategies to manage cost of adding generation Benefits from this new generation
10/10/2011 3
City Commission Policy Reduce carbon emissions (June 2005 Commission
passes resolution to enter Climate Protection Agreement)
Adopted aggressive TRC test which expanded energy efficiency programs (April 12, 2006)
Increase use of renewable fuels (June 2007)
10/10/2011 4
County Commission Policy Alachua County Commission March 2007 Resolution
Energy efficiency Reduce energy consumption Renewable energy
Environmental Protection Advisory Committee (EPAC) Report adopted by the County Commission Suggested GRU build a 100 megawatt biomass generation facility Report found biomass could contribute over 20 to 30 million
dollars to the local economy in the interval 2011 to 2023
10/10/2011 5
GRU Business Strategy Improve generation reliability
Deerhaven Unit 2, which provides most of the community’s around-the-clock base load power, is nearly 30 years old
Increase fuel diversity Bond rating agency recommended
Provide price stability and obtain long term cost savings for customers
Hedge against further environmental regulation
10/10/2011 6
Improve Generation Reliability
10/10/2011 7
SummerUnit Unit Primary Age Net Capacity
Name Type Fuel in Years (MW)
JR Kelly Unit 7 Steam Turbine Natural Gas 50.1 23.20JR Kelly GT1 Gas Turbine Natural Gas 43.6 14.00JR Kelly GT2 Gas Turbine Natural Gas 43.0 14.00JR Kelly GT3 Gas Turbine Natural Gas 42.3 14.00Deerhaven Unit 1 Steam Turbine Natural Gas 39.1 78.00Deerhaven GT1 Gas Turbine Natural Gas 35.2 17.50Deerhaven GT2 Gas Turbine Natural Gas 35.1 17.50Crystal River Unit 3 Steam Turbine Nuclear 34.5 11.85Deerhaven Unit 2 Steam Turbine Coal 29.9 222.10Deerhaven GT3 Gas Turbine Natural Gas 15.7 75.00JR Kelly CC1 Combined Cycle Natural Gas 10.3 112.00South Energy Center GT1 Gas Turbine Natural Gas 2.3 4.10
Megawatt Weighted Average Age: 28 603.25
Current Year: 2011
Increase Fuel Diversity – Portfolio Strategies Reduce Risk
10/10/2011 8
Coal61.8%
Oil0.2%
Natural Gas17.1%
Landfill Gas1.1%
Nuclear4.1%
Coal, Gas and
Nuclear Purchases
15.6%
Solar0.1%
2010
* Assumes GRU retains 50 MW of GREC
Coal57.9%
Natural Gas
15.4%
Landfill Gas1.5%
Nuclear5.1%
Biomass*18.6%
Solar1.5%
2015
Out-of-State78.4%
Local21.6%
2015
Out-of-State98.8%
Local1.2%
2010
Energy Independence - Local Fuel
10/10/2011 9
Price Stability – Less Market Exposure
10/10/2011 10
Variable Costs
Subject to Market Pricing73.3%
Fixed Costs
Subject to Contract
26.7%
2015
Variable Costs
Subject to Market Pricing94.7%
Fixed Costs
Subject to Contract
5.3%
2010
Less Exposure To Gas Fired Generation Will Improve Price Stability
10/10/2011 11
$-
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$350.0020
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$/M
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Base Case Gas Alternative High Fuel Price Gas Alt. Low Fuel Price Gas Alt.
Biomass Biomass w/o Grant10/10/2011 12
Long Term Cost Savings:Biomass Compared To Gas Alternative
Source: May 7, 2009City Commission presentation
10/10/2011 13
New Generation Costs Will Escalate Under EPA’s Pending Regulations
Balancing Policy And Business ObjectivesWhat brings us to today
Policy & business objectives
Previously provided pricing analyses Change in market and regulatory environments Resulting cost considerations Strategies to manage cost of adding generation Benefits from this new generation
10/10/2011 14
What’s Changed Since May 7, 2009*
What we said Projected price effects
Sensitivity to natural gas forecasts Potential mitigating factors
What factors have changed Update on projected price effects
10/10/2011 15
* As presented at the May 7, 2009 City Commission meeting
Base Gas Forecast - $10.56/1,000 kWh
10/10/2011 16
Measured as Equivalent Effect on 1000 KWH Residential Bill
$/Month
Scenario: Base Load and Energy Price Forecast
2014 2019
ItemCumulative Effect on
Bill Item
Cumulative Effect on
Bill Direct Utility Bill Cash Flows
Net Effect After Fuel Savings $10.56 $10.56 $5.12 $5.12Effect of Prepayment Restructure -$2.25 $8.31 -$2.27 $2.85CO2 Regulation savings @ $12/MWH -$2.22 $6.10 -$2.10 $0.75
Indirect Utility Bill Benefits Avoided capacity in 2023 -$4.73 $1.37 -$4.49 -$3.75
Other Community Benefits From Off-System SalesProp Tax Revenue for County, Schools, Library -$1.35 $0.02 -$1.28 -$5.03
Other Regulatory Risk From DelayMissing ITC Grant Deadline 1/1/2014 $1.48 $1.50 $1.40 -$3.62PTC Not Extended $3.14 $4.63 $3.29 -$0.34
Parameter
Source: May 7, 2009 City Commission Presentation. Assumes 50 MW of GREC sold through 2023.
Low Gas Forecast - $12.78/1,000 kWh
10/10/2011 17
Measured as Equivalent Effect on 1000 KWH Residential Bill
$/Month
Scenario: 20% Lower Energy Price Forecast
2014 2019
ItemCumulative Effect on
Bill Item
Cumulative Effect on
Bill Direct Utility Bill Cash Flows
Net Effect After Fuel Savings $12.78 $12.78 $8.50 $8.50Effect of Prepayment Restructure -$2.25 $10.53 -$2.27 $6.22CO2 Regulation savings @ $12/MWH -$2.22 $8.32 -$2.10 $4.12
Indirect Utility Bill Benefits Avoided capacity in 2023 -$4.73 $3.59 -$4.49 -$0.37
Other Community Benefits From Off-System SalesProp Tax Revenue for County, Schools, Library -$1.35 $2.24 -$1.28 -$1.65
Other Regulatory Risk From DelayMissing ITC Grant Deadline 1/1/2014 $1.48 $3.72 $1.40 -$0.25PTC Not Extended $3.14 $6.85 $3.29 $3.04
Parameter
Source: May 7, 2009 City Commission Presentation. Assumes 50 MW of GREC sold through 2023.
Balancing Policy And Business Objectives
What brings us to today Policy & business objectives Previously provided pricing analyses
Change in market and regulatory environments
Resulting cost considerations Strategies to manage cost of adding generation Benefits from this new generation
10/10/2011 18
Conditions Have Changed – And They Will Again
Demand for electricity Natural gas prices Environmental permitting requirements
10/10/2011 19
Demand For Electricity Increased
10/10/2011 20
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History2009 Forecast2011 Forecast
Natural Gas Price Dropped
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Gas History
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Biomass '11
More Stringent Regulations Enacted EPA’s endangerment findings
Carbon emissions detrimental to public welfare Resulted in new automobile efficiency standards Resulted in “Tailoring Rule” for carbon accounting Carbon regulation under discussion
Florida’s Best Available Control Technology changed EPA enacted Industrial Boiler Maximum Achievable
Control Technology standards (IBMACT) Suwannee River Water Management District
imposed reclaimed water requirements
10/10/2011 22
GREC’s Design Had To Change Original GREC Design
Selective Non-Catalytic NOx Reduction Calcium dry sorbent injection Baghouse for particulate reduction
Revised GREC Design Selective Catalytic reduction for NOx
Sodium dry sorbent Double baghouse size Pipeline to City of Alachua WWTP
10/10/2011 23
Balancing Policy And Business ObjectivesWhat brings us to today
Policy & business objectives Previously provided pricing analyses Change in market and regulatory environments
Resulting cost considerations Strategies to manage cost of adding generation Benefits from this new generation
10/10/2011 24
GREC Contract Structure
10/10/2011 25
Fixed Costs $/MWhNon Fuel Energy Charge $56.15Fixed O&M $23.74Property Taxes $8.88Subtotal $88.76
Discretionary Dispatch Costs*Variable O&M $3.56Fuel Charge $37.80Subtotal $41.36
Total $130.13 /MWh
*Only incurred if better alternatives are not available
Total Annual Cost$103 M/Year
DiscretionaryDispatch Cost$33 M/Year
Fixed Cost*
$70 M/Year
Let’s Translate $/MWh to Annual Costs
10/10/2011 26
Discretionary Dispatch Cost* = $41.36/MWh x .90 CF x 100MW x 8760 hours/Year = $32,608,224 /YearFixed Cost = $88.76/MWh x .90 CF x 100MW x 8760 hours/Year = $69,978,384 /YearTotal Extended Cost = $130.13/MWh x .90 CF x 100MW x 8760 hours/Year = $102,594,492 /Year
*If GREC is available and capable of 100 MW 90% of the time (.90 CF)
Balancing Policy And Business ObjectivesWhat brings us to today
Policy & business objectives Previously provided pricing analyses Change in market and regulatory environments Resulting cost considerations
Strategies to manage cost of adding generation
Benefits from this new generation
10/10/2011 27
GREC’s Benefits And Strategies To Manage Fixed Costs
Immediate cost savings Power marketing and prepay opportunities Savings from policy alternatives
10/10/2011 28
Immediate Cost Savings
Drop base load capacity contract costs from Progress Energy Florida (PEF)
Reduce fuel costs for power production by avoiding running higher cost units
Ability to sell Renewable Energy Credits (REC’s) Current market values
Solar: $10/MWh Landfill Gas, Wind, Biomass: $1/MWh
10/10/2011 29
Immediate Cost Savings(x $1,000,000 per year)
10/10/2011 30
SavingsDrop PEF Baseload Capacity Contract $12Net Production Cost Savings $7Renewable Energy Credit Sales $1
Total Immediate Cost Savings 20$ M/Year
Power Market And Prepay Opportunities
Long term contract assignment Non-recourse prepayment System power sale Federal agency contract
10/10/2011 31
Long Term Contract Assignment Utilities want GREC’s long term values Favorable market conditions
Coal retirements Gas pipeline constraints Florida reserve margins
GREC’s economics are competitive with nuclear Cost per MWh Long term stable price Hedges carbon and fuel price risk No nuclear waste disposal or construction cost risk
Willing to offer 25 MW on a long term basis
10/10/2011 32
Non-Recourse Prepayment
Authorized by 2005 Energy Policy Act How It Works
Tax-Exempt Power project formed under FS Chapter 163 (The “Conduit”)
Tax-Exempt Bonds issued by Conduit to prepay Producer provides discount (negotiated) Not GRU debt: Conduit’s debt
10/10/2011 33
System Power Sale
GREC energy creates a very favorable incremental cost of generation for off-system sales
Blended with other GRU assets, wholesale power is available Pricing very competitive Indexed to hedge fuel risk
10/10/2011 34
Federal Agency Contract
Federal agencies have renewable energy goals Energy Policy Act of 2005 Executive Order 13423 7.5% by 2013
10/10/2011 35
Power Marketing And Pre-pay Strategy BenefitsX $1,000,000 Per Year
10/10/2011 36
*Reflects the effect of having only 75 MW of GREC available for retail power supply
Potential Benefit
Long Term 25 MW PPA Assignment $16Non- Recourse Pre-Pay* $15System Wholesale Power Sale* $7Federal Agency Contract $2
Total Marketing & Prepay Strategies $40 M/Year
Savings From Policy Alternatives
Solar Feed In Tariff scale back
General Fund Transfer (GFT) offset
10/10/2011 37
Solar FIT Scale Back
Solar FIT has upward rate pressure City Commission may terminate program for any
project not holding an executed Solar Electric Power Agreement (SEPA) at any time.
One option is to not issue additional capacity reservations after 2013.
10/10/2011 38
General Fund Transfer (GFT) Offset
Tangible Property Tax estimated at $7 million per year About $1.3 million accrues to the City of Gainesville This amount could be offset from GRU’s GFT in future
years General Government would remain whole
10/10/2011 39
Savings From Policy Alternativesx $1,000,000 Per Year
10/10/2011 40
Potential Benefit
No Addtional Solar FIT Commitments After 2013 2014 Cost Reduction 0.3$ Additional Reductions By 2016 0.6$ Reduce GFT By GREC Ad Valorem Taxes 1.3$
Total 2.2$ M/Year
Price Mitigation Summaryx $1,000,000 Per Year
10/10/2011 41
() indicates a negative number (or cost to be recovered)
PotentialCosts and Savings
GREC Fixed Cost (70)$ Immediate Cost Savings 20$ Power Marketing and Pre-Pay Strategies 40$ Policy Alternative Options 2$
Residual Amount To Recover Through FA (8)$ M/Year
Lets Translate Millions of Dollars Per Year Into Customer Prices $8 million per year of cost is equivalent to $4.00/1000
kWh
Given that savings may vary from estimates, a target of a $10.00/1000 kWh is realistic which corresponds to recovering $20 million per year
10/10/2011 42
Note: As a purchased power cost recovered through fuel adjustment, GREC’s costs are not subject to utility taxes or surcharges.
Balancing Policy And Business ObjectivesWhat brings us to today
Policy & business objectives Previously provided pricing analyses Change in market and regulatory environments Resulting cost considerations Strategies to manage cost of adding generation
Benefits from this new generation
10/10/2011 43
Benefits Not Quantified In This Analysis
Present value of avoided capacity in 2023 Hedge value against fossil fuel price volatility Regional economic benefits
$5.7 million per year net increase to local tax base Creates 700 jobs in the region* $31 million circulated in the regional economy instead of
being shipped out of state* Hedge value against carbon or renewable portfolio
standard regulation
* Dr. Julie Harrington, Economic Impact Analysis of Gainesville Renewable Energy Center (GREC) Proposed Biomass Power Project in Alachua County and Surrounding Counties, March 2010
10/10/2011 44
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Historical FA FCST FA With GREC
Assumes that offsets necessary to achieve 10.56 FA impact in 2014 are achieved
Projected FA – Current Fuel Price Forecasts
10/10/2011 45
Summary
The need and policy objectives for GREC have not changed.
GREC continues to have long term value for our customers.
The initial projections as presented on May 7, 2009 are still achievable.
Staff continuously pursues cost mitigation strategies for all generation resources as market conditions change on a daily basis.
10/10/2011 46
Recommendation
The Regional Utilities Committee hear periodic updates on ongoing changes and strategies that positively or negatively impact GRU generation.
10/10/2011 47
More information on GREC available at:
10/10/2011 48
www.gru.com