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Regional authority for Railbelt grid? Preliminary results of AEA study point to cost savings, other benefits from central coordination of power generation, transmission By Alan Bailey Petroleum News
A study commissioned by the Alaska Energy Authority into the future operation of the Alaska Railbelt electricity grid is recommending the formation of a regional power authority.
“We’re proposing … a regional entity that would coordinate operation of the grid, economic dispatch, regional resource planning and project development,” Kevin Harper, a consultant with Black & Veatch, told a Railbelt Electrical Grid Authority Study technical conference in Anchorage July 10. “… Essentially, the regional entity would be responsible for all the generation and transmission aspects of delivering power to the Railbelt, and then the existing utilities would have the distribution side … of delivering the power to the customers.”
Black & Veatch is carrying out the AEA study with funding from an $800,000 state appropriation. The study is seeking ways to address some major problems that the Railbelt grid is facing. However, the study is only addressing organizational and management issues relating to the grid and is not assessing what types of energy should be used for electricity generation. The purpose of the July 10 conference was both to present the preliminary study results and to seek comments on the findings from the various stakeholders in the grid.
Following the conference, AEA published a draft version of the report on its Web site on July 23.
Six utilities Currently, six independent electric utilities and AEA own the electricity generation facilities and power transmission lines that constitute the Railbelt grid. Each utility operates as a monopoly electricity supplier within its own service area and is regulated by the Regulatory Commission of Alaska. The power transmission grid extends all the way from Seldovia in the south more than 500 miles to Delta Junction in the north; major regions in the network are connected by interties.
Harper characterized the current fragmented organization of the grid as the end result of thousands of decisions made in the past. But despite that fragmented organization, the individual utilities that operate the grid have worked together quite successfully, he said.
“There is a history of cooperative decisions,” Harper said. “… The lights largely speaking have been kept on.”
So, is there really a need for change?
With a peak load of about 900 megawatts, the Railbelt grid is small by U.S. standards. But the use of a single intertie line connecting each of the major regions of the grid presents some “very practical limitations” on the operation of electrical facilities, Harper said.
“It’s not double circuited and it’s not looped,” Harper said. “… It’s been described basically as a long straw as opposed to what you would typically see in the Lower 48 or other parts of the world in terms of a fully developed transmission system.”
Increasing the resilience of the current interties by adding second lines and upgrading the circuits might by itself cost anywhere from $700 million to $1 billion, he said.
Cost and uncertainty The average cost of electricity in the Railbelt is towards the higher end of the U.S. cost spectrum, Harper said. At the same time there is uncertainty regarding future gas supplies for power generation and gas is becoming more expensive. And although the power load has grown slowly and consistently over the years, there is uncertainty in the future demand profile because of possible major industrial projects such as the Pebble Mine near Iliamna.
But the existing generation facilities are aging and inefficient, with a significant proportion of those facilities scheduled for retirement in the next 15 years, Harper said. And the state enjoys a wide variety of future energy resource possibilities, including gas, coal, hydropower and wind energy.
Could a more regional organization address future risks and uncertainties more easily than six independent utilities?
“You’re at an historical crossroads,” Harper said. “… Decisions that are made in the next five years really will set the course for the next 50 years. It’s an opportunity to build a very solid foundation for the future.”
Management options In assessing how to manage the Railbelt grid in the future, Black & Veatch considered four possible options, in addition to the way in which the grid is currently organized:
• Form a regional entity to independently manage operation of the electrical transmission grid;
• Form a regional entity to manage the grid and manage power generation for optimum regional cost and reliability;
• Form a regional power authority that would manage the grid, manage power generation, do regional energy resource planning and manage joint project development for new infrastructure; and
• Form a regional power pool that is similar to the previous option, but leaves investment decisions regarding infrastructure upgrades to individual electric utilities.
The consultants dismissed as a possibility an entity that is termed a “regional transmission organization” in some parts of the United States. This type of entity facilitates regional competition as well as carrying out the functions of a regional power authority, but typically requires a much larger scale of operation than the Alaska Railbelt grid.
And, to test the sensitivity of the analysis results to different mixes of energy resources for power generation, the consultants evaluated each of the management options in four scenarios:
• A use of a large hydropower scheme and renewables, combined with demand management through energy conservation;
• The continued use of natural gas as the primary means of power generation;
• The use of coal as the primary means of power generation; and
• A mixture of different energy resources.
For each of the scenarios, the consultants assessed the likely infrastructure requirements and then ran an economic model to project costs using the current management situation and the four alternative management options. Cost savings The modeling showed overall cost savings relative to the current situation for all of the alternative options, other than just regional management of the grid, for all energy scenarios. Those savings would result from factors such as more effective regional planning and the economies of scale achievable from regionally scaled power generation. The savings would be achieved even after allowing for operational costs and the capital cost of new facilities.
But it turned out that the highest net savings relative to the status quo would come from the implementation of a regional power authority, the third of the options listed above. In fact the exceptional power cost savings gained from this management option would swamp the option’s relatively high administrative costs — depending on the energy scenario and method of financing, the net savings per year could be in the range $9.6 million to $38.9 million, the modeling showed.
And that would all translate to savings of 3.3 to 10.6 percent in the electricity bill for a typical residential consumer.
But, assuming that the Railbelt were to implement a regional power authority, what legal structure should the authority have and how should it be funded?
There are two well-proven legal structures, either of which could be used in Alaska: a private generation and transmission cooperative or a state power authority. But although the track record in the Lower 48 indicates that generation and transmission cooperatives tend to have stronger and more flexible organizations than state power authorities, the funding of infrastructure upgrades may prove to be a decisive factor in the choice of legal structure, Harper said. Depending on which energy scenario the Railbelt uses for future power generation, infrastructure costs are likely to fall in the range of $2.5 billion to $8 billion over the next 30 years, with the lower end of that range representing the continued use of natural gas as a power source, he said. Financial capability In fact the size of these cost projections poses the question of whether a regional authority would have the financial capability to raise sufficient money to do anything beyond continuing down the path of using natural gas fired power stations, Harper said. And could the region raise enough money to invest in the future, regardless of how the grid is organized or managed?
Even a mid-range cost of say $5 billion, the approximate cost of the mixed energy source scenario, represents three times the total book value of all of the current Railbelt utility electric plants, seven times the utility annual revenues, a little less than five times existing utility debt obligations and eight times utility cash reserves, Harper said.
“The reality is that in order to be able to get away from natural gas, you’re talking about significant dollars. … If you can’t finance it, it’s going to force you to keep going with natural gas,” Harper said.
And that consideration would raise the question of the need for state funding assistance, perhaps in the form of a grant or a low-interest loan.
“In terms of … impact on retail customers … financial assistance from the state has the greatest direct impact relative to other ways of reducing the cost of debt,” Harper said.
The value of state assistance points to the need for a legal structure that the state favors: That structure might well turn out to be a state power authority, Harper said. And state ownership of the authority would also open the way to reducing the funding costs through the use of tax-exempt bonds, an option not available for a generation and transmission cooperative, he said.
There are mechanisms for funding a generation and transmission cooperative at preferential rates, but these mechanisms (federal Rural Utilities Service funding, for example) involve significantly more uncertainty and risk than tax exempt bonding, Harper said.
Public comment period Following the July 23 publication of the draft report, AEA has initiated a 20-day public comment period on the report. AEA will then review comments received and plans to publish a final report on Sept. 6.
AEA project manager Jim Strandberg told Petroleum News July 22 that the authority is also starting work on an energy resource plan for the Railbelt and will complete that plan as soon as possible after completion of the Railbelt grid authority study. The energy resource plan will recommend an appropriate mix of energy sources for power generation in the Alaska Railbelt and, together with the grid authority recommendations, will form a package of recommendations that need to eventually synchronize with the overall energy plan that the state is developing.
“The whole thing has to knit together,” Strandberg said.
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