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Renewable energy: a level playing field? Aspiring Alaska independent power producer requests changes in rules that can determine viability; utilities argue for status quo Alan Bailey Petroleum News
The relationships between Alaska Railbelt electric utilities and businesses wishing to independently supply power to the Railbelt grid, in particular from wind farms, have not been especially happy in recent years, with the would-be new producers arguing for the benefits of new renewable energy sources and the utilities tending to baulk at what they claim to be the high cost of independent power. Currently the utilities operate the bulk of the power generation facilities on the Railbelt electric transmission grid.
In the latest twist in the debate over the addition of independent power producers, or IPPs, to the Railbelt power supply arrangements, Alaska Environmental Power LLC, or AEP, has petitioned the Regulatory Commission of Alaska to change the rules for small-scale power generation on the grid. AEP wants to build a wind farm at Delta Junction in the Alaska Interior but has been unable to agree with Golden Valley Electric Association, the local electric utility, on terms under which this wind farm would supply power.
Golden Valley Electric has already implemented its own wind power facility at Eva Creek near the town of Healy.
The petition focuses on four issues: the way in which a utility determines the cost of the power that an IPP displaces when connected to the grid; the way in which the cost of integrating an independent power source into the grid is calculated; the circumstances under which a utility can curtail power production from a specific facility; and the bidding process used for the evaluation and approval of proposed renewable energy projects.
Avoided cost The cost of displaced power, referred to as the avoided cost, is a critical factor in determining the economic viability of a new power plant. If the cost of power from the new plant will be more than the avoided cost, construction of the plant does not make economic sense.
Under current Alaska regulations the utilities use their average cost of power as the avoided cost. The IPPs, however, want the regulations to require the utilities to determine the avoided cost by initially using their highest cost of power and incrementally adding successfully lower costs from other power sources, depending on how much power is displaced. This incremental approach to the avoided cost calculation results in a cost figure that would be higher than the average cost and hence more favorable to the economics of adding new independent power to the grid, the IPPs say.
The rationale behind using the incremental cost rather than the average cost calculation is an expectation that when an IPP brings new power generation on line a utility will switch out its most expensive generation first, to minimize its cost of power.
The average cost method used in Alaska places a new facility at an economic disadvantage and is inconsistent with the incremental cost method mandated by the federal Public Utilities Regulatory Policy Act, said the Alaska Independent Power Producers Association, or AIPPA, in a filing in the RCA case.
Reasonable approximation? But the simple 12-month average cost calculation used in Alaska does reasonably approximate the incremental cost required under federal law, Chugach Electric Association, a major Southcentral Alaska electric utility, told RCA. And, while current regulations assume average cost as the default means of calculating the avoided cost, the regulations allow the commission to approve other calculation methods, the Chugach Electric filing said. There are no doubt many potentially legal ways of calculating avoided costs when negotiating power sales and agreements, the utility said.
Chugach Electric currently purchases a small amount of independent power from a new wind farm on Fire Island, offshore Anchorage, owned and operated by Cook Inlet Region Inc.
In its RCA filing Anchorage electric utility Municipal Light & Power commented that the average cost calculation became the default standard in Alaska some years ago because of the difficulty of calculating the avoided cost by any other means, either on a moment-to-moment basis or on an average basis. The introduction of power from an independent source can have a variety of impacts on the existing power generation facilities, including the continued running of a machine, the shutting down of a machine, or not starting one machine while perhaps starting another. And power generation decisions are sometimes impacted by the cost consequences of using hydropower in one hour rather than another, ML&P said.
“Avoided cost is not easily determined or agreed upon by adverse parties, is not necessarily, or even usually, higher than average cost, and can often be close to zero,” ML&P said.
Integration costs The cost of integrating new power generation into an electricity grid can be particularly tricky for a continuously varying power source such as a wind farm, where the power output depends on the vagaries of how strongly the wind blows from one moment to the next. The grid operator needs to have available some other power source, the output of which can be continuously varied to fill in the troughs in the wind farm power. Operating this compensating power source and having it available costs money, thus adding cost to the wind power output. Grid integration costs became a major bone of contention in negotiations between Cook Inlet Region Inc. and Alaska utilities over the purchase of power from the Fire Island wind farm.
Given the current absence of any Alaska regulations governing the determination of integration costs, RCA should implement new regulations setting a presumption that integration costs are zero unless a utility can demonstrate otherwise, AIPPA said in its filing. This would have the effect of placing the onus on a utility to prove legitimate and verifiable integration costs, directly linked to the proposed new facility. And RCA should require consistent integration fees for similar IPP projects, with the fees being transparent, verifiable, just and reasonable, AIPPA said.
Chugach Electric commented on the likely difficulty of developing any regulations governing integration costs, given the unique circumstances surrounding most new power generation proposals and the large number of variables that can come into play in determining the cost of integration. And trying to impose a general regulation for use in a range of situations, each unique and complex, runs the risk of unintended consequences, not anticipated by the regulators, Chugach Electric said.
Curtailment Issues surrounding the curtailment of a power source relate to a question of whether a utility would use its curtailment practices to circumvent mandated small-scale renewable energy purchase obligations — the operator of a power grid will typically adjust its use of different power sources to accommodate the continuous variation of the power load on the grid, preferentially curtailing its use of its more expensive power sources if the load drops.
AIPPA said RCA does have current regulations governing curtailment and that, while there is no reason to modify these regulations, the commission might consider adding a provision expressly stating that the regulations are not intended to alter a utility’s obligation to purchase power from a facility.
ML&P said it understands that RCA follows curtailment rules set by the Federal Energy Regulatory Commission and that these regulations limit curtailment appropriately. Chugach Electric said it would wait to see any proposals relating to curtailment before commenting.
Competitive bidding AIPPA said competitive bidding for the provision of renewable energy for the grid was already stunted by other impediments to renewable energy, such as the methodology for calculating avoided costs. However, it may be worth exploring ways of mediating disputes or achieving dispute resolution during negotiations over proposals for independent power production, the organization suggested.
Chugach Electric commented it is unlikely that RCA has the authority to create an independent body to oversee bids from IPPs, as a substitute for the judgment of the boards and managements of regulated utilities. A fundamental issue such as this would likely need to be mandated by statute, the utility said. Open bidding, a process normally reserved for government contracts, increases the costs of transactions and would likely increase the cost of renewable energy, ML&P said. Moreover, since utilities have to purchase power from small renewable energy facilities at a price equal to the avoided cost, it is not clear how any sales from these facilities could be bid, ML&P commented.
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