Unalaska exits Makushin geothermal, ends the power purchase agreement
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Alan Bailey for Petroleum News
During its monthly meeting on Feb. 27 the Unalaska City Council allowed the expiry of a power purchase agreement with Ounalashka Chena Power LLC, or OCCP, for the purchase of electricity from a planned geothermal power plant on the flank of the Makushin volcano on Unalaska Island in the Aleutians. The decision leaves OCCP, developer of the project, without a customer for electricity from the geothermal system. And, with the company already experiencing difficulty in securing sufficient investment and grant funding to complete the project, the Unalaska city decision has presumably brought the project to a halt.
PPA modification In early November OCCP requested a modification to the PPA that would increase the price of the electricity from the planned power plant from 16 cents per kilowatt hour to 22 cents per kilowatt hour. During a Nov. 28 Unalaska council meeting David Matthews, OCCP program manager for the Makushin project, commented that the electricity rate in the PPA was associated with the price of diesel fuel and that the cost of diesel fuel had increased significantly since the original 16-cent pricing had been set. At the same time, there had been a 22% increase in project costs. And at the 22-cent price, the cost of the geothermal energy would still be significantly lower than the cost of diesel fueled power, Matthews had said.
OCCP is seeking a price adjustment that would satisfy investors in the project while also lowering the cost of energy in Unalaska, Matthews commented.
As recently as January OCCP announced that it was approaching a final investment decision for the project. However, although the project has been planned and permitted, the company has been struggling to find the means to fully fund the project.
City manager recommendation In a memo to the city council, for discussion at the Feb. 27 council meeting, City Manager William Homka recommended allowing the PPA to expire. And during the meeting several council members, while supporting the concept of developing the geothermal energy, expressed concern about continued support for the project, given recurring delays in the project timeline and the requested increase in the price of the electricity.
The city has been supportive of developing Makushin geothermal power, given the city's aging electrical system and its dependence on diesel fueled generation. One council member commented that the city had placed on hold investigations into the use of wind power, given the prospect of obtaining geothermal power. Because of the planned geothermal power system, the city had also decided not to proceed with the acquisition of a flywheel system and battery energy storage, to stabilize renewable energy supplies, Homka wrote.
Three modifications to the PPA Homka wrote that there had been three modifications to the original PPA, authorized in August 2020. These modifications have ultimately involved moving the original commercial operation deadline from May 31, 2024, to May 31, 2027, and extending the deadline for project financing from June 10, 2021, to Dec. 10, 2023. Then in December 2023 OCCP notified the city that it needed to revise its project schedule and delay project completion to a date in 2028, Homka wrote.
"The city has been patient and supportively waiting for the project to advance," Homka wrote. "But, in waiting, the city has deferred on investing in electric generation and distribution system needs."
Homka wrote that the requested change in the electricity rate in the PPA from 16 cents to 22 cents would increase the cost commitment for a 30-year PPA from $480 million to $660 million. OCCP is also seeking to sell 20% of its power to another entity, to avoid a potential tax problem associated with selling to a single customer, Homka wrote. There is potential to sell power to a fish processing plant on Unalaska Island.
A need for testing Homka also commented that OCCP has been working with the Department of Energy to try to gain energy loans for the project but has run into issues relating to the need to conduct tests to confirm the amount of energy that the project would be capable of producing. Testing of the resource would require drilling into the geothermal source -- current knowledge of the resource comes from an exploration well drilled several decades ago. The testing might cost somewhere around $25 million to conduct and could not be started until there are suitable weather conditions in a few months time, Homka wrote. There were also issues relating to the required construction of a road to the project site, he wrote.
As a consequence of all of these issues, Homka said that, at this point, the city should allow the PPA to expire.
OCCP responds Makushin program manager David Matthews filed a memo with the city council, in response to Homka's memo. Matthews wrote that "there has been an incredible amount of progress and milestones accomplished, short of a commitment for a full project financing package." Until a few weeks ago OCCP had understood that full project financing was in sight. The company successfully completed phases 1 and 2 of the Department of Energy loan commitment process but has found that the process for due diligence with DOE has not been as straightforward as DOE had previously indicated.
And there are mitigating circumstances that would support not allowing the PPA with the city to lapse, Matthews wrote. Although OCCP does not yet have sufficient financing to complete the project, the company has secured financing that is allowing the project to proceed. The company has a contract with Ormat Technologies for the engineering and construction of the power plant and has selected contractors for the whole project.
"Timelines have changed only due to the difficulty securing long term financing," Matthews wrote.
OCCP has requested an increase to the electricity rate in the PPA, because the current rate is insufficient to cover all financing options. At the same time, the increased rate would still be lower than electricity rates resulting from diesel generation, Matthews wrote.
A six-month time window Matthews recommended that a modified PPA should be approved. The city could then give OCCP six months to secure a path to adequate financing. If that financing arrangement is not achieved, the project would come to an end. This six-month time window would not significantly delay the city's efforts to implement an alternative plan for improvements to the electrical system, he suggested.
During the Feb. 27 council meeting Matthews suggested that another option would be to maintain the electricity rate at 16 cents and to seek grant funding to fill the funding gap. Again, OCCP would be given six months to secure the funding. If on the other hand grant funding were to be found after the rate had been increased to 22 cents, it would be possible to reduce the rate back down. At this point OCCP has the necessary permits and has done the engineering for the project. And the project remains a great opportunity for the city, Matthews said.
At the end of the meeting a council member proposed a motion to extend the PPA for a further six months. However, since no one seconded the motion, the motion failed, thus allowing the PPA to expire.
--ALAN BAILEY
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