One water agency will save millions with green renewable power.
Free as the wind, goes the expression. But, if the wind happens to drive a generating turbine, the electricity output—after the turbine investment is repaid—“makes the power free, almost,” observes Rob Taylor. He’s energy manager for the Washington Suburban Sanitation Commission (WSSC) in Maryland’s Prince Georges and Montgomery Counties, and, spends many millions of dollars a year on power for the numerous pumping stations and treatment plants.
Last year, Taylor took part in helping to structure a $150 million investment in wind-generated electrical power, to provide about a third of WSSC’s electrical load for the next 10 years. A bit paradoxically, not only will the wind be “free, almost” (in the above sense), but, projections through the far-off timeframe of 2018 indicate the deal could save the agency as much as $20 million on energy purchases.
The unusual contract, which Taylor and a host of others had a hand in arranging, will propel WSSC near the top of the list of public-sector wind power user in the nation, just beneath the federal government.
Truly, the wind is free; it’s also clean and comes in a virtually endless
supply. So copious is our wind, in fact, that studies have shown wind-power alone could provide 100% of the nation’s electricity need; blustery North Dakota by itself could furnish 40%—although, at present, wind accounts for less than 1%.
All of which explains why—in a world seeking to diminish greenhouse gases—wind power is also a hot commodity. It’s now well-established as the preferred clean power resource worldwide. In the US, wind farms now rank second only to natural gas power plants, in terms of new generator production.
Demand for wholesale wind power is also soaring, as scores of utilities and some state agencies, like WSSC, face renewable-energy portfolio (REP) standards; these mandate a gradual shift away from fossil fuels. WSSC itself, for instance (operating a system of more than 5,300 miles of fresh water piping, and 5,200–plus miles of sewer lines), has its own REP mandate of 7.5% renewable by 2018, notes WSSC General Manager Andy Brunhart.
Typically, energy buyers can satisfy REP requirements simply by paying a premium for certain qualifying generation, defined by Renewable Energy Certificates (RECs). Currently, this comes to several cents per kilowatt-hour.
Now, though, WSSC is breaking new ground, literally and figuratively, and will be virtually buying the green, clean wind power—not via RECs, but directly.
Steady Electric Rates
First, some background. In 1999—shortly after energy deregulation arrived in Maryland—Taylor took WSSC into a consortium of 16 local government agencies to pool their kW–buying and to obtain power at low, fixed rates. For several years of this, he says, the consortium could save about 3%.
“That was okay,” he notes, and so too was the assured pricing; everyone still recalls what happened to the state of California, around that time. However, “what was missing” from this flat-rate deal, he says, “was any incentive to do load shaving that would save some real money,” by rewarding the agency for curtailing or shifting usage at peak-rate times.
So, WSSC broke away from the consortium and signed on with one of the newly emerging, post-deregulation retailers specializing in shopping in the new markets—a firm called Constellation Energy (www.constellation.com) buys power wholesale, and sells electricity to about 10,000 commercial and industrial accounts in the 17 deregulated states.
Now, as Taylor recalls, things got interesting. Through an existing energy performance contract, Constellation offered WSSC an opportunity to supply the bulk of its 22-MWh annual load via real-time energy purchases. With WSSC and Constellation formulating the strategy, the contract guaranteed better savings than a simple bid.
As Taylor (a certified energy manager) recalls, “on the wholesale level, we could buy on the PJM [the grid for Pennsylvania, New Jersey, and Maryland] … and supplement this with block purchases to stabilize price fluctuations on a long-term basis. This would give us the creativity to load-shift, by scheduling certain plant operations in the off-peak hours. It gave us the advantage of market timing, where we could buy blocks for [variable periods] —a year, to six months, or three months,” he says. “We could take advantage of opportunities in the market to buy blocks.
Lots of Buying-Power
Purchasing energy on the hourly market is usually the cheapest way to go, over the long run, says Taylor; but it also carries the most risk. Overall, though, WSSC’s price risk is being reduced by buying blocks of power 24 hours a day, seven days a week—for months or years in advance. Having such flexibility hedges much of the risk of gyrations in the hourly real-time market. Taylor notes that, “By varying the lengths and sizes of the blocks, the risk is further mitigated by not putting all your eggs in one basket.” The presence of many buyers and sellers in wholesale markets makes the spot—or block-pricing very competitive, he adds.
Managing such fine points is the role of Constellation, which happens to be one of the larger players in the North American energy market. But, notes Taylor, dozens of other such firms, spun-off from local “gas and electric” utilities, can be called upon for quotes too. This enables him to check periodically whether his vendor is still giving him comparatively good deals. During this period, Taylor focused his skills in sizing his block purchases on WSSC’s average loads over a given time period. The agency’s major power-gobblers are its seven water and wastewater plants, but the loads are relatively stable, because the plants operate 24 and seven.
Constellation also assists in optimizing calculations by downloading and charting WSSC’s hourly energy consumption data. The firm’s mid-Atlantic regional vice president, Martha Duggan, explains: “We look at every hour of energy consumption and the patterns when the consumption happens,” particularly to identify opportunities to load-shift. This helps a client figure-out “how to flatten those demand peaks,” as well as helping Taylor better appreciate various risk tradeoffs. Taylor receives graphs of the load profiles several times yearly, to help refine the accuracy of budgeting and estimating. In a three-year period of buying power this way, WSSC obtained a total of 18 major blocks, of sizes ranging from 2 MW to 17 MW, and of lengths varying from a few months to two years. In its current fiscal year, WSSC will spend $21 million on electricity.
Going With the Wind
Shifting to green amidst this “brown” energy industry became Taylor’s next goal, starting in 2005. At that time, he asked Duggan to put out some feelers for what a major purchase and deal might require. Also, checking around on his own, somewhat, he came across a helpful white-paper on the subject, from the New York State Energy Research and Development Authority (NYSERDA), titled, “Using Wind Power to Hedge Electricity Prices for Commercial and Industrial Customers in New York,” issued May 14, 2003. NYSERDA’s report helpfully itemized the organizational characteristics of an energy customer, who might make a good candidate for a direct wind-energy purchase—again, keeping in mind that wind power for more, typically is bought using RECS, via wholesalers. But, NYSERDA—and the wind energy industry generally—are keen on exploring whether a niche exists for large end-users to buy directly.
And, indeed, WSSC turned out to fit the profile very well, as Taylor recounts. There are about a half dozen key factors. These include:
- Long-term financial stability—“which we have, as most water utilities do,” Taylor notes;
- A level load profile—again, common to most water utilities;
- Experience with conventional block purchasing—“which we had, at the time, a couple of years’ worth going into the wind purchase;”
- Ability to shift loads—As noted earlier, Taylor was having WSSC do this already. In particular, the agency has the capacity for about 160 million gallons of elevated storage (water towers). “We can fill tanks at night when prices are lower, and we can drain those tanks and run less-expensive pumps during the afternoon, when the PJM prices are higher,” he adds.
- Wholesale pass-through—which, as stated above, WSSC was already doing with its block purchases on the conventional power market;
- Ability to execute a long-term contract of 10 to 20 years. This, too, was doable, but: “A lot of agencies really have a problem with long-term contracts,” he says. “That might have been our biggest hurdle here.”
Nevertheless, WSSC’s existing energy performance contract and commodity purchase agreements with Constellation, allowed WSSC to execute two five-year extensions; ultimately, it was this that enabled the agency to make the major 10-year commitment needed.
So, in spring 2006, Constellation made requests-for-proposals (RFPs) from major wind developers in the Appalachian air shed, asking for power to meet WSSC’s criteria and timetables. This resulted in choosing a low bidder, who was also most advanced in its development.
Under the new wind-power scenario, Constellation will buy 100% of the output (maximum output capacity: 30 MW) from a farm to be built in Somerset County, PA, by Edison Mission Group (subsidiary of Edison International). Constellation will then sell 85% of this power output to WSSC, in two five-year blocks, at PJM’s hourly wholesale price structure of four cents per kWh, or $64 per megawatt-hour.
These good rates reflect, as WSSC’s general manager Andy Brunhart notes, the clout of a big ($800 million annual budget) AAA bond-rated buyer. Altogether, WSSC expects to obtain about 70,000 MWh of power annually—equivalent to the load of 6,000 homes—supplying about one-third of WSSC’s total demand as it serves its 1.7 million ratepayers.
How Buying Wind Saves Money
To return to the “almost free” point noted at the outset: once the farm is built, says Taylor, “the price is more or less locked-in for 10 years,” beginning in January 2008.
Brunhart adds: “Part of the beauty in this is that we’re required to pay zero dollars up front. We’re not paying for the development and construction of the wind farm at all. We’re just buying the power for 10 years at a guaranteed price … in line with the cheapest [natural gas-fired plant output].”
The downside here would be a fall in either green or brown energy prices, rather than a rise. But, here, current market forces suggest that if anything, wind will grow costlier. First, construction and wind turbine manufacturing costs are rising. Second, regional utilities are scrambling for whatever green power is available, to meet REP mandates.
Historically, for the past few years, both green and brown power rates have been climbing about 10%. Thus, when WSSC’s wind power farm comes on-stream, sometime in 2008, its 6.4 cents-per-kilowatt-hour price will almost certainly be cheaper than conventional wholesale power rates, which were about 6.5 cents per kilowatt-hour, in autumn 2007, Taylor reports.
Even in the unlikely event of a price drop, this would be quite acceptable after all, because the wind-power portion comprises only one-third of the agency’s total need anyway. Thus, the remaining two-thirds of the agency’s purchases would be enjoying a sudden “windfall” of lower prices.
If It’s So Great, Why a Third?
This fraction actually reflects one of the complicating equations of wind power—namely, its sometimes wild variability. Although the pricing is rock-steady, the big question mark is always output. Sometimes it blows at gale force; at other times it’s in the doldrums. WSSC’s agreement to buy 85% of the power, effectively translates into committing to purchase at least one-third of the farm’s energy all the time, day or night. In this case, this means about 8 MW of the allotted 24 MW maximum, on a continuously averaged basis.
That 8 MW is a modest and consistently usable output. However, if Somerset County should enjoy fair breezes and the farm manages to rev-up to its rated capacity, then WSSC will be obligated to buy 85% of this surplus as well. At the upper production limit, the total would come to, again, 24 MW. This would still be usable much of the time, but edges close to the margin, depending on the hour and season. If WSSC had committed to buying more wind, there might be more times when this would be yielding an excess (as on windy nights). WSSC would then have to sell the surplus.
Impact on Brown-Energy Blocks
What if the wind output is low? Taylor replies that, during such times (likely to occur especially during the summer), he has already charted-out graphs defining conventional purchases to be made. “Instead of buying a single block of power, you’re now buying two—a ‘green’ block and a ‘brown’ one,” he says. The wind-produced energy arrives at a consistent price, but is quite variable in terms of megawattage. To compensate, WSSC “will probably buy two sizes” of conventional brown power, he adds, “to keep it simple.” One block will be sized to provide whatever the wind power doesn’t. Then, if this purchase turns out to be a bit low, the difference every month will be adjusted by buying more on the spot market. And again, all the while, WSSC will do load-shifting. If this demand-response strategy leaves WSSC receiving too much power, the surplus can be readily sold back to the PMJ grid at the prevailing price.
These modest transactions will occur automatically via Constellation’s marketing service. All in all, coordinated green-and-brown buying should save WSSC an estimated $14 million over the contract term. Next, additional millions in cost-avoidance will be realized, calculated from the wind’s value in the RECs that WSSC will accrue.
Currently, in Maryland these are valued at about two cents per kilowatt-hour. Were it not for WSSC’s wind purchase, the agency would easily spend $7 million or more for RECs needed to meet assorted clean–generation targets, Taylor says. REC values will also likely rise, as utilities press to meet REP standards.
Contractually, WSSC will own all of the RECs; thus, the agency legally could sell the RECs, but never would do so, Taylor says, “because we want to maintain the environmental benefit” under the Maryland Department of Environment’s nitrogen oxide–reduction plan to achieve
air-quality compliance.
On that score, the farm’s proposed location, though not in-state, puts it in the regional air shed; it thus will help meet local air–quality goals under the Clean Air Act. (Important note: suburban Washington, DC is in a currently noncomplying Air Quality Management District.) It also helps satisfy WSSC’s participation in the Maryland Department of the Environment mitrogen oxide set-aside program.
All told, buying 70,000 MWh yearly in wind energy, equates to a reduction of an estimated 83,700,000 pounds per year in carbon dioxide pollutants, 583,000 pounds per year in sulfur dioxide, and 188,000 pounds annually in nitrogen oxides.
Closing the Sale
With all the calculations worked out, Brunhart, Taylor, and WSSC staff sought the six-member commission’s approval, and that of county executives. Here, a critically important five-step process ensued, which Brunhart recounts.
Step one was to provide all decision-makers “a basic education about wind power and engineering,” followed by discussion of energy market economics, to substantiate the rosy $20 million cost-avoidance scenario. Next, came some underscoring of the project’s environmental benefit, reaffirming this as one of the WSSC’s core values. Then, Brunhart explained the specific REP standards that the wind purchase would satisfy. Finally came frank discussion of the risks and tradeoffs in the 10-year contract. In such a lengthy time frame much can happen, including technology breakthroughs that might conceivably provide green power at even less costs. Ultimately, the contract won a squeaky 3–2 commission vote, with one abstention.
Is Wind Power for You?
WSSC’s example should help you begin to answer this. First, a would-be direct-buyer should almost certainly be located within one of the 18 deregulated jurisdictions—Connecticut, New Jersey, Delaware, Illinois, Maine, Oregon, Texas, Arizona, Washington DC, Maryland, New York, Pennsylvania, Massachusetts, Rhode Island, Michigan, Virginia, New Hampshire, and Ohio.
Next, reviewing the six characteristics that NYSERDA identified for good candidates should also provide a gauge. (The full report, “Using Wind Power to Hedge Volatile Electric Priced for Commercial and Industrial Customers in New York,” is available online at www.powernaturally.org.)
A third key, though, is that even agencies which don’t meet NYSERDA’s ripest-prospect profile—but operate in deregulated states—should perhaps be buying strategically on wholesale power markets, looking at opportunities for load-shifting, block-buying, and spot-market purchasing, as outlined by Taylor and Constellation.
Constellation’s Duggan estimates that several thousand of the firm’s commercial and industrial customers spend enough on power to justify doing an in-depth load analysis with an eye to better purchasing strategies.
As for WSSC’s deal, she suggests, “It is very repeatable” for other qualified buyers. However, she adds, “What it also takes is a forward-thinking, involved, strategic-minded agency … [with] a strong energy partner that has knowledge of these markets, and strong financial backing to be able to make those commitments.”
Constellation’s Larry McDonnell adds that, although WSSC stands out as a rather unique prototype case, other, smaller water and sewer agencies are doing similar green-power makeovers as well. One example: the Scarborough (ME) Sanitation District last year embarked on a load-response program in which they now permit the local grid-operators to decide to reduce the district’s power availability during high demand times. This reduction is coordinated with load-shifting and with powering-up an onsite electric generator (which doubles as a backup power supply) for peak-shaving.
McDonnell observes: “Large users are becoming much more sophisticated in managing their usage and making it work for their budget.” In some ways, he adds, buying power is not unlike managing a diversified investment portfolio in which a combination of short- and longer-term contracts, hedging strategies, conservation measures, and demand-response schedules are all in vogue. This is largely coming about, he adds, “because a number of municipalities are now facing a power crunch in which demand is increasing but new power generation is difficult to site and build, due to market, regulatory, and pricing constraints.” Hence, the new power-acquisition approaches are a
necessity.
Purchasing strategies will vary, too, depending on acceptable risk levels and the willingness to be flexible bargain hunters. Meanwhile, in suburban Washington, all parties involved in WSSC’s wind deal are anxiously awaiting the day the commission begins producing water thanks to wind.