PURPOSE

Staff seeks City Council approval granting authorization for the General Manager of BWP to enter into an amended Power Sales Agreement for the Chiquita Landfill Gas to Energy Project (referred to as Ameresco) and a Power Purchase Agreement with PPM Energy Inc. (referred to as PPM) for the energy associated with a 5 MW wind project located in Wyoming.  The PPM power purchase agreement has an associated corporate guarantee agreement with Scottish Power Finance (US), the parent of PPM that also needs to be executed by BWP.  Through the guarantee, Scottish Power has agreed to backup payment obligations of PPM�s in the event any should arise out of the power purchase agreements.

BURBANK�S RENEWABLE PORTFOLIO STANDARD (RPS)

The City Council adopted a Renewable Portfolio Standard (RPS) in October 2003 that established an RPS target of 20% by 2017.  Acquiring the renewable energy associated with this staff report would be an important step in meeting Burbank�s Renewable Portfolio Standard and in reducing production of greenhouse gasses.7

BWP�s renewable energy portfolio currently includes the following resources located within Burbank:

• Micro-hydro facility at Valley Pumping Plant

• Micro-turbines at Burbank�s landfill

• Photovoltaic demonstration project over BWP parking lot

THE AMERESCO AGREEMENT

Since 2003, Burbank Water and Power (BWP) has worked with Southern California Public Power Authority (SCPPA) to contract for renewable energy.  The first agreement was with Ameresco for energy from a landfill gas project located at the Chiquita Landfill on Hwy 126 West of Santa Clarita.  On February 10, 2004, Council approved BWP entering into a power purchase agreement for the energy associated with 1/6^th of the output of the project.  The contractual arrangements were for SCPPA to purchase the output of the project and then resell it to Anaheim, Burbank, Glendale, and Pasadena.  Since then, the project has been under development. 

In May 2006, the project developer advised SCPPA that it would not be able to complete the project within their original budget and would not be going forward with the project unless they could negotiate a new energy price for the output.  (The developer has an �out clause� in the agreement allowing termination of the agreement before the start of construction.)  The developer claims that costs have more than doubled.  They attribute major cost increases to a higher price for the landfill gas; having to change from internal combustion engines to combustion turbines to meet South Coast Air Quality Management District (SCAQMD) emissions requirements and associated gas cleanup system; higher than anticipated interconnection costs with the Southern California Edison Company (SCE); reconfiguring and relocating the plant for combustion turbine operation; a plant condensate disposal system and including the cost of sales tax.  As well, the SCAQMD has imposed new regulations requiring that a larger quantity of the site�s landfill gas be flared.  In addition to added cost, the flare also reduces the gas available for generation resulting in a smaller plant from 13 MW to 8 MW.  In fairness to Ameresco, BWP experienced a similar impact in developing its generation at the Burbank landfill.

One of the original reasons for choosing this project was that Ameresco is a significant developer of landfill generation technology.  They have built and operated several projects throughout the country and recently completed a multi-million dollar landfill gas project for the Bavarian Motor Work�s (BMW�s) manufacturing facility in South Carolina.  That facility is located at a nearby landfill and generates nearly 25% of the electrical needs for the BMW plant.  Ameresco has an excellent record in successfully developing landfill gas projects.  However, they admit they severely underestimated the cost of doing business in Southern California.

The original contract had a fixed energy price of $54/MWh for the 20 year term of the contract.  They are now requesting a fixed price of $65.25/MWh over the 20 year term of the agreement.  If they get final approval this Fall from SCAQMD to use combustion turbines, they anticipate the project will be completed by the end of 2007.  

For an amended agreement, the developer is proposing a price increase to $65.25/MWh, reducing the output to 8 MW, and that the other terms of the agreement remain the same.  SCPPA is proposing that several milestones such as getting SCAQMD permitting by a certain date or SCPPA could terminate the agreement, should be included.

This situation is regrettable but staff believes that the new price of $65.35/MWh is fair when compared to alternatives and recommends that the contract be amended to reflect the new price.  The major contract terms are as follows:

• Quantity: 1.33 MW including all associated capacity, energy and environmental attribute rights.  BWP�s share corresponds to 16.7% of the project�s output, or approximately 10,000 MWh/year at the expected annual capacity factor of 85%.  BWP would also have the right to the increased output of the plant if it is expanded.

• Renewable Energy Credits:  Burbank will receive all associated renewable energy credits and other environmental attributes including credit for reducing green house gas emissions by offsetting electric generation from fossil fuels.

• Delivery:  Delivered to SCE�s 66kV system.  The project is located within the California Independent System Operators� control area so scheduling needs to be made through a scheduling coordinator.  BWP would bear the associated cost.  (However, BWP would most likely �swap� energy with one the Magnolia participants to minimize costs and losses.)                                                                                                                              

• Term:  20 years starting in fall of 2007

• Price:  Fixed price of $65.25/MWh, with no escalation over the term of the Agreement.

JOINT DEVELOPMENT OF RENEWABLE ENERGY THROUGH SCPPA

To continue building its renewable energy portfolio, BWP in the fall of 2005 participated with SCPPA and nine other SCPPA member utilities in a joint Request for Proposals (�RFP�) for renewable energy projects from qualified renewable providers.  This RFP generated twelve (12) proposals which were distilled down to a short-list of nine potential projects.  The proposals were further evaluated based on the following criteria:

• Price of the energy over the term of the agreement

• Project development experience and expertise

• Stability and creditworthiness of the counterparty

• Expected output of the project based on historic wind patterns

• Transmission availability from the point of delivery to Burbank

• Project status and energy delivery start date

On April 25, 2006, Council authorized BWP to enter into a renewable energy project development agreement with other SCPPA members.  This provided BWP the means and opportunity to participate in large projects and take advantage of opportunities of both economy and scale.  The power purchase agreement with PPM Energy Inc. presented in this staff report is the first project to come out of that process.

NEW AGREEMENT WITH PPM ENERGY, INC. FOR WYOMING WIND

Staff is also requesting authorization for execution approval for a new power purchase agreement for renewable energy with PPM Energy, Inc. from wind resource located there.  It is the best alternative available from the proposals currently under consideration for the following reasons:

• The project is already built.

• The price of the energy associated with the proposed power purchase agreement is very attractive compared to the other alternatives.  Some of the other projects which might result in ownership have the potential of having a lower cost resource, however, additional transmission costs associated with them will likely make them more expensive.

• Burbank has existing transmission in place to bring the power to Burbank from the point of delivery -- that is not the case with all the projects under consideration. 

As indicated above, this is an existing project located in Uinta County in Southwest Wyoming known as the �Pleasant Valley Wind Energy Center.�  The project is owned by Florida Light and Power which has contracted with PPM for all the output of the project.  It became operational in December 2003 and consists of eighty (80) Vestas V80 1.8 MW wind turbines with a total installed capacity of 144 MW.  The facility is interconnected to PacifiCorp�s transmission system.

The following graph shows the anticipated hourly wind generation for the four seasons based on historical wind data.  This chart shows that a reasonable amount of energy can be expected during the afternoon to early-evening period when energy has the most value.

Negotiations of the associated power purchase agreement have been finalized and contain the following key terms:

• Quantity: 5 MW including all associated capacity, energy and environmental attribute rights.  BWP�s share corresponds to 3.47% of the project�s output, or approximately 14,235 MWh/year at the expected annual capacity factor of 32.5%.                                     

• Renewable Energy Credits:  Burbank will receive all associated renewable energy credits and other environmental attributes including credit for reducing green house gas emissions by offsetting electric generation from fossil fuels.                                                

• Delivery:  Delivered to the Mona Receiving Station in Utah where BWP has rights to receive and transmit the energy to Burbank.

• Term:  16 years starting July 1, 2006

• Price:  Fixed price of $63.00/MWh, with no escalation over the term of the Agreement.                                                                                                                        

• Corporate Guarantee: PPM Energy, Inc., is a wholly owned subsidiary of Scottish Power Finance (US), Inc., which is an investment grade counterparty rated by Standard and Poors. The recommended agreement with PPM for the wind energy will be guaranteed by Scottish Power up to an amount of $250,000 for any obligations owed to Burbank by PPM.

The energy from the Wyoming project will be delivered at the Mona Substation in Utah.  There is some concern about the long term availability of the transmission required to deliver the energy to Burbank.  BWP�s transmission rights at Mona are associated with the Northern Transmission System (NTS) and derived from the Excess Power Sales Agreement associated with the Intermountain Power Project (IPP).  The Excess Power Sales Agreement for IPP is related to power BWP receives from the municipal and co-operative utilities located in Utah.  Under the Agreement they have the right to recall the power for their own needs with six months notice.  Staff does not expect that this will occur.  However, it may be the case if IPP Unit 3 is developed.  In anticipation of such an event, the purchase power agreement with PPM for Wyoming wind provides provisions for negotiating alternate means of delivery should BWP lose the existing rights to use the NTS. 

HOW RENEWABLE ENERGY FITS INTO BWP�S RESOURCE PORTFOLIO

Because BWP is a fully resourced utility, it is challenging to add renewable energy to our portfolio and control costs.  A way that it could be done is to back-down local gas fired generation as low as practical and substitute renewable energy.  This can be most readily and economically achieved using wind power.  The idea is to bring wind power to BWP while simultaneously reducing natural gas generation in a like amount. 

With current natural gas prices running in excess of $8/Dth, wind energy is competitive with the cost of generation from natural gas.  (Ignoring variable O&M costs - $8/Dth natural gas run through a 7,500Btu/KWh heat rate plant produces energy that costs $60/MWh.) Therefore, by backing down natural gas generation to minimum load levels and substituting intermittent wind energy, it would be possible to increase the portion of renewable energy in our portfolio without significantly increasing costs.

BWP has a preference for locations where wind projects will produce most of their power during the day and during the summer months, when it is most valuable to us.  At those times, our less efficient natural gas generating units are more likely to be operating.  Curtailing their operation and substituting wind generation will save an even larger amount of fuel, further improving the relative economics of this renewable resource

The following table summarizes the contribution that existing renewables and the proposed commitments requested herein would have on BWP�s resource portfolio.  With the proposed power purchase agreements renewable energy as a percentage of sales is 2.3%.

Further, the following table shows the amounts that the individual resources contribute as a percent of sales.

FISCAL IMPACT

The following table presents the anticipated annual costs associated with each agreement and the effect on power supply costs of adding the two proposed power purchase agreements to BWP�s resource portfolio.  The analysis assumes that 100% of the energy produced by these two contracts could be used to displace energy normally produced by natural gas generation.  Based on that assumption and using the Public Benefits spending obligation that is being set aside annually to subsidize the out-of-market cost of renewable energy, there would be little, if any, impact (increase) on expected power supply costs.

Referring back to the wind profile presented earlier in this staff report, it is apparent that about 30% of the expected annual output of that project occurs during the first eight hours of the day.  As well, the output of the Ameresco project is expected to be constant throughout the day, including the early morning hours when customer loads in Burbank are at a minimum and natural gas generation is likely to be already operating at its minimum load.  As a result, it may not be possible to lower natural gas generation output further in order to absorb the wind energy.  Since BWP cannot control when the renewable energy is produced and will have to take the renewable energy, it would be necessary to sell off the �surplus� energy during those times when it is not possible or practical to off-load natural gas generation or other generation.  As indicated above, this would normally be expected to occur during the early morning hours.  However, this is also the period of the day when other utilities have also backed down their generation with the result being that energy prices are typically the lowest during this time. 

The following table shows the expected effect on power supply costs should 30% of the energy associated with the Ameresco and Wyoming Wind PPA be resold at 50% of their contract prices.  Based on the aforementioned assumptions, it would take about $400,000 per year, or approximately 55% of the annual Public Benefits spending obligation being set aside to subsidize renewable power, to offset the added costs of the proposed agreements and not increase power supply costs.  However, continued procurement of renewables beyond approximately the 5% level will begin to increase electric rates for customers.

RECOMMENDATION

Staff recommends City Council approval granting authorization for the General Manager of BWP to enter into an amended Power Sales Agreement for the Chiquita Landfill Gas to Energy Project and a Power Purchase Agreement with PPM Energy Inc. for the energy associated with the 5 MW wind project. 

If the Council concurs, the appropriate action would be a motion to adopt the following two Resolutions:

(1)        �A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK APPROVING AND AUTHORIZING EXECUTION OF A FIRST AMENDMENT TO THE CHIQUITA LANDFILL GAS TO ENERGY PROJECT POWER SALES AGREEMENT BETWEEN THE SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY AND THE CITY OF BURBANK.�; and

(2)        �A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK APPROVING AND AUTHORIZING EXECUTION OF A LONG-TERM POWER PURCHASE AGREEMENT (WINDPOWER) BETWEEN PPM ENERGY, INC., AND THE CITY OF BURBANK�

RD:FF:BJ:XB:bj

COUNCIL STAFF RPT., Ameresco & PPM Power Purch. Agrmts., 06-16-06

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