Legalectric

Oh, it was a LONG meeting. It makes an equally long post.

As in Minnesota, it’s not quite dead, but the plug has been pulled and we’re waiting for the inevitable.

The good news is that the PSC did adopt the staff recommendation for a wind/gas hybrid! Sure makes my day when state agency staff recommend something I’ve been pushing for so long, and then the PSC actually adopts it, like wow, a bit of progress. And staff is recommending a big broad look at energy policy. I don’t have the exact quote, but in his presentation to the Commissioners explaining how they got to proposing the hybrid, Bob Howatt, PSC staff, said something like, having done all the work of analyzing the proposals, and seeing the necessary path, “It’s time staff just said what needs to be done” (Bob, if that’s off, let me know). They did a superb job on it, of course I can pick at points, but the overview was, indeed, just what was needed, and this is a trend that needs nurturing — FORETHOUGHT IN POLICY!

Delaware PSC staff – wind/gas combo!

Here’s the report from the News Journal, something to do while I’m finishing my write up:

PSC endorses offshore wind farm with gas backup for Delmarva

And yes, DNREC’s Phil Cherry needs a little awakening, spouting things about IGCC that are patently false. So much for his credibility as a public servent charged with protecting the state’s natural resources! I’ll be sending him his own personal copy of the ALJs’ recommendation that the Mesaba PPA be denied. He’s got access, they know the Mesaba info is all public record, and there’s no excuse for misrepresenting IGCC — which then leads me to question… WHY???

PSC DECISION

The PSC motion passed was to accept the staff recommendation of the wind/natural gas hybrid EXCEPT that both Conectiv and NRG are to negotiate at same time. Bluewater Wind is also to be evaluated as single supplier, and that the PPA shall be reduced but it shall not be a fixed figure, to provide flexibility. The precise words will appear in a PSC order soon.

Here’s the PSC Staff Recommendations (p. 63-71, click below for link) in its entirety — it’s too well done to omit any of it:

VI. PSC STAFF RECOMMENDATIONS

In order to integrate the complex components of the RFP process and develop a workable solution, the Commission must consider the possibilities from the State of Delaware’s perspective. It is important to have dependable energy sources, a reliable energy system, reasonable prices and price stability. The General Assembly seeks to ensure that innovative baseload technologies, environmental benefit, existing fuel and transmission facilities, fuel diversity and use of existing brownfield sites are valued in any generation solicitation. Staff recommends a course of action that gives back to Delaware more control of its energy future through a supply portfolio that satisfies the EURSCA’s underlying intent. Accordingly, Staff

recommends that the State craft a comprehensive package of energy options that will allow utilities, their customers, and Delawareans to reap maximum benefits over time.
The critical nature of efficient management of future energy supply options drives Staff’s recommendation. Delmarva should have the first option to manage future SOS requirements, with the caveat that such management would require a commitment to minimizing and stabilizing overall SOS energy costs. Staff believes that by requiring Delmarva to conduct an IRP, the EURCSA intended Delmarva to be responsible for managing the resources. Certainly, it is in the best position to do so. Nevertheless, Staff further recommends that should Delmarva decline its responsibility, the State should issue an RFP for energy management services, at Delmarva’s cost, to manage the supply options sought in Delaware’s portfolio.

Staff believes that each of the parties that submitted bids in this RFP are serious about bringing new generation to Delaware, and thus recommends granting Bluewater and Conectiv the first opportunity to negotiate within the construct of the RFP. Thus, Staff recommends that Delmarva be directed to negotiate with Bluewater for an offshore wind farm in the 200-300 MW range and with Conectiv Energy for a 150-200 MW CCGT with synchronous condenser capabilities, to be located in southern Delaware at a site to be determined. Although neither Bluewater’s nor Conectiv’s current proposal is a complete solution to Delaware’s energy concerns, they each provide value to the long-term energy supply portfolio in Delaware. Wind power coupled with the availability of a gas fired turbine provides a secure energy source with minimal environmental impact. Although Staff’s recommendation is not the least expensive solution, it is a complementary energy arrangement that will help to mitigate global warming and reduce dependence on fossil fuels. Taken together, these projects, when appropriately managed, should have a positive impact on price stability.

Staff recognizes that this is not a perfect solution and that the bidders may be unwilling to support such a concept. Moreover, this option creates an additional layer of complexity, because additional natural gas capacity would be necessary to locate a natural gas turbine in southern Delaware. However, given the attendant benefits, Staff believes that this option should be pursued.

If Bluewater and/or Conectiv do not support Staff’s recommendation, Staff agrees with the IC that a renewable-only RFP is appropriate. Depending on the form of renewable resource bids submitted, Staff may recommend that Delmarva self-build a CCGT.

a. Essential Energy Portfolio
Staff’s recommendation to negotiate long-term contracts with Bluewater and Conectiv is not a final solution to Delaware’s energy needs. Staff recommends a portfolio approach, but the above recommendation relates solely to SOS customer needs. Staff recommends that the Commission endorse the portfolio planning approach for SOS supply and ensure that Sustainable Energy Utility concepts (to the extent they fit) are woven into Delmarva’s IRP.

b. The Hybrid Need/Benefit
Staff refers to the wind farm/gas turbine as the Delaware Hybrid. It is a combination that creates a synergistic benefit beyond that of either project standing alone. The wind farm may lack reliability on days when peak load is needed, whereas the gas turbine, while not the worst environmental offender by far, lacks the cleanliness and low fuel costs of a wind farm. The gas turbine provides peak supply, and the wind farm provides clean energy. In addition to environmental benefits, wind farms can provide voltage support, depending on the types of turbines incorporated in the plan. Because both projects would be located in southern Delaware, system reliability, particularly voltage and reactive support, for the entire Delmarva Peninsula will be enhanced. This coupling of innovative wind technology with veteran gas turbine technology can provide the equivalent of a smaller base load generation plant.

c. Risk Assessment
Several risks accompany Staff’s recommended proposal. First, offshore wind farms are more expensive and federal permitting practice is unclear. The exclusive utilization of a gas turbine for peaking and Voltage Amps Reactive (VAR) support is also expensive. Building smaller scale plants miss the economies of scale associated with larger generating units. Second, a long-term contractual arrangement could be overpriced. However, the financial risk of Staff’s recommendation is arguably outweighed by innovation, positive environmental impact, capitalization on existing fuel and transmission infrastructure, promotion of fuel diversity, and enhanced reliability. The addition of generation in southern Delaware can help meet Delaware’s needs and avoid the need for a $1.2 billion transmission line. In addition, the Delaware Hybrid will still be smaller in capacity than the projects offered by several of the larger sized bids and provide less energy than those projects, thereby reducing the overall risk associated with them. Staff concludes that the financial risks associated with its recommendation are manageable and limited and that its recommendation satisfies the intent of the EURCSA.

VII. PATH FORWARD

a. Delmarva Direction
Staff recommends that Delmarva be directed to negotiate in good faith with both Bluewater and Conectiv in an attempt to finalize a PPA for the energy needs defined above. Staff further recommends that Delmarva provide at least weekly updates on the progress of negotiations. Staff also recommends that Delmarva consider the options for regulated generation, to the extent that it may enrich the negotiated outcomes.

b. PPA Negotiations
Staff recommends independent oversight of PPA negotiations, either through an existing contracting organization or with a firm specializing in PPA negotiations.

c. Critical Concerns
There are several critical concerns that should be addressed in this proceeding. First, the potential for a non-bypassable surcharge, the need to curtail customer choice and the potential to re-regulate generation all must be considered. Because customer choice remains a distinct possibility, Delmarva is concerned with potential customer migration should SOS energy prices surpass energy market prices. In the event of migration, Staff recommends rolling generation capacity and ancillary service charges related to the PPAs into a non-bypassable surcharge payable by all Delmarva customers. Staff declines to address the issue of curtailing energy supply choice at this time. If management of the SOS energy portfolio is successful, customer choice will not likely be an issue. However, customer choice should remain an option for those customers desiring supply service from other parties. Accordingly, Staff recommends deferring any potential action intended to eliminate customer choice.

Finally, Staff addresses the suggestion to return to regulation of public utilities in Delaware. The EURCSA confers permissive authority to Delmarva to build regulated generation. Staff concludes that re-regulation should remain an option pending the conclusion of the RFP proceeding. The State Agencies may exercise the self-build regulated option if none of the bidders are willing to provide the requested generation.

VIII. CONCLUSIONS

The review and analysis mandated by the EURCSA was initiated in August 2006 and has continued over the last nine months. The process has provided a critical learning experience for the participants. More importantly, it has afforded all participants in this process a tremendous opportunity to be educated and have a better understanding through public input of the issues surrounding the building of new generation resources in Delaware.

Staff’s conclusions with respect to the process at this time are as follows:

1. Delaware needs additional generation in Delaware. Maintenance of the status quo presents enormous risks and uncertainties associated with the potential for older unit shutdowns within and outside the State, the possibility (indeed, probability, as evidenced in recent SOS auction results) of being held hostage to PJM’s new capacity “Reliability Pricing Model” and rapidly rising capacity prices, coupled with an unquenched growth in demand for energy on the Delmarva Peninsula. Although a meritorious argument exists that no single risk is imminent, the uncertain future indicates that it would be in Delaware’s best interest to take control now of its future generation needs before an emergency arises. With the potential for impending unit shutdowns in southern Delaware, and the consequences of aging generation resources, future reliability issues and more transmission congestion on the Peninsula are likely. It is critical that we plan now for the anticipated growth in population as people migrate to Delaware for better business opportunities and retirement advantages. It should be noted that only eight years ago, Delmarva was forced to implement rolling blackouts in southern Delaware in order to prevent a cascading event that would have potentially caused widespread outages on the Peninsula. The lack of sufficient transmission capacity and native generation located in southern Delaware contributed to the severity of the outage by limiting the amount of reactive power available to maintain the system. Without proper planning, future population growth will only exacerbate this problem as older generation units are retired.

2. In light of the need for both reliable electric service and clean renewable energy in today’s environment, negotiation with two companies that desire to build additional generation resources in Delaware sends the message that Delaware is serious about managing its own energy future. Staff recommends that Delmarva be directed to negotiate in good faith with both Conectiv and Bluewater for a hybrid energy supply that combines a 200-300 MW offshore wind farm with a 150-200 MW synchronous condenser CCGT in Sussex County to determine these bidders’ interest in meeting Delaware’s needs.

3. Staff also recommends the development of an energy portfolio policy that includes demand response, energy efficiency, distributed renewable energy, new Delaware generation, market contracts and spot market purchases with adequate transmission to support delivery of regional supplies as the optimal arrangement for Delaware.

4. Under this portfolio approach, Delaware generation needs to be the right size, in the right place, available at the right time, and developed with the right pricing structure to meet Delaware’s needs — not the needs of project developers. Moreover, Delaware’s energy portfolio should not be at the mercy of the regional energy market that, in the past, has not been kind to Delaware or its neighbors.

5. Delaware has the option to provide regulated solutions for securing SOS energy supply. Such an option could be pursued either through negotiations with bidding companies, through Delmarva’s delivery business or through other utility companies desiring to provide services in Delaware. If negotiations fail, regulated solutions should be considered to structure suitable deals through negotiations.

6. The economics of the current bid process provide the bidders with returns that are only marginally above a typical regulated project. This distinction is caused by the reasonable assurance of revenues to cover changing conditions in the longer term. Staff recommends that the risk of some level of future cost change may be assumed by the buyer in negotiations, but only to the extent it results in real initial bid price savings.

7. The current Delaware environment appears to disaggregate energy supply responsibility. While all the portfolio components can be complementary, the legislative mandate of 30% market purchases, set levels of demand resources managed by the Energy Office’s Sustainable Energy utility, new generation resources managed by the Commission, and the potential for market contracts negotiated by Delmarva might not be the most effective set of conditions. Staff recommends investigation of a unified authority (private, public or joint) to direct Delaware’s energy affairs (perhaps in cooperation with the State Agencies overseeing this RFP).

8. With respect to actively managing the energy portfolio, Staff has serious reservations about Delmarva’s willingness to voluntarily assume that role (and, to be fair, its attendant risks). Staff recommends that Delmarva be given the first option to serve as resource manager, with performance expectations set and understood. Staff further recommends that should Delmarva refuse the option, the State should contract with a separate party for such resource management, at Delmarva’s cost.

9. As reported in the IC’s Interim IRP Report, there is little or no impact on the relative bid evaluations with respect to Delmarva’s suggested IRP solutions. Staff’s additional review revealed no significant change in the relative rankings even with modified ranking weights. Staff recommends acceptance of the bid evaluation as completed by the IC.