Twisting in the Wind
Austin Energy is trying to find the right price for renewable energy – but that's much easier said than done
By Nora Ankrum, Fri., Aug. 21, 2009
On July 24, two weeks after news broke of Austin Energy's troubles selling its latest batch of GreenChoice wind power, the utility announced plans to significantly lower the price, a proposal it expects to submit to City Council this Thursday, Aug. 20. According to the U.S. Department of Energy, AE's highly esteemed GreenChoice program is ranked No. 1 in the nation for total kilowatt sales, and since the program has maintained that standing since 2002, it's no surprise that its sudden stumble attracted national attention. First, a few right-wing bloggers pounced on the story, gleefully declaring "Green Choice Fails in Austin" and "1% Want Green Energy." Then, environmental reporter Kate Galbraith wrote in The New York Times Green Inc. blog: "The nation's largest green-power program has seen enrollment fall far short of expectations as its wind power prices have soared."
As skeptics were busy taking the news as an opportunity to dismiss green power, Mike Sloan of local watchdog website PowerSmack.org – a nonprofit devoted to energy issues – was doing the exact opposite. Sloan (who works as an independent energy consultant) insisted not only that the utility is overcharging for Batch 6 – a suspicion apparently confirmed when AE announced plans to lower the rate – but that the GreenChoice program itself hides the costs not of green power but of brown. The argument that GreenChoice users pay more than they should is not new (and requires opening a pretty big can of green and brown worms), but it does point to a more recent dilemma facing the utility, one with broader consequences than one green-power program.
Over the past year or so, AE has been preparing its generation plan, which will determine how most of Austin gets its power through the year 2020 – and on Monday, Aug. 17, the utility made a preliminary recommendation to City Council (see "2020: More Solar, Higher Cost"). AE has made extensive efforts to involve the public in this process – with town hall gatherings, stakeholder meetings, and several interactive online resources, most notably a citizen survey and an interactive game called Change Your Generation (see www.austinsmartenergy.com). But not everyone is convinced that the public outreach effort has been entirely sincere.
"We were really pleased that we were invited early on in the renewables thing," says John Sutton of the Building Owners and Managers Association of Austin. "Then suddenly, the city announced that it was going to buy a $250 million solar array. ... Were they really seeking meaningful input from the public and major users on the plan if they were going ahead and starting to procure large components of the plan?"
AE's public response in March was that it needed to move forward on a deal that would not be on the table later – an awkwardly common explanation in the volatile energy business. The move was also necessary, says AE General Manager Roger Duncan, in order to meet Austin Climate Protection Plan mandates. "We had to have 30 megawatts of solar online by the end of 2010 to meet the council goal," he says.
The resulting pressure for more public input led to the creation of the council-appointed Austin Generation Resource Planning Task Force, a temporary advisory group with nine members – including Sloan and Sutton – representing consumer, commercial, industrial, and environmental interests. The group, which began meeting in July, will join two other citizen bodies – the Electric Utility Commission and the Resource Management Commission – in making independent recommendations on the generation plan this fall. While the two commissions will likely announce their recommendations in September, the task force might not be making its announcement until October, right before council is expected to make its final decision.
Sloan is skeptical that the task force's opinion will carry much weight at that late stage. In fact, both he and Sutton have questioned whether any further public input will be taken seriously, especially after AE's Aug. 17 recommendation to council. "Are they really paying any attention to the public input, or are they just going off and preparing their own plan?" asked Sutton earlier this month. "Are they just letting us blab away and patting us on the head and then doing what they want to?"
"The recommendations that will go to council are meant to be vetted through the process," AE spokesman Ed Clark explained at the time. "They'll be thoroughly discussed." Task force Chair Phillip Schmandt echoed Clark's sentiments when asked about the task force's progress. "Staff hasn't even made their recommendation yet," he said. "So in a certain sense, our work really can't begin."
While there may be some disagreement on their exact mission, there is one thing none of the interviewed members denies – the enormity of the task. "We're shoveling 5 pounds into a 1-pound sack," says Schmandt. The group spent about a month just in "information gathering mode," as task force member Matt Johnson of consumer advocacy nonprofit Public Citizen put it, and only in recent weeks has it really begun to debate the merits of the various generation scenarios presented to it. That debate, it seems, is stirring up the same kinds of issues dogging the GreenChoice program – but on a much larger scale.
Sloan believes that while AE may very well achieve the goals mandated by the ACPP, the utility has the capability – if not necessarily the will – to do a lot more. "Our motto at Austin Energy is that we provide clean, affordable, and reliable energy. ... The council has to decide what the balance is," counters Duncan. Still, he concedes, "We can make any recommendation that we want, even if it's to change the council goals." As Sloan sees it, the utility appears to be short-sightedly using its financial resources not to lead the way toward a greener future but to subsidize its fossil fuel use for as long as possible: "When we have money to spend, we keep stuffing it into the same stuff that we already own." That means the money's going to fossil fuel and nuclear plants, "which just continues the cycle of burning more fuel to sell more electricity," says Sloan. This focus on ownership is the "old way of thinking," he says, and it will not only compromise AE's commitment to climate protection goals, but eventually hurt its bottom line.
Sutton also questions AE's intentions, but from a very different perspective: that of a business group representing major consumers of energy (and it's been business consumers of energy, incidentally – as opposed to residential users – that represent 84% of GreenChoice subscribers). "It seems like Austin Energy is looking for what's good for Austin Energy: 'What could produce us the most revenue?,' as opposed to, 'What is the cheapest thing that we could provide to the customers?'" says Sutton. "Maybe we should step back and see: Is it really practical to go for renewables?"
Who's Carrying the Load?
Austin Energy's 9-year-old GreenChoice program has traditionally offered customers a slightly higher rate for electricity produced by wind power (and a small amount of methane recapture) than they'd otherwise pay for more conventional sources: coal, natural gas, and nuclear power. The upside for subscribers is that AE locks that rate in for several years, protecting them against the volatility of fuel prices, which have tended eventually to surpass the rates of most GreenChoice batches, all of which have sold out – until now. The current, sixth batch – priced at 8 and 9.5 cents per kilowatt-hour, respectively, for five- and 10-year contracts (at a time when regular customers are paying 3.65) – has sold only 1% since it went on sale in January. Under the proposed revision, Batch 6 will be available for a five-year contract only, and the new price – 5.7 cents/kWh – will be much closer to that of its predecessor, Batch 5, which sold out at 5.5 cents.
What's particularly grating about Batch 6 to renewable energy proponents is the implication that wind prices – as the Times put it – have "soared." Sloan insists that though Texas wind prices have increased, they've remained cost competitive, citing recent reports from the Public Utility Commission of Texas and the U.S. Department of Energy, as well as the comments of Mike McCluskey, AE's former chief operating officer. Sloan has posted on his website a video of McCluskey at a town hall meeting earlier this year, saying, "When you take into account all costs, not just the cost of the fuel or not just the cost of operating, but all the costs of ownership, the wind is the cheapest." According to AE, while wind is indeed one of the least expensive forms of generation, broad comparisons can be misleading – unlike power derived from fossil fuels, electricity from wind can't be conjured at the push of a button.
The green vs. brown debate goes beyond disputes about the price of wind, however, and reaches back further than Batch 6. Sloan, who chaired the 1997 task force that helped design GreenChoice, argues that the program itself is flawed. It's structured so that green customers – who still use some amount of conventional power, since wind isn't always blowing when people happen to be using electricity – not only pay for all of the costs associated with producing GreenChoice's power but many of the costs associated with producing brown power, too. At issue, he says, is the "energy charge." "Part of what you're paying for here is for the power plants," he says. There are "workers, there's pollution costs, there's nuclear waste disposal, all that stuff. Even railroad cars ... to move coal." Instead of helping make costs lower for fossil fuel users, says Sloan, GreenChoicers should be paying just a slice of those costs, proportionate to what they use.
AE's Clark disagrees: "To sit down and try to figure out some sort of an apportionment would be a very difficult task." Plus, he points out, while the list of what GreenChoice customers pay for may be long, "the list of what they don't pay for is actually pretty long, too." They don't pay for fuel, though they use some, for instance, nor do they pay anything else that's in the fuel cost, such as fees for use of the electric grid. The debate leads down a formidable rabbit hole (into which you're welcome to jump; see "What You're Paying For"), so it's no wonder Duncan has expressed doubts about the future of a distinct GreenChoice program. "It was our intent to use it to stimulate the market for renewables, which it did, and then eventually phase it out," he told the Statesman last month. "It was never intended to go on forever."
Some say they'd welcome such a change. "It's not like you're actually getting specific electricity generated from those windmills. ... It all gets put in the big pool of electrons that people are sucking down," says Solar Austin's Cary Ferchill, also a member of the Generation Resource Planning Task Force. "I thought GreenChoice was a really great program to get people started with that. But at some point we need to look at the entire system as a single system."
For Duncan, that's already a given. "Everybody uses the entire system and all of our resources at different times of day and at different points in the seasons," he says. "I don't want to start saying these people are using green power and these people are using brown power. ... The electric system can't work that way."
By contrast, Tom "Smitty" Smith, of Public Citizen, thinks that the perspective should be turned completely around. "The brown power is what ought to be separated, as opposed to renewables," he says. "We think – as the brown power is going to be driving many of our costs in the future and the instability due to high natural gas prices or high pollution costs – that those people who choose to continue to want to purchase from those types of sources ought to have the right to sign up for 100 percent brown power."
Mixing and Matching
If you can imagine the infinite minutiae into which this discussion devolves, and then imagine there to be equally nuanced arguments among those on Sutton's side of the fence, where clean energy is sometimes met with more skepticism – and then apply the whole debate not to one program but to the entire generation mix that is to power Austin's homes and businesses through 2020 – you begin to see the complexity of the task facing a publicly owned utility beholden to its stakeholders, charged with helping fund the city's budget, yet uniquely positioned to actually affect, for good or ill, global climate change.
To meet the city's Climate Protection Plan goals, AE has hired Pace Consulting to explore the implications of several portfolio mixes, including one AE developed last summer – dubbed the "straw man" – which Duncan calls "one way that you can mix the different fuels and technologies to meet the goals that the City Council set." (The straw man does not, he insists, represent an early proposal by the utility, as some have interpreted it – it is simply an "illustration" of a possible plan.) One of the task force's main activities is examining the Pace scenarios and possibly mixing and matching them to find a unique plan that addresses all of the members' concerns. (See the Pace reports at www.austinsmartenergy.com.)
One Pace scenario in particular – one that eliminates altogether AE's Fayette Power Project in La Grange (though not phasing it out completely until 2020) – has been making waves. Because coal burned at Fayette accounts for 71% of AE's total CO2 emissions, while only providing about a third of its current generation mix, it's an obvious target for achieving ACPP goals. But it's the price tag, says Johnson, that really jumps out. The Pace analysis shows only a 2% cost differential between the straw man and the scenario that closes Fayette. At the same time, it pushes the renewable portfolio standard up to 54%, well above council's 30% renewables mandate. "We can get so much more renewable energy, with marginal cost impact," says Johnson. "Why not go for it?"
Other task force members aren't so sanguine about that cost differential – for an industrial user, 2% can translate to a sizable increase – but Johnson believes he can find common ground with members whose primary responsibility is their bottom line. "That doesn't necessarily conflict with what I would like to see the task force recommend," he says. "The more energy efficiency and demand-side management we go after, the lower the bills would ultimately be." Duncan agrees. "Our first priority is to get all the energy efficiency out of our system that we can possibly achieve," he says. According to AE's "Resource Guide," energy efficiency is "the lowest-cost new generation for meeting load growth," and the utility spends "$350 per kilowatt of peak demand avoided, a level far below the construction and operating cost of any type of new generation."
But still, Duncan argues that the "2 percent cost difference" between the straw man scenario and the one that closes Fayette is a "misperception." Although Pace's numbers show "a net present value of difference of 2 percent," he says, "that does not mean, for instance, that in the year 2020 the difference on your electric bill from closing Fayette to not closing Fayette will be 2 percent. ... You could have a 50 percent difference in the bills in 2020."
Not even all environmentalists think getting rid of Fayette would be wise at this point. "We would end up ... buying [the power] back at three times what we used to buy it for," says longtime energy gadfly Paul Robbins. "It is like all the money we could be spending on energy conservation and renewable energy, we would be paying robber barons for our base load we just gave away."
The dispute reflects the complexity of the problem. "People out there are making statements like, 'Renewables are more expensive' or 'Fossil fuels are cheaper' or 'Nuclear's cheaper,'" says Duncan. "None of those statements really makes sense. Really, you have to say what exact fuel you are comparing to what exact fuel, and in what year. ... We can tell you what we think the cheapest fuel or technology is on August the 11th of 2009 – but check again next month."
The task force's job is growing even more complex as it looks deeper into the assumptions underlying Pace's calculations. For example, a bill impact analysis produced at a recent meeting by AE staff presents a very different picture, one in which the Fayette-less plan adds $32.78 to a residential bill while the straw man adds less than half that – $15.85. While task force members have been poring over the Pace analyses, AE has turned toward its own: "We're looking at the bill impact analysis because Austin customers don't pay 'net present values,'" says Duncan. "They pay bills." Meanwhile, Ferchill believes that the bill impact analysis is misleading; he wrote a memo to AE and the task force last week explaining how (download a PDF of the memo here).
With the public stakeholders looking at one set of data – the publicly available Pace reports – and AE now putting its faith in an entirely different one, it's easy to understand why some folks are saying that the public process is just treading water. But this number-crunching is exactly what the various task forces and committees are chewing over right now – with the working presumption that out of all this conflicting information, a consensus will arise.
It's frankly too soon to tell.
And Then Came the Nodes
As if the task ahead weren't difficult enough, there's yet another external factor to consider: the effect of the state's electric grid. The Electric Reliability Council of Texas manages most of the state's grid and charges AE for costs incurred by transmission congestion (the inability to move power efficiently from one of the state's four "zones" to another, for lack of sufficient transmission lines). In 2008, the unprecedented build-out of West Texas wind farms so tremendously outmatched transmission capacity that congestion costs for power leaving the West Zone skyrocketed, causing statewide congestion to hit $360 million, more than doubling the previous high. It was in December of that volatile year that AE was faced with setting a long-term fixed price for Batch 6 – which has now proven to be too high.
Unlike with previous batch pricing, AE decided to build in a high risk-premium, a third of the entire rate, to cover estimated congestion costs from West Texas. However, this year West Texas congestion costs have lessened, and more importantly, it turned out Batch 6 pricing needn't ever have covered the costs of West Texas congestion at all. As Duncan explained in his July 24 memo to council announcing the proposed rate change: "The estimated congestion costs in the original pricing assumed that the Hackberry wind plant [near Abilene], which supplies Batch 6, would be assigned to ERCOT's 'West Zone' for congestion purposes and would therefore have higher congestion costs. However, Hackberry was ultimately assigned to the 'North Zone,' thereby reducing its exposure to transmission congestion costs." Overall, says Duncan, "Once we had some real experience with the congestion costs, now we're coming back and adjusting."
But even accounting for congestion costs, Sloan believes AE's GreenChoice pricing doesn't add up. AE's risk premium, as Sloan sees it, overshoots the congestion estimates staff gave at public meetings earlier this year, a contention Duncan explains yet again as AE's attempt to be cautious. Stranger still, Sloan argues, was AE's decision to price the longer contract at a higher price than the shorter one, when future legislation is expected to make carbon-based resources, not wind, more expensive. "They just want to make sure they get enough money. ... So you're providing a disincentive for people that do the green stuff and a relative incentive for the people burning the coal. ... It's this perverse inverse risk premium." Moreover, the Public Utility Commission of Texas has approved a plan to build 18,456 megawatts' worth of transmission lines to the state's Competitive Renewable Energy Zones by 2013. "Everyone knows the state is building transmission lines out to West Texas," Sloan says. "So why in the world do you charge more for a 10-year product than a five-year?"
"It's 10 years of uncertainty versus five years of uncertainty," says Duncan. "And Mike [Sloan] doesn't have a crystal ball." Furthermore, he explains: "The CREZ build-out is scheduled to take care of the wind that's out there and a little bit more, but in five years there's gonna be more wind built. ... So, no, I'm not assuming that congestion goes away in five years. I just have no basis for that."
If that isn't enough, carbon legislation and transmission capacity aren't the only unknowns on the horizon. In December 2010, the Electric Reliability Council of Texas grid will switch to what is called a "nodal system" in which ERCOT will no longer manage transmission among four zones, but rather among 5,000 to 6,000 tiny zones, or "nodes" – basically "every point on the grid where there is a power plant or there's certain transmission equipment," according to Mark Dreyfus, AE's director of regulatory and government affairs. Ultimately, this change is supposed to make the entire system more efficient – but no one knows exactly how the transition will unfold. This was also on AE executives' minds last year when they were pricing Batch 6. "It's gonna be a whole new ball game," says Clark. "So we were faced with putting together a plan and a price, coming out of almost a record year of transmission congestion," and with nodal also taking effect, he says, it was a difficult task.
"What happens is this," Clark continues. "You send ERCOT a price on everything [each generating unit] you own. So we would send them a price for running our gas plants here in Austin, and we send them a price hypothetically for what we own of the nuke and what we own of the coal and that sort of thing, and every day ERCOT decides what generation will run to power every community in the state, and they are choosing the generation that can be produced at the least expense and with the least congestion. So they make that decision, and what you're hoping, as a generator then, is that you will sell more power to the market than you buy – and therefore you'll make money."
While even the experts don't yet agree on exactly how these changes will affect Austin Energy, one thing is clear: Though AE aims to use a certain percentage of renewables, ERCOT will ultimately decide what to dispatch, and its decisions will be "100 percent economic," as Duncan puts it. Dreyfus says that wind and solar may have a natural advantage in this scenario, because they have no fuel cost and relatively low operating costs; he says that coal is likely to do well also: "Fayette is a very low-cost generating unit, and low-cost units will be dispatched before high-cost units." Sloan agrees about wind and solar, but he thinks Fayette could put AE at a disadvantage. "If you look at what's going on in the energy market, things are getting ready to change." Cheap equipment and cheap fossil fuels are a thing of the past, he says, and those technologies can become liabilities with rising fuel and environmental costs. He hopes that AE will be wary of sinking money into maintaining old coal plants or building new gas plants that he believes will ultimately lose out to wind and even, eventually, to solar.
It's not an argument that will be resolved this week, but only – like the Batch 6 pricing adjustment – in actual practice. Ultimately, AE's ability to follow through with its climate goals will depend on how well prepared it is to compete in the nodal market – which at first will depend on decisions made now. Will the task force – and ultimately Austin Energy and the City Council – agree that the greenest way forward is also the most economical?
Generation Plan Timeline
Tuesday, Sept. 1: Town hall meeting (6pm, Town Lake Center, 721 Barton Springs Rd.).
Monday, Sept. 21: Electric Utility Commission meeting; EUC makes recommendation (6pm, Town Lake Center, assembly room).
Tuesday, Sept. 22: Resource Management Commission meeting; RMC makes recommendation (6:30pm, City Hall, 301 W. Second, Boards and Commissions, Rm. 1101).
Thursday, Oct. 15: City Council public hearing (City Hall).
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