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HomeMy WebLinkAbout15 WAPA Base Resource Contract 2025 AGENDA ITEM # 15 Page 1 of 6 MEETING DATE: February 3, 2021 TO: Board of Directors FROM: Joe Horvath P.E., Electric Utility Director/Assistant GM SUBJECT: Consideration of Resolution 2021-03, Authorizing the Contract for Electric Service Base Resource with Western Area Power Administration APPROVED BY______________________________ Brian C. Wright, Interim General Manager RECOMMENDATION: Adopt Resolution 2021-03 (Attachment 1) authorizing the Board President to execute Contract 20-SNR-02339 for Electric Service Base Resource with the United States Department of Energy, Western Area Power Administration, Sierra Nevada Region. BACKGROUND: In 1933 the California Legislature first authorized the Central Valley Project (CVP) as a State water project but was unable to finance the project at the time. The Rivers and Harbors Act of 1935 re-authorized the CVP as a Federal project and defined its purposes to improve navigation and flood control, to supply water for irrigation and domestic uses, and to generate power. Today the CVP is owned and operated by the Bureau of Reclamation (BOR), a Federal agency under the United States Department of Interior. The CVP covers approximately 400 miles in California, from Redding to Bakersfield, and draws from two large river basins: the Sacramento and the San Joaquin. It is composed of 20 dams and reservoirs and many miles of water storage and conveyance infrastructure. In an average year, the CVP delivers more than 7 million acre-feet of water to support irrigated agriculture, municipalities, and fish and wildlife needs, among other purposes. About 75% of CVP water is used for agricultural irrigation, including 7 of California’s top 10 agricultural counties. The CVP is operated jointly with the State Water Project (SWP), which provides much of its water to municipal users in Southern California. When Congress enacted the Central Valley Project Improvement Act (CVPIA) in 1992, the 1935 Act was amended to add fish and wildlife mitigation, and other environmental enhancements, as authorized CVP purposes. The CVP has 11 hydroelectric generation facilities with 2,100 megawatts (MW) of installed Page 2 of 6 capacity producing on average, over the historical record, 4,600,000 megawatt-hours (MWh) of generation annually. CVP generation is first used to operate the project, including water pumping and deliveries, which consumes roughly 23 percent of total CVP generation. The Western Area Power Administration (WAPA), a Power Marketing Administration under the United States Department of Energy, markets the remaining wholesale generation, termed Base Resource energy, to entities such as State and local governments, municipalities, public agencies and cooperatives. The District, along with all other Northern California Power Agency (NCPA) members, are Base Resource power customers. WAPA also collects funds from Base Resource power customers to meet allocated revenue requirements pursuant to CVPIA environmental mitigation measures on behalf of the BOR. Base Resource generation from the CVP is mostly classified as large hydroelectric (greater than 30 MW) and therefore does not meet the California definition of renewable. However, this energy is emissions-free and is considered a carbon-free resource under California regulations. Under SB 100, the District is required to procure 60% of our energy from renewable resources by 2030, and the remaining 40% from carbon-free resources by 2045. Base Resource generation, with its carbon-free attributes, can help the District to achieve the State’s clean energy requirements for energy procurement. Another important attribute of CVP generation is that it is shaped to load, unlike other hydroelectric generation. This means that the BOR maximizes energy production so that energy is predominately available during peak demand hours from late afternoon through early evening. This attribute enhances the value of this hydroelectric resource to the District. Contractually, the term Base Resource technically includes the CVP and also the Washoe Project. The Washoe Project is better known locally as the Stampede Dam and Power Plant (Stampede). The District, along with the City of Fallon, Nevada are under a separate contract with WAPA to receive 100% of Stampede energy generation. Therefore, as a practical matter, references to Base Resource energy amounts and percentages in this staff report reflect CVP generation only. The District Board approved the existing Stampede contract with WAPA on April 4, 2007 and it expires on December 31, 2024. WAPA has informed District staff that a proposed 2025 Stampede contract will be forthcoming sometime in 2022. Staff anticipates bringing the proposed 2025 Stampede contract to the Board for review and consideration in late 2022 or early 2023. It is important to note that the District has the right to receive Stampede generation, subject to a separate contract, by virtue of the fact that the District is an existing Base Resource customer. The District Board approved the existing 20-year Base Resource contract with WAPA for CVP generation by Resolution 2000-20 on October 18, 2000 with a start date of January 1, 2005. The District’s allocation is 0.2210 percent of total Base Resource generation. The District did not directly receive energy but assigned our Base Resource percentage to NCPA who was also performing power scheduling services for the District. The Base Resource energy was sold through the NCPA power pool. The proceeds were used to purchase energy from Utah Associated Municipal Power Systems (UAMPS) for delivery to the District. This arrangement lasted until July 1, 2014 when all power scheduling services were transferred by the District from NCPA to UAMPS. On June 4, 2014 the Board terminated the agreement that assigned the Base Resource to NCPA, and approved a new Page 3 of 6 agreement to transfer the Base Resource to Plumas Sierra Rural Electric Cooperative (Plumas). At the time, Base Resource costs were rapidly increasing and reached peaks in 2015 and 2016. Essentially, this new agreement with Plumas transferred our obligation to receive and pay for Base Resource energy as prices rapidly increased, but it also allowed the District to legally remain a Base Resource customer. The District’s existing Base Resource contract with WAPA expires on December 31, 2024. On September 16, 2020, WAPA offered the new 2025 CVP Base Resource contract (Attachments 2 and 3) to existing Base Resource customers. The new contract has a term of 30 years, beginning January 1, 2025, and ending December 31, 2054. As part of the new contract, all existing Base Resource customers retained 98 percent of their existing Base Resource percentage. The District also received an additional percentage of Base Resource allocation through the 2025 Resource Pool process, resulting in a total CVP Base Resource allocation amount of 0.30862 percent. This share for the new contract represents a 42 percent increase from the District’s existing contract share of 0.2210 percent. Contracts must be executed and returned to WAPA by March 16, 2021. Any time before July 1, 2024, the District can reduce the Base Resource percentage or terminate the contract for any reason. The new contract will become effective upon execution by WAPA and shall remain in effect through December 31, 2054, subject to prior termination. The single most important factor driving the amount of CVP hydropower generation is hydrology (annual weather, including snowfall and other precipitation) and is highly variable year-to-year. The timing and availability of Base Resource generation is also subject to CVP operational limitations and scheduling constraints, and climate change. In 2015, the driest year on record, Base Resource generation was at its lowest point, 1,732,000 MWh, since the start of the existing Base Resource contract in 2005. In 2017, one of the wettest years on record, Base Resource generation rebounded to a total of 4,157,000 MWh. Since 2005, the 15-year Base Resource annual average generation is about 3,000,000 MWh. It is estimated that the new Base Resource contract could supply approximately 6 percent of the District’s energy usage based average hydrological conditions. The following table summarizes the amount of energy the District could expect to receive based on the 15-year annual average CVP generation of 3,000,000 MWh with a comparison to the existing contract: Item Existing Contract (2005) New Contract (2025) Base Resource Percentage 0.2210 0.30862 Annual Energy, MWh 6,630 9,259 Annual Energy, as % of Total District Requirement 4.1 5.8 The CVP Base Resource is a take-or-pay resource contract. In essence, take-or-pay contracts guarantees the seller (WAPA) a minimum payment whether or not the buyer (Base Resource customers, including the District) takes delivery of the CVP generation. In general terms, take-or-pay contracts benefit sellers by reducing the risk of losing money on Page 4 of 6 any capital improvements made to produce generation. They also benefit buyers by obtaining energy at lower prices since they are taking on some of the seller’s risk. Base Resource customers repay Federal government CVP power-related construction costs (with interest), annual operation and maintenance costs, and other costs such as transmission. Construction repayment obligations include BOR’s power plants, a share of multipurpose dam and reservoir costs, WAPA’s transmission infrastructure and switch yard costs, and both agencies’ annual power operating costs, including labor, maintenance, and overhead. In addition to CVP power costs, Base Resource customers also pay a mitigation and restoration environmental fund surcharge (Restoration Fund) under the Central Valley Project Improvement Act of 1992 or CVPIA. CVP power customers’ share of annual CVPIA Restoration Fund contributions should match the share of CVP capital costs assigned to power customers, which is less than 30% of the total. Yet, over the past decade, BOR has assessed power customers nearly 50%, and in FYs 2014, 2015, and 2016, the power customers’ share averaged 75%. In FY 2020, power customers’ share exceeded 40%. NCPA, along with the City of Redding, City of Roseville, and the City of Santa Clara, filed a lawsuit in the U.S. Federal Court of Claims seeking recovery of excessive CVPIA Restoration Fund contributions. Following a two-week court trial, the judge dismissed the case, and NCPA filed an appeal. The U.S. Court of Appeals for the Federal Circuit reversed the lower court’s decision in November 2019, determined that proportionality is a limitation, and reinstated NCPA’s legal claim. The U.S. government’s subsequent request for rehearing was denied, and on April 16, 2020, the Appellate Court remanded the case to the U.S. Federal Court of Claims for damages. Following a settlement on the court’s damages determination for historical over collections, future CVPIA Restoration Fund assessments will be limited and subject to proportionality determinations, a very significant victory for all Base Resource customers including the District. BOR must now include the proportionality limitation as part of the ongoing CVPIA Restoration Fund costs assessed to power customers. NCPA anticipates refunds of prior years over collections, along with reduced ongoing Restoration Fund costs for Base Resource customers. These legal decisions and protections offer some stability for future Base Resource rates. Most purchase power contracts offer a fixed cost-per-unit ($ per MWh) price and quantity of generation. Predicting the future energy rate for the new Base Resource contract is challenging because both CVP costs and energy production are highly variable. An analysis of historical Base Resource costs performed by NCPA (Attachment 4) yielded a range of unit costs for this energy ranging from $11 MWh in 2006 to more than $60 MWh in 2015. However, since 2005, the unit cost has averaged about $30 MWh when compared to an average market price of about $40 MWh for that same time period. The CVP Base Resource generation is located entirely within California, with energy distributed to customers via WAPA transmission lines. Although some NCPA member utilities have direct connections to the WAPA transmission system, the District does not. For the District to receive Base Resource generation, energy would need to be wheeled over Pacific Gas & Electric (PG&E) transmission lines to NV Energy’s system for use by the District. PG&E transmission lines are subject to California Independent System Operator (CAISO) transmission wheeling costs, currently at $26.70 MWh. NV Energy Page 5 of 6 transmission costs are approximately $3.10 MWh. Combining these transmission wheeling costs results in a total transmission cost to the District of about $29.80 MWh. Therefore, the total energy cost to the District for Base Resource generation including transmission costs is about $59.80 MWh based on an average generation year. The District’s average annual purchase power portfolio cost, including transmission charges, has ranged from $65 MWh to $75 MWh over the last several years. Since CVP Base Resource energy is anticipated to cost less, on average, than the District’s purchase power portfolio cost, this resource can help keep electric rates stable in the future. While it is anticipated that the average annual cost of the Base Resource may increase over time due to inflation and other regulatory requirements, additional value will likely be realized as the demand for carbon-free resources increases, and efforts by BOR continue to improve the operating efficiency of these generating resources. With the November 2019 U.S. Appellate Court affirmation that proportionality is a limitation when determining CVP power customers’ contributions to the CVPIA costs, we expect Restoration Fund assessments for power customers to be substantially less, on average, each year going forward. Contract provisions provide surety over the long-term, and importantly, termination provisions that permit termination at least every five years, offer options to seek alternative resources if costs continue to increase and generation conditions deteriorate. Another option is that the District can assign our Base Resource percentage to another willing entity, removing our obligation to receive and pay for the energy, similar to what was performed in 2014 in the agreement with Plumas. Despite costs and resource uncertainties, several factors exist as previously described to help mitigate risk associated with variable costs and generation. Base Resource generation also includes favorable operating practices to shape generation to load, and valuable carbon-free attributes to help the District meet regulatory requirements for clean energy procurement. For all these reasons, Staff is recommending that the District enter into the 2025 Base Resource Contract 20-SNR-02339 with WAPA. This item is in support of the following objectives and goals identified by the District. 1.05.020 Objectives: 1. Responsibly serve the public. 5. Manage the District in an environmentally sound manner. 6. Manage the District in an effective, efficient and fiscally responsible manner. 1.05.030 Goals: 1.1. Conduct the District’s business in a legal, ethical, open, and transparent manner. 5.1 Seek power supply from a resource mix that satisfies its RPS program. 6.6. Develop appropriate financial procedures to assure responsible financial management. Page 6 of 6 FISCAL IMPACT: The historical analysis performed by NCPA (Attachment 4) yielded an average cost of about $30 MWh over a 15-year period for Base Resource energy, compared to an average market price of about $40 MWh for that same time period. Total transmission wheeling costs are about $29.80 MWh. Therefore, the total energy cost to the District for Base Resource generation including transmission costs is about $59.80 MWh based on an average generation year. The District’s average annual purchase power portfolio cost, including transmission charges, has ranged from $65 MWh to $75 MWh over the last several years. Since CVP Base Resource energy is anticipated to cost less, on average, than the District’s purchase power portfolio cost of energy, this carbon-free resource can help keep electric rates stable in the future. ATTACHMENTS: 1. Resolution 2021-03 Authorizing The Board President To Execute Contract 20-SNR- 02339 For Electric Service Base Resource With The United States Department Of Energy, Western Area Power Administration, Sierra Nevada Region 2. Contract 20-SNR-02339 - Contract for Electric Service Base Resource with the United States Department of Energy, Western Area Power Administration, Sierra Nevada Region. 3. General Power Contract Provisions - Western Area Power Administration 4. NCPA’s Analysis of Historical Base Resource Energy Costs