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HomeMy WebLinkAbout10 Consideration to Approve Red Mesa Solar 2022 TRUCKEE - AGENDA ITEM #10 Public District MEETING DATE: September 7, 2022 TO: Board of Directors FROM: Joe Horvath P.E., Electric Utility Director/Assistant GM SUBJECT: Consideration to Adopt Resolution 2022-17 Authorizing the Amended and Restated Red Mesa Tapaha Solar Project Transaction Schedule and Auxiliary Agreements with UAMPS APPROVED BY Brian C. Wright, General Manager RECOMMENDATION: Adopt Resolution 2022-17 authorizing the Red Mesa Tapaha Solar Project Amended and Restated Transaction Schedule and Auxiliary Agreements with Utah Associated Municipal Power Systems. BACKGROUND: Utah Associated Municipal Power Systems (UAMPS) and the Navajo Tribal Utility Authority (NTUA) began discussions in late 2018 about the possibility of developing a solar generation project for use by UAMPS Members. NTUA has developed and brought online two utility scale solar projects within the last five years and is in the process of developing additional solar resources on and off the Navajo Nation. NTUA uses a significant amount of proceeds from these projects to support electrification of homes on the Navajo Nation, such as with its Light Up Navajo! Initiative. The proposed 66 MW solar photovoltaic generation project would be located on Navajo Tribal land in southeast Utah adjacent to an existing substation near the town of Aneth, Utah. The solar project was designated by NTUA as the Red Mesa Tapaha Solar Project (the Red Mesa Project or Project). Starting in early 2019, UAMPS staff began negotiating a Power Purchase Agreement (PPA) with NTUA for the Red Mesa Project. Negotiations were completed in early July, 2019 with pricing for energy at $23.15 MWh, with a 2% annual escalation factor for a term of 25 years. The UAMPS Board approved the PPA at the regular meeting held on July 17, 2019. The PPA would become effective upon UAMPS obtaining governing body approvals from all Members, including the District, associated with the Red Mesa Project. The PPA between NTUA and UAMPS provides for the delivery of solar energy for twenty- Page 1 of 5 five years once the Red Mesa Project comes online. The District obtained a 6 MW share of the Red Mesa Project, which equates to about 10% of estimated total annual District energy requirements. The cost for energy included the associated renewable energy credits (RECs). The energy is renewable and carbon- free, and was expected to increase the District's RPS achievements to approximately 70% or more starting in mid-2022. The Red Mesa Project's Commercial Operation Date (COD), the date the Project would produce power for participants, was scheduled for June 1, 2022. UAMPS used a Master Firm Supply Agreement with a specific Transaction Schedule for the Red Mesa Project as the proposed agreement with its Members, including the District. The District is a participant in the Master Firm Supply Agreement with UAMPS. Therefore, a resolution authorizing the Red Mesa Project's Transaction Schedule with UAMPS was required for District participation. In September 2019, the District's Board of Directors adopted Resolution 2019-20 authorizing the Red Mesa Tapaha Solar Project Transaction Schedule with UAMPS. ANALYSIS / BODY: In October, 2021 NTUA informed UAMPS that the Red Mesa Project was behind schedule, and the COD would need to be extended to at least September 1, 2022. NTUA staff cited delays due to the lingering effects of the COVID pandemic when the Navajo Nation and NTUA offices were shut down for a large portion of 2020. In addition, vendors contracted to NTUA for supplying solar panels, inverters, and other hardware for the Project were unable to honor delivery schedules and pricing for these critical materials due to global supply chain constraints affecting production of all electronic goods. Over the remainder of 2021 and into the first quarter of 2022, UAMPS staff asked for, and received, additional documentation from NTUA concerning details of schedule delay and price increase issues. In May, 2022 UAMPS received a Force Majeure claim from NTUA, requesting relief from their contractual obligations for the original COD and PPA energy pricing. In addition to schedule delays outside of their control, the claim identified that NTUA could no longer obtain bank financing for the Red Mesa Project at the original PPA energy pricing. NTUA proposed a new COD of March 15, 2023 and energy pricing at $31.5 MWh, with a 2% annual escalation factor for a term of 25 years. This proposed new pricing was equivalent to a fixed price of $40.36 MWh. UAMPS had the option of litigating the Force Majeure claim, but their staff believed that any litigation would be very difficult, expensive, and have a high probability of a less than favorable outcome. UAMPS also had the option of identifying an anticipatory breach of contract, which would allow UAMPS to break the contract and retain the development security funds. This action would be subject to litigation by NTUA, also with an uncertain overall outcome. An additional complication with either of these options is that NTUA became a full participating Member of UAMPS in April, 2021. Nationwide and globally, supply chain constraints have slowed deliveries for new solar projects. The industry has seen many projects delayed or cancelled as a result of this challenging environment. In addition, many large-scale solar power projects are on hold Page 2 of 5 nationwide as the industry awaits the outcome of a U.S. Department of Commerce investigation into potential trade violations that began in March, 2022 involving solar panels purchased from Asian suppliers. Federal investigators hope to determine whether Chinese manufacturers are skirting longstanding tariff rules on solar imports from China by funneling components through affiliates in four nearby countries including Malaysia, Thailand, Cambodia and Vietnam. Panels are assembled in these countries for export to the U.S. The Solar Energy Industries Association (SEIA), a Washington, D.C.-based trade group, notes that solar installation forecasts for 2022 and 2023 are down by 46% attributable to concerns about this federal investigation, though other pressures including pandemic supply chain issues also play a major role. Although President Biden issued an emergency declaration for a 24-month tariff exemption for solar panels sourced from these four Southeast Asian nations in June, 2022, it may take some time for solar panel delivery schedules to improve. In addition, UAMPS staff indicated that even if the contract with NTUA was dissolved and a search was begun for an alternative project, a new PPA with another developer would be at an increased price approaching $40 MWh. This is because the shortage of new renewable projects available to utility buyers has caused prices for PPAs to rise almost 30% since the beginning of 2021, according to an analysis performed by PPA marketplace analytics firm LevelTen Energy (LevelTen). LevelTen's market-averaged national PPA price index graph for North American Solar stands at $36.31 MWh in Q1 2022 with an increasing price trajectory. This graph is shown in Attachment 1. Existing and planned utility-scale solar projects are fully subscribed nationwide. UAMPS staff estimates that it may take up to 5 years to receive energy from another solar project due to full subscription for existing and planned projects, supply chain constraints, and an increasing level of transmission system restrictions to accommodate new generation across the western states region. For all of these reasons UAMPS staff recommended, and Red Mesa Project participants agreed, to renegotiate the PPA with NTUA. Negotiations were completed in July, 2022 with pricing for energy at $37 MWh, with no escalation factor, for a term of 25 years. The UAMPS Board approved the Amended and Restated PPA at the regular meeting held on July 20, 2022. The scheduled COD is March 15, 2023 with a not to exceed date of September 15, 2023. The District's participation at the 6 MW amount remains unchanged. UAMPS is again using a Master Firm Supply Agreement with a specific Transaction Schedule for the Red Mesa Project as the updated agreement with its Members, including the District. Similar to the documents and approvals made by the District in 2019, a Resolution authorizing the Red Mesa Project's Transaction Schedule with UAMPS is required for District participation. The proposed Resolution 2022-17, authorizing the Red Mesa Tapaha Solar Project Amended and Restated Transaction Schedule and Auxiliary Agreements with UAMPS, is included as Attachment 2. The Amended and Restated PPA will become effective upon UAMPS obtaining governing body approvals from all Members, including the District, associated with the Red Mesa Project. In anticipation of a number of common questions from the governing bodies of Member Agencies and the public, UAMPS staff prepared a "Talking Points" document listing several expected questions and corresponding answers. As an example, a central Page 3 of 5 question from many governing bodies may concern the possibility of future price increases. The answer to this question from the "Talking Points" document is shown below: What guarantee do we have that the Amended and Restated PPA's price per MWh will not increase again? The Contract Price in the Amended and Restated PPA includes language that states, 'In no event shall the Contract Price be increased for any reason, including Excused Delay or Force Majeure." For the full list of questions and answers, please refer to the "Talking Points" document which is also included in Attachment 1. Despite these unfortunate events resulting in a price increase and a significant delay to the Project's commercial operation date, staff believes the Red Mesa Project remains the best option for the District to acquire low-cost, utility-scale solar energy generation in the shortest possible time. Therefore staff recommends the Board adopt Resolution 2022-17 authorizing the Red Mesa Tapaha Solar Project Amended and Restated Transaction Schedule and Auxiliary Agreements with UAMPS. If adopted by the Board, Resolution 2022-17 will also have the effect of rescinding Resolution 2019-20 previously adopted by the Board for the Red Mesa Project. GOALS AND OBJECTIVES: This item is in support of the following goals and objectives: District Code1.05.020 Objectives: 1. Responsibly serve the public. 4. Provide reliable and high-quality electric supply and distribution system to meet current and future needs. 5. Manage the District in an environmentally sound manner 6. Manage the District in an effective, efficient, and fiscally responsible manner. Strategic Goals: 1 . Manage for Financial Stability and Resiliency 2. Environmental Stewardship: Create a sustainable resilient environment for all of our communities. FISCAL IMPACT: The renewable energy that will be produced from the Red Mesa Tapaha Solar Project represents a significant portion of purchase power resources that might otherwise be obtained from unspecified, i.e., greenhouse gas (GHG) emitting market purchases. The District has a 6 MW share of the Red Mesa Project, which equates to about 10 percent of the District's total annual energy requirements. Pricing for energy is $37 MWh fixed, for a term of 25 years. Although this new price represents an almost 25% increase from the previously agreed upon 2019 pricing of $23.15 MWh with a 2% escalation factor for 25 years (equivalent to a fixed price of$29.66 MWh), it will still be, even at $37 MWh, among the lowest cost of all District energy resources. Page 4 of 5 However, the delay in the commercial operation date for the Red Mesa Project from June 1, 2022 to March 15, 2023 requires the District to purchase energy at much higher prices from the market that would have otherwise been supplied by the lower-cost Red Mesa Project. Unfortunately, the need to purchase additional energy from the market comes at a very challenging time. Severe drought conditions across the western US have resulted in significantly lower energy production from the majority of hydroelectric sources. With reduced hydroelectric production and the nationwide reduction of fossil fuel base load sources, the demand for natural gas has increased, resulting in upward pressure on natural gas prices. The market price for energy rises or falls, primarily, as the cost of natural gas changes. This is due to natural gas increasingly becoming the marginal fuel for electricity generation, therefore natural gas power plants typically establish the market-clearing price of energy generation. Natural gas prices have remained relatively low in the years 2015 to 2021, ranging from$2.00 to$4.00 per metric million British thermal units (MMBtu). These prices have now been ranging from $6.00 to $10.00 per MMBtu, resulting in increased prices for market energy purchases. As a consequence of increased natural gas prices and heavy demand for energy during the hot summer months, market energy prices have been ranging between $100 MWh to $200 MWh for the months of July through September. Staff estimates that it may cost the District from $600,000 to $1,200,000 to purchase market energy that would have otherwise been supplied by the Red Mesa Project for the six month period of July through December, 2022. This estimate assumes average energy production from other UAMPS resources. If these resources including Horse Butte Wind, Veyo Heat Recovery, and Transjordan Landfill Gas produce more or less energy, this will also have a positive or negative impact on the need to purchase energy from the market. UAMPS has been operating, and will likely continue to operate the Nebo Natural Gas plant at close to full load throughout the summer and into September. This will help the District to rely less on the market for energy purchases. The 2022 Budget for purchased power is $13.5M. The current forecast for purchased power is $988,000 or 7.3% cost over-run to budget in 2022 due to the delay of the Red Mesa Project. There are multiple variables that affect final purchase power costs including customer demand, weather, and market energy prices in addition to the cost impact due to the delay in commercial operation date for the Red Mesa Project. As discussed in the mid-year financial update presented to the Board on August 3, 2022 staff recommends a December 2022 review of purchased power costs and potential use of Electric Rate Reserve funds (current balance $6.8M) to mitigate any over-run of purchased power costs. ATTACHMENTS: 1 — Red Mesa Tapaha Solar Resource Talking Points for UAMPS Participants' Governing Bodies, and LevelTen's PPA Price Index Graph 2 — Resolution 2022-17, Authorize the Red Mesa Tapaha Solar Project Amended and Restated Transaction Schedule Under the Power Supply Agreement with Utah Associated Municipal Power Systems; And Related Matters Page 5 of 5