HomeMy WebLinkAbout2004-08-09 City Council (11)City of Palo Alto
C ty Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:AUGUST 9, 2004 CMR:370:04
LONG-TERM ELECTRIC ACQUISITION PLAN
IMPLEMENTATION UPDATE
TITLE:
This is an informational report and no Council action is required. A Council study
session to discuss aspects of this report is currently scheduled for October 12th.
BACKGROUND
City Council approved the implementation of the Long-Term Electric Acquisition Plan
(LEAP) in August 2003 (CMR: 353:03). The plan was approved in preparation for the
energy deficits the City expects as a result of the new Western Base Resource Contract
that begins in January 2005. The plan was based on Council-approved LEAP Objectives
and Guidelines (CMR: 425:01 and CMR: 398:02). This report also provides information
regarding the electric supply portfolio plans of a sample of municipal electric utilities in
California in accordance With Recommendation #22 of the July 2002 City Auditor report
on Utility Risk Management Procedures.
DISCUSSION
Since the approval of the LEAP implementation plan in August 2003, staff has provided
Council updates on several facets of the implementation plan. This report provides a
comprehensive update within the context of the 15 elements of the implementation plan.
Attachment A provides the complete inplementation plan, and the following table
provides a status summary.
CMR:370:04 Page 1 of 15
Summary of the Status of the 15 Elements of the Implementation Plan
1. Block Energy Purchases
2. EMA Approval & Delegation
of Authority
3. Development of Short-term
Hedging Strategies
4. Evaluation and Design of
Demand Response Program
Renewable Resource
Acquisition Targets
Implementation of Palo AIt~
Green Program
7.Implementation of Public
Benefits Program
8. Implementation of Cost
Effective Energy Efficiency
Programs
9.Investment on Natural Gas
Fired Generation
10. Distributed Generation
o Energy purchases made .
¯EMA with 4 suppliers completed, Council has
delegated authority
¯STEAM Guidelines Implemented
¯Program economic evaluation
¯Customer survey
¯Expand the installation of interval metering,
and evaluation of control equipment
In negotiations for wind and landfill gas energy
contracts for Renewable Resource
Implementation Plan Tier 1
Continue to implement a nationally recognized
program
Continue to implement existing program
A comprehensive study to begin shortly
Assessment of local generation options
underway
Valuation project nearly complete.
Integration study initiated - also supports LT
Plan #4
June 04
February 04
June 04
July 04
September 04
Fiscal 05/06
Fall 2004
On going
On going
Spring 2005
Phase I result
Spring 2005
Fall 04
°Fall 05
11. Investigation of New Risk ¯Tool to manage transmission cost under ¯2006
Management Tools evaluation
12. Pursue Low-Cost, High ¯On going portfolio optimization activity- no ¯Ongoing
Value Supply Opportunities new high value supply opportunity identified
13. Continue to Refine Analytical ¯Portfolio models, analytical tools updated;¯June 04,
Tools new deal capture database created,ongoing
14. Influence Legislative and ¯Influenced the creation of load aggregation ¯On going
Regulatory Initiatives zones in the new transmission markets being
formulated. Continue to be actively involved
with other Bay Area municipalities.
15. Maintenance of Adequate ¯Council approved new financial reserves ¯December 03
Rate Stabilization Reserves guidelines
CMR:370:04 Page 2 of 15
Short- and Medium Term Portfolio Implementation Plan Update
Outlined below is the status update of the four elements of the Short-and Medium Term
Portfolio Implementation Plan.
1. Execution of 3 block energy purchases within approved parameters (Block Purchases)
Council authorized the purchase of up to 586 GWh over a three year period 2005-
2007 for a total cost not to exceed $35.7 million, with the authorization expiring on
June 30, 2004. Total purchases made under this authority were 310 GWh as of June
30, 2004, at a total cost of $16 million and an average price of $51.76/MWh. Though
the market price for electricity at the time the transactions were executed was’
relatively high, the purchases were executed within parameters established by Council
and these purchases will help achieve the City’s objectives for rate stability. The
table below is a summary of the block purchases executed categorized by both energy
blocks and by calendar year.
Summary of Council Approved Block Energy Purchases versus Actual Purchases
Energy MWh
Max Weighted Average $/MWh
Price
Maximum Cost $M
Actu a I ~r~h~s es
Energy MWh
% of Council.Approved
Energy "
Weighted Average Price $/MWh
iCost $M
% of Council Approved
Cost
Block 1
381,675
$59
$22.34
229,005
60%
$50.71
$11.61
52%
Block 2
81,600
$67
$5.4O
56,960
70%
$54.68
$3.11
58%
Block 3
122 800
$65
$7.98
24,160
20%
$54.91
$1.33
17%
2005
290,825
$63
$18.22
192,185
66%
$50.28
$9.66
53%
2006
168,025
$61
$10.24
67,050
40%
$55.27
$3.71
36%
2007
127,225
$59
$7.51
50,890
40%
$52.74
$2,68
36%
TOTAL
586,075
$61
$35.72
310,125
53%
$51.76
$16.05
45%
Staff continues to make additional purchases under the authority delegated to the City
Manager when Council approved the Electric Master Agreements in February 2004.
Northern California Power Agency (NCPA) member cities such as the cities of
Roseville, Lodi, and Lompoc also undertake their purchases in a laddered fashion
over multiple years.
CMR:370:04 Page 3 of 15
Seek Council approval of Electric Master Agreements’ (EMAs) with suppliers and
delegation of authority to City Manager to transact under the agreements for terms of
up to 3 years.
In June 2003, staff issued a request for proposal for EMAs with electric commodity
suppliers. Through this process, staff negotiated EMAs with four suppliers: BP
Energy Company, Duke Energy Marketing America, Sempra Energy Trading and
Coral Power. Council approved and executed the EMAs through Ordinance 4812 in
February 2004 (CMR: 510:03). The ordinance provided for the delegation of authority
to staff to execute purchases under the EMAs for transactions of up to three years in
term and the aggregate transaction amount not to exceed $75 million per supplier.
The EMAs are effective through December 2011.
The EMAS were used to facilitate the block energy purchases outlined above.
Council will be provided an update of all transactions on a quarterly basis as part of
the Risk Management Quarterly report.
A detailed table comparing the authorization levels delegated to staff at different
Northern California municipal utilities in shown in Attachment D. This information
is also being provided in accordance with Recommendation #22 of the July 2002 City
Auditor report on Utility Risk Management Procedures ("CPAU should conduct a
peer study to provide the City Council with background inforrnation comparing
CPAU commodity supply strategies with other municipal utilities."). Additional
information related to the overall commodity supply strategy of various public power
utilities is also provided in Attachment D. A number of utilities such as Southern
California Edison, Pacific Gas & Electric, and the State of California tend to use the
same type of EMA as the City does (EEI Master Agreement). However, most public
power agencies such as Roseville, Redding, and Northern California Power Agency.
tend to use the WSPP Master Agreement format. The governing Boards of most
utilities have also delegated authority to staff to transact regularly with suppliers.
Sacramento Municipal Utility District (SMUD) staff has authority to transact up to 5
years out, while the City of Roseville has authority to transact up to 3 years out. The
City of Santa Clara has authority to transact up to 1 year out with no dollar limit.
3. Development of Short-Tern~ Hedging Strategies
Staff developed the Short-Term Electric Acquisition Management (STEAM) plan to
establish parameters to ladder electric purchases to meet retail load within parameters
established by the LEAP Objectives and Guidelines. A detailed information report
CMR:370:04 Page 4 of 15
was provided to the Council in June 2004 [CMR:331:04]. STEAM, together with
LEAP Guidelines, the Risk Management Policies, Guidelines and Procedures, and
supply contract limits all specify the operating tolerance bands for the electric supply
portfolio in the 0 to 36-month time horizon.
The STEAM strategy proposes that staff maintain the monthly energy supply position
within 80% to 120% of forecasted load in the near 12 months; 70% to 110% of
forecasted load for 13 to 24 months out, and 60% to 100% of forecasted load for 25 to
36 months out, and to maintain 15-17% capacity reserves for the near 12 months. The
STEAM target ranges strike a balance between keeping costs low and stable and
guarding against assuming excessive risk from having too much supply in a wet year
or not enough in a dry year. The analysis includes deviations in hydro generation, load
uncertainty, and market price fluctuations. Staff expects to manage the portfolio based
on this strategy in a streamlined and efficient manner to minimize overhead and
within the guidelines established by the Risk Oversight Committee.
All municipal utilities surveyed tended to avoid having to buy energy in the short-
term market to serve load. For example, the City of Roseville has a guideline "not to
buy or sell electricity such that there is greater than 10% market exposure on. a 12
month rolling basis." It expects to expand this guideline to ladder purchases and track
positions up to 5 years out. SMUD is gearing to procure 20-30 year natural gas
reserves in the ground to meet up to 50% of natural gas needs to fire its power plants.
All electric utilities in California are also gearing up to acquire resources tO conform
to the State’s ~Resource Adequacy’ regulations that requires load serving entities to
contract for energy supplies and 15-17% reserves in advance of the consumption
period to ensure sufficient generation is built and system reliability is maintained.
The STEAM guideline conforms to these utility best practices.
4. Evaluate and Design a Pilot Customer Demand-Response Program
Staff evaluated the potential for and economics of a Demand Response Program,
where by retail loads will reduce demand in real-time when lnarket prices are high or
in the event of system emergencies. The analysis focused on large (E7) customers and
concluded that there was a potential of 1MW - 4MW of demand response capability
in this customer group. A pilot test,was conducted with large customers on June 9
which resulted in a demand response of 2MW - 4MW depending on the hour.
CMR:370:04 Page 5 of 15
A review of existing demand response programs in California was also conducted.
With the exception of SMUD and the City of Anaheim, California muni’s currently
do not have active demand response programs. Some have voluntary mechanisms in
place, similar to the City of Pal0 Alto, to call on their large customers to reduce
demand during Stage III emergency, in order to avoid a black-out. The IOU’s, on the
other hand, offer a menu of programs targeting various customer groups and load
control technologies.
Staff’s conclusion is that economics for a demand response program for both the
utility and the customer is not favorable for the time being, given wholesale electric
price levels observed in 2003 and projections for the next four to six years.
Staff plans to continue with the following activities:
Continue to monitor the market conditions and prices; and should market
conditions improve, accelerate program development.
Conduct a customer survey in September to gather feedback regarding customer
readiness and barriers to implementation.
Expand the deployment of interval metering to increase awareness and readiness.
Continue investigation and testing of control teclmologies.
Long Term Portfolio Implementation Plan Update
Outlined below is a brief status update of the eleven Long-Term Portfolio
Implementation Plans, a more detailed update is provided in Attachment B.
5.Acquisition of Renewable Resources to meet 10% of load by year 2008 and 20% of
load by year 2015
The renewable energy implementation plan was provided to Council as an
information report in March 2004 [CMR:168:04]. CPAU is implementing renewable
energy procurement in two phases: power purchase agreements for the near term
(2005-2008), and exploring new resource development opportunities for the longer
term (2008-2015).
CPAU participated in a Request for Proposals (RFP) issued in conjunction with the
Northern California Power Agency (NCPA) for renewable energy supplies to meet
Long-Term Electric Acquisition Plan (LEAP) Guideline #6, Renewable Portfolio
Investments. The RFP was issued on March 11, 2003. Resources being pursued for
CMR:370:04 Page 6 of 15
the near term are 20 MW of wind energy from Solano County with deliveries
beginning in 2005, .and 3-10 MW of electricity from landfill gas from various
locations in and around the Bay Area, with deliveries beginning in 2006-2007.
Agreements with ~NCPA (second and third phase agreements) to negotiate power
purchase agreements for wind and landfill gas energy were approved by Council in
March 2004 [CMR: 174:04].
The contract negotiations are nearing completion. A report describing the forthcoming
renewable energy contracts, basic structure, key contractual terms, the products being
delivered, and next steps was presented to the UAC on July 7, 2004 (Attachment B).
These contracts will provide 8-12% of the City’s projected electric load. Staff expects
to present these contracts to Council for its consideration and approval over the next
few months. Staff will begin to evaluate longer term opportunities for Tier 2
renewables following adoption of the Tier 1 renewables contracts.
California Senate Bill 1078 passed in 2002 requires retail electricity sellers, including
investor-owned utilities (IOUs) but not publicly, owned utilities, to increase the
eligible renewable energy content of their electricity deliveries by one percent per
year over a baseline level determined by the CPUC. Retail sellers must meet a target
of 20 percent renewable content in their electricity portfolios by December 31, 2017.
The IOUs are starting from an existing level of eligible renewable energy content of
approximately 11%. New legislation is being considered by the state to accelerate the
20% target from 2017 up to the year 2010. The CPUC intends to allow the IOUs to
issue RFPs to begin the solicitation process for meeting these goals during July of this
year. Staff expects to monitor these developments and implement programs for the
City as appropriate.
6. Implementation of Palo Alto Green Program (PAG)
As of 7/6/2004 PAG has approximately 2,527 active participants or 9.2% of all
electric accounts. PAG continues to be the secondhighest subscribed program in the
nation based on the percentage of utility customer enrollment. PAG purchased 1,178
MWh for the month of June 2004, approximately 1.5% the month’s total retail energy
sales. A more detailed program description was provided to Council in April 2004
(CMR: 196:04).
CMR:370:04 Page 7 of 15
o Continued Implementation of Public Benefits Program
The Public Benefits Program is funded at 2.85% of electric retail sales revenues, or,
FY 03-04, at approximately $1.8 million. The City offers various incentive and
educational public benefit programs to residential, commercial and public/institutional
customers.
Residents receive rebates for installing efficient lighting, appliances, windows,
insulation and other measures. Commercial and public sector customers receive
subsidized energy efficiency studies and rebates for efficient lighting, motors, heating
and air-conditioning and process equipment. All customers are eligible for rebates to
install solar electric (photovoltaic) systems. Other programs include research and
demonstration of new technologies such as geothermal heating and cooling systems,
low income rate assistance, public art showcasing energy themes, and targeted tree
planting.
The following is a list of program accomplishments for fiscal year 2003-04. Some
programs are funded from both electric and gas public benefit budgets. These
programs are similar to those offered by other local utilities such as PG&E, Silicon
Valley Power and Roseville electric.
Ene~ Efficiency Programs
Approximately 50% of the Public Benefits funds are expended on energy efficiency
programs listed below, providing an energy savings of approximately 0.4% of City’s
annual energy load.
Smart Energy Program’. Provide incentives for a variety of residential energy
savings measures. $330,000 in rebates was paid, saving 900,000 annual
kilowatt-hours.
Eichler Home Program: Provide incentives for a variety of energy savings
measures tailored to the unique needs of Eichler-type homes. $17,000 in
rebates was paid, saving 3,500 mmual kilowatt-hours.
Appliance Rebate Program: Provide incentives to residents for purchase of
efficiency appliances. $133,000 in rebates was paid for 915 appliances, saving
400,000 annual ldlowatt-hours.
Commercial Advantage Program: Provide incentives to implement various
efficiency projects (lighting, motors, air-conditioning, controls) at COlnmercial
CMR:370~04 Page 8 of 15
facilities. 75 energy saving measures were installed, saving 700 kW and 3,000
MWh per year for a cost of $222,000 in rebates.
Consultant Assistance for Resource Efficiency: Provide incentives for
commercial energy audits. 24 studies were perfola’ned for a cost of $184,000.
Photovoltaic, R&D, Education, and Rate Assistance Programs
PVPartners Program: Provided $75,000 in rebates to 8 residential customers
for installing solar electric systems (23 kW, generating 40,000 kWh/yr.). Pato
Alto now has 85 systems totaling 266 kilowatts, generating 450,000 kWh per
year.
Research, DemonsO’ation and Development: Research a variety of new
efficient technologies. A $50,000 grant was paid to demonstrate the
effectiveness of ground-source heat pumps in comparison to standard air-
cooled equipment.
Consumer education: This is an ongoing effort to provide education to
residential and commercial customers about energy efficiency and renewable
energy. Marketing tactics include: utility bill inserts, advertising in local
newspapers, point of purchase displays, direct mail, workshops, special events,
tours, and working with community groups such as neighborhood associations,
retail associations and the Chamber of Commerce. The City’s largest
commercial customers receive tailored information from their assigned account
representative.
Schools Education Grant." Provided $50,000 to the Palo Alto Unified School
DistriCt for tailored educational programs and professional development related
to energy efficiency, water conservation and renewable energy.
Residential Rate Assistance Program: $5,000 in assistance was budgeted for
the 271 residents on the discounted electric rate.
8. Evaluation of Additional Opportunities for Cost Effective Energy Efficiency Program
Evaluation of additional opportunities for cost-effective energy efficiency programs
will be done in conjunction with the Rocky Mountain Institute (RMI) project. Staff is
worldng with RMI, a leading planning and analysis organization, to implement an
integrated approach for a robust energy resource portfolio to meet balanced objectives
and reliable service at low and stable cost/rates in an environmentally responsible
manner. RMI has developed state-of-the art resource planning principles called the
Energy ResQurce Investment Strategy ("ERIS") which is directly applicable to CPAU.
CMR:370:04 Page 9 of 15
RMI received a grant from the William and Flora Hewlett Foundation to apply these
unique ERIS principles to utilities resource planning. RMI will apply $30,000 of this
grant to Palo Alto’s proposed project. Palo Alto’s cost is $75,600. The specific goal
of the project is to refine the local resource elements of CPAU’s electric portfolio
implementation plans to meet the objectives and guidelines reflected in the long-term
plans, with particular attention to (1) local generation alternatives, and (2) demand-
side resources.
9. Monitor Opportunities to Invest in Natural Gas Fired Generation
Two major iliitiatives were implemented to address the gas-fired electric generation
component of the electric portfolio plan. First, the City parti(ipated in an RFP
initiated by Northern California Power Agency (NCPA) on behalf of its Bay Area
members to evaluate opportunities for Bay Area generation from the all interested
suppliers. The City has also, as a follow-up, initiated a feasibility study to evaluate
local generation alternatives.
The objective of the NCPA RFP was to seek interest from suppliers to meet electricity
demands of Bay Area members of NCPA (Palo Alto, Alameda, and Port of Oakland)
with gas fired thermal plants. Types of suppliers targeted were:
®
@
Existing power plant owners
Power plants in construction, ready for construction, or in a conceptual stage
Other supply methods (e.g. as power purchase for an initial period with option
for equity ownership and/or tolling arrangement)
Multiple proposals were received from 17 suppliers by the November 10, 2003 RFP
deadline. Highlights of the proposals were:
None of the 17 proposals were from existing generator owners willing to sell a
part of their plant
Duke and Calpine were the only two responding entities that owned thermal
generators in the Bay Area - these entities were proposing tolling or pre-pay
type transactions
TID proposed a must-take type . arrangement for its new plant and did not
provide any flexibility associated with operating the plant
A number of entities were only interested in being a contractor if NCPA chose
to build a plant
CMR:370:04 Page 10 of 15
Coral, Sempra, Duke (3 of the 4 Palo Alto EMA suppliers) responded to the
RFP with a variety of tolling agreement and fixed price proposals
Some of the proposals had terms of up to 20 years, but most of them were for
5-15 year duration
While the RFP proposals were competitive with generic market purchases, internal
generation has unique advantages related to reliability, local control, and high benefit
to cost ratios due to avoidance of transmission costs. None of the proposals received
could meet these unique advantages. Hence, it was decided that it is prudent for the
City to explore Palo Alto customer interest to site a local generation plant. City of
Alameda and Port of Oakland also decided not to commit to any of the supplier
proposals.
Attachment C provides a detailed description of the process to undertake the Local
Generation Feasibility Study.
Whiie the City is exploring local generation Options in the 25-50 MW range, other
municipal entities are also designing power plants to meet their own community
needs. Plant being built by SMUD (500 MW), City of Santa Clara (150MW), and
Turlock Irrigation District (250 MW) are expected to come on-line in the 2005-06
timeframe. The City of Roseville is also planning a 150 MW plant and is expected to
come-online in 2007. These new generation projects are expected to meet 25-50% of
these entities’ projected loads over the next 10 years. Further detail is provided in
Attachment D.
10. Monitor Local Opportunities to Site Small Renewable and Cogeneration Projects
Distributed generation (DG) provides electric supply very close to the end user, which
can reduce the strain on the transmission and distribution systems, reduce power
losses, and enhance reliability. DG can be modular, providing implementation and
operational flexibility unavailable to centralized generation, and may be able to offset
or defer investments in transmission and distribution infrastructure. Many DG
technologies can also produce either steam or hot and chilled water, referred to as
"cogeneration" or "combined heat and power" (CHP), which achieves higher overall
energy efficiency compared to generating electric power only. Because of the many
potential benefits, DG may have an important role to play in contributing to meeting a
portion of Palo Alto’s electricity needs.
CMR:370:04 Page .11 of 15
CPAU is currently undertaldng two distributed resource (R&D)projects: Distributed
Generation Valuation Methodology, and Local Resource Integration. These applied
research projects dovetail well with the local generation alternatives feasibility study.
The first project is nearly complete, focused on evaluating the value of distributed
generation, particularly renewable DG, specific to Palo Alto as a case study in a
California Energy Commission funded Public Interest Energy Research (PIER)
project. The CPAU case study is one task of a larger project being conducted in
cooperation with several other municipal utilities. This project is expected to be
competed by the end of the year. The initial results indicate that there are several
potential locations in Palo Alto where small-scale supply resources could reduce
system losses, enhance reliability, and avoid costs such that DG may be cost-effective
in some locations.
The second project is just getting underway, applying state-of-the art resource
planning principles directly applicable to CPAU electric resource planning. These
principles, Energy Resource Investment Strategy ("ERIS"), were developed by the
Rocky Mountain Institute and are described under implementation plan #4above.
These projects continue to examine and learn from similar projects implemented by
other utilities.
11.Continue to Investigate New Tools to Manage Portfolio Risk and Seek Council
Approval if Required
Staff continues to investigate new tools to manage electric portfolio risk. One of the
tools being proposed, as part of the State’s transmission market design proposal is
Congestion Revenue Rights (CRRs) to manage the transmission-basis risk between
point of generation" and location of load. Siting of local generation provides some
protection in the portfolio against this risk. However, the City expects to participate in
the CRR allocation process to hedge the transmission basis cost risk from CPAU’s
generation resources (CVP generation projects, Calaveras generation projects, energy
contracts with suppliers) to the City meter. With the expectation that the CRR
proposal will be solidified in the 2005/06 timeframe, a more complete assessment will
be provided to Council at that time. All risk management tools have to undergo the
review and approval process of the Risk Oversight Committee as outlined in the
August 2002 Council-approved Risk Management Policies (CMR: 400:02).
CMR:370:04 Page 12 of 15
12. Pursue any Low-Cost, High Value Prospects to Acquire Supply Related Resources
No specific, executable high value supply opportunity has arisen to this point. Staff
continues to optimize available supply resources and contracts to maintain low and
stable retail rates. An example is the new 2005 Western Base Resource Contract.
Though Palo Alto, along with other Western customers who operate electric utilities
(such as SMUD and other NCPA members) has not subscribed for a bundled Western
product after 2005, the City continues to participate in various ways to enhance the
value of the CVP hydro projects and transmission systems.
13. Continue to Refine Analytical Tools used to Manage the Electric Portfolio
Staff has revamped and upgraded the existing electric portfolio models in recent
months with additional tools to closely model newly created ancillary services
markets. Under the new Western contract, the City will be obliged to make additional
ancillary capacity purchases. A new database has been created to closely track the
increased volume of market transactions staff is undertaking to fill the energy hole
arising in 2005 and beyond. Staff is also closely working with Western to better
model the hydro production variability to better respond to cost variation caused by
hydro production uncertainties.
14. Monitor and Participate in Regulatory and Legislative Initiatives
City and NCPA staff continues to actively participate in the California Independent
System Operator (CAISO) workgroups and Federal Energy Regulatory Commission
(FERC) technical conferences to influence the proposals to redesign California’s
transmission markets ’ (called MD02 by the CASIO) expected to be in place in the
2006-07 timeframe. Palo Alto, along with the City of Santa Clara and City of
Alameda were successful in advocating for a ’load aggregation’ settlement under the
CAISO’s proposed L0cational Marginal Pricing (LMP) model under MD02. This will
considerably reduce the cost exposure of Palo Alto loads from having to pay
potentially high cost for transmitting electricity from City-owned generation projects
in the Central Valley to City loads along congested transmission paths in to the Bay
Area and the SF Peninsula.
There are also a number of.ongoing procedures and initiatives relating to Bay Area
transmission planning and upgrades that staff, either directly or via the Bay Area
Municipal Transmission Group (BAMx) is monitoring and participating in with the
CMR:370:04 Page 13 of 15
goals to maintain grid reliability, promote a streamlined planning process, and support
economic and reliability &iven transmission projects.
15. Maintain Adequate Rate Stabilization Reserves
In December 2003 Council approved a Revised Utility Reserves Guidelines (CMR:
483:03) to keep up with the changing nature of the electric supply portfolio in 2005.
The guidelines specifically sets aside approximately $10-20 million dollars (min-max
guidelines) to make additional energy purchases in the event of 2 consecutive dry
hydro seasons without having to increase retail electric rates to customers. Since
commodity budgets are set based on average hydro conditions, staff expects to seek
budget increases and draw down from reserves in mid-year if the actual hydro
production turns out to be below average.
RESOURCE IMPACTS
This is a plan update. Resource requirements to implement elements of the plan have
been included in the Council adopted budget. Specific contracts required to implement
individual elements of the plan will be brought to Council at the appropriate time.
POLICY IMPLICATIONS
LEAP Implementation plan conforms to the Council approved LEAP Objectives and
Guidelines. The plan is also in accordance with the Utilities Strategic Plan and Energy
Risk Management Policies.
ATTACHMENTS
A: List of LEAP hnplementation Plan approved by Council in August 2003.
B: Long Term Implementation of Plan #1: UAC report of July 7, 2004 on Forthcoming
Renewable Resource Contractual Terms
C: Long Term Implementation Plan #5 Feasibility Assessment of Local Generation
Alternatives
D: Summary of Electric Commodity Portfolio Strategy Survey
CMR:370:04 Page 14 of 15
PREPARED BY:
Ipek Connolly, Resource Planner
Lindsay Joy, Marketing Engineer
Kar! ICnapp, Sr. Resource Planner
Brian Ward, Residential Acct. Rep
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
Debbie Lloyd, Resource Planner
Monica Padilla, Resource Planner
Shiva Swaminathan, Sr. Resource Planner
’ of Utilities
Asset City Manager
CMR:370:04 Page 15 of 15
Attachment A: List of LEAP Implementation Plan Approved by Council in
August 2003 (CMR: 353:03)
Recommended Implementation Plan - Short- and Medium-Term Portfolio
1. To reduce short-term cost variability and to ladder the purchase commitments,
while leaving sufficient flexibility to Commit to long-term resources, three fixed-
price block purchases are recommended for executio.n in year 2003:
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Block 1 on-pk X X X X X X X
(2005-2007)off-pk X X X X X X X
Block 2 on-pk X X X X
(2005-2006)off-pk
Block 3 on-pk X X X X X X ! X X X X X X
(2005)off-pk
o
At current market prices, the expected cost of the first two blocks of power is as
follows:
a. about $16.4 million for Block 1 (4.3 C/kWh);
b. about $4.5 million for Block 2 (5.57 C/kWh); and
c. about $6.3 million for Block 3 (5.1 C/kWh). This purchase will be completed
as a term transaction via the Northern California Power Agency (NCPA) under
the authority delegated to the City Manager by Council to execute transactions
up to $20 million per fiscal year in conformance with the NCPA Pooling
Agreement (CMR: 135:03 on March 3, 2003).
Seek Council approval of a set of master agreements with suppliers by summer or
fall 2003 with the authority to transact for terms of up to 3 years out. Any
transactions outside this limit will be brought to the UAC and Council for
approval.
Develop short-term hedging strategies and operations plans with the objective of:
a. Clearly identifying and capturing supply needs and supply portfolio risks;
b. Whenever possible, utilizing simple tools to manage risks and utilizing NCPA
resources and expertise; and
c. Managing the electric portfolio to achieve the portfolio objectives with
streamlined operations to minimize overhead costs and to act expeditiously,
while maintaining the appropriate level of oversight and control.
Evaluate, design, and pilot a customer demand-response program. If such a
program makes sense, develop and implement a customer demand-response
program to protect against high congestion costs and to be part of new capacity
rese~we requirements that are likely to be imposed.
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Recommended Implementation Plan - Long-Term Portfolio
Acquire renewable energy resources to meet LEAP Guideline 6. The first step is
to issue a Request for Proposals. (RFP) to potential suppliers. NCPA is
coordinating this activity as many of its members have an interest in acquiring
new renewables for the post-2004 period. The RFP was issued on March 11, 2003
with responses due in mid-April. Depending on the responses to the RFP, staff
will request UAC and Council approval to execute long-term contracts for
renewable supplies.
Implementation of the Palo Alto Green program, a green pricing product available
on a volunteer basis to customers who wish to purchase a greater fraction of green
resources. This program was reviewed and approved by the UAC at its ~February
2003 meeting and was approved unanimously by the Council Finance Committee
on March 4, 2003. It is expected to go to the Council for approval on April 21,
2003
o
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Continue implementation of Public Benefits programs, which is funded by
collecting a fee equal to 2.85% of the electric retail rate. These funds are partially
used to demonstrate renewable resources or alternative technologies and to assist
customers in pursuing efficiency improvements.
Staff will continue to evaluate additional opportunities for investment in efficiency
improvements. As appropriate, additional funding for cost-effective efficiency
programs will be recommended.
While continuing to monitor opportunities for participation in gas-fired generation
as they arise through staff’s contacts in the market and at NCPA, prepare an RFP
to formally announce to the market Palo Alto,s interest in investing in thermal
generation resources or its "look alike" (i.e. tolling contracts).
Monitor technology costs and opportunities for smaller renewable technologies,
cogeneration and gas-fired generation that can be located.within Palo Alto and!or
at customer sites. A study funded by the California Energy Commission, Palo
Alto, and other municipal utilities is currently underway to identify sites within
Palo Alto that have high value to the electrical distribution system.
Continue to discuss gas tolling options with suppliers. Gas financial instruments
will allow staff to most effectively use tolling contracts, therefore, staff will
investigate using these products and, if attractive, will pursue approval from the
Council to add these products to the list of approved products in the Energy Risk
Management Policies.
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10.
Pursue any low-cost, high value prospects to acquire supply-related resources that
may arise from time to time. Staff monitors on an ongoing basis any opportunities
such as availability of additional below-market hydroelectric production or access
to additional power or transmission due to ownership of existing assets.
Refine the analysis and collect additional market information to evaluate scenarios
when various portfolio elements would have value. ~Staff will solicit current
market information on specific products such as hydro hedges. Additional
analysis will include sensitivity analysis and stress testing of tl~e portfolios.
Monitor and participate in regulatory and legislative initiatives related to
transmission market design, support Bay Area transmission upgrades, and pursue
alternatives to increase reliability at a reasonable cost
Maintain adequate reserves by recognizing the degree of uncertainty the City faces
in the futurel Evaluate modifying the policy or targets to make certain that the
Supply Rate Stabilization Reserve is adequate to ensure stable rates in an
environment of uncertainty and consider potential guidelines such as being able to
maintain stable rates in the event of two dry years in a row.
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Attachment B
MEMORANDUM
TO:UTILITIES ADVISORY COMMISSION
FROM:UTILITIES DEPARTMENT
SUBJECT:RENEWABLE ENERGY SUPPLY IMPLEMENTATION PLAN:
ENERGY CONTRACTS SUMMARY
DATE:JULY 7, 2004
REQUEST:
This report is foi" the Colnmission’s information only. No action is required.
BACKGROUND
The City of Palo Alto Utilities (CPAU) participated in a Request for Proposals (RFP)
issued in conjunction with the Northern Califonda Power Agency (NCPA) for renewable
energy supplies to meet Long-Term Electric Acquisition Plan (LEAP)Guideline #6,
Renewable Portfolio Investments.
The renewable energy ilnplelnentation plan was presented to the UAC on January 14,
2004, and then ta’ansmitted to Council as an information report on March 1, 2004
[CMR:168:04]. CPAU is implementing renewable energy procurement in two phases:
power purchase agreements for the near term (2005-2008), and exploring new resource
developlnent opport~nities for the longer term (2008-2015).
Resom’ces being pursued for the near term are 15-30 MW of wind energy from Solano
County with deliveries beginning in 2005, and 3-10 MW of electricity from landfill gas
from various locations in and around the Bay Area, with deliveries beginning in 2006-
2007. Agreements with NCPA (second and third phase agreements) to negotiate power
purchase agreements for wind and landfill gas energy were approved by Council on
March 15, 2004 [Resolution 84t 1, CMR:174:04].
The contract negotiations are nearing completion. This report describes the renewable
energy contracts, including the basic structure, key contractual terms, the products being
delivered, and next steps.
UAC 07/07/04 LEAP Implementation Update Energy Contracts Summary Page 1 of 4
DISCUSSION
The basic contract structure for all of the renewable energy contracts cmTently in
negotiation phase is illustrated in Figure 1. Palo Alto and Alameda are the only NCPA
members who elected to participate in the wind and landfill gas resources described in
this report. Palo alto expects to purchase 67% of the wind energy contract, and 50% of
the new landfill gas contracts. NCPA acts as Palo Alto’s agent to manage the scheduling,
billing and settlement tasks.
Schedufing Coordinator
Poofing & Settlement Agent
Figure 1. In each renewable energy contract, Palo Alto and Alameda are each end users, taldng varying
percentages of the output, from the supplier. NCPA acts as Palo Alto’s agent to manage scheduling,
billing and settlement tasks. In the wind contract, there is als0 an owner/operator that is different frorn the
supplier.
Each contract includes key contractual term as specified in the RFP. A defaulting party is
not entitled to a temaination payment, or "one-way" termination. California is specified as
both ~he applicable law and the venue for dispute resolution. Payments are based on
energy deliveries, and there are terms to ensure performance by the Supplier and provide
adequate credit protection for the City. Final details of these specific .terms are in
negotiation. Each final agreement will be presented to Council for approval.
The High Winds project is located in Solano County near Rio Vista, about a one-hour
drive from Palo Alto. It has a rated capacity of 162 MW, consisting of ninety 1.8 MW
turbines, each ~200 feet tall. Each turbine has three blades, each 125 feet long. The
facility occupies ~6,000 acres, with agricultural activities continuing on the land. The
facility is designed to be bird-friendly, with long slow-moving blades mounted on tubular
UAC 07/07/04 LEAP Implementation Update Energy Contracts Summary Page 2 of 4
towers. High Winds is one of very few "Class 4" wind sites in northern California, with
an average ammal wind speed of 12-13 mph, which translates to an animal capacity factor
of -33%. By contrast Moffett field has an am~ual average wind speed of about 5.5 mph.
The High Winds facility came on line in June 2003, and is fully operational. It is owned
and operated by FPL, Inc., with the output exclusively marketed by PPM Energy, Inc.
The intended product for Palo Alto is a 20 MW share of the output (12.3%), which
translates to -58,000 MWh per year, or -6% of the City’s ammal electric load. The term
will be 23.5 years: January 1, 2005 through July 1, 2028. PPM will provide a day-ahead
hourly finn product at a fixed price less than 7 ¢/kW-h. Day-ahead hourly firln means
that any deviations from the day-ahead forecast are made up by the supplier, which better
suits the operating procedures at NCPA, who will then manage the other pool resources
(e.g. Calaveras) to incorporate the wind generation. The option to switch to a less fima as-
generated product at a later time will also be available at a lower price, but may cost more
when combined with the cost of managing the day-ahead and hour-ahead variability of
wind generated electricity.
The facility fits Palo Alto’s portfolio well because it generates higher than average output
during the low hydro generation months, and nearly half of the mmual production is
duringthe three hottest summer n~onths. Specific details of monthly and hourly wind
generation estimates from the facility are proprietary. Wind also fits the portfolio well
because wind is "energy-rich and capacity poor" whereas hy&oelectric is capacity-rich
and energy-poor". The credit for capacity (as opposed to energy) is uncertain at this time,
as the algol-ithms for estimating firm capacity, provided by intermittent resources such as
wind are still being developed bythe ISO.
Landfill Gas
The landfill gas generation projects have not yet been built. Staff is negotiating contracts
that will provide energy from at least four different locations: Santa Cruz (3 MW),
Livermore (3.8 MW), Suisun (1.9 MW), and Pittsburg (3 MW). The Pittsburg facility is
proposed by Energy Developments, Inc., and the others are proposed by Ameresco, Inc.
Landfill gas provides around-the-clock energy with reliable capacity. Generally the
capacity factors exceed 90%, depending on the quality of the landfill gas being generated
by the sanitary landfill. Palo Alto’s share of these purchases will provide ~46-50,000
MWh per year, or -5% of the City’s annual load. These contracts will range in term from
15 to 20 years, withrenewal options, at prices less than 6 C/kWh, escalating at 1.5% per
year. Different facilities have different projected online dates, and are contingent on
completing negotiations and executing the agreements. The base-load landfill gas
electricity located at several diversified delivery points provides some transmission and
congestion cost risk diversity, and is a good complement to the intem~ittent wind
:-"/~-~-;-~"
resource. The CAISO is expected to allow full capacity credit for unit-contingent landfill
gas facilities such as these, subject to any deliverability constraints.
NEXT STEPS
The contracts meet the quantity and rate impact limits in LEAP Guideline #6, approved
by the Finance Committee and Council. The final agreelnent for wind energy will be
presented to Council for approval in mid to late Sulnmer 2004; Staff expects to complete
the .agreements for landfill gas energy during the summer, ready for Council
consideration for approval after in late Summer or early Fall.
PREPARED BY: Karl E. IGaapp, Senior Resource Planner ~
REVIEWED BY:
APPROVED BY:
Girish Balachandran, Assistayt Director, Resource Managemen~-&~"
I~ir@tor of Utilities
7/
UAC 07/07/04 LEAP Implementation Update Energy Contracts Summary Page 4 of 4
Attachment C: Long Term Implementation Plan #5 - Feasibility Assessment
of Local Generation Alternatives
On May 10, 2004 [CMR:247:04] Council approved the Policy and Services Committee
recommendation [CMR:206:04] to support the staff request to undertake a
comprehensive feasibility study exploring the feasibility of constructing electric
generation facilities capable of serving a portion ofPalo Alto’s total electric load. The
staff recommendation was presented to the UAC on February 11, 2004 and was
unanimously supported by the UAC. The Policy and Services Committee voted
unanimously to support the staff request with the amendment that dedicated parkland was
not to be used for electric power generation facilities.
The local generation feasibility study most directly supports LEAP Implementation Plan
Long-term Task #5 to monitor and evaluate thermal generation resource investments, but
also spans many aspects of Task #6 to monitor technology costs and opportunities for
smaller renewable technologies, cogeneration, and gas-fired generation that can be
located within Palo Alto. The proposed feasibility study plan included several progress
reports to Council. This section of the report is the first progress report.
The proposed study includes (1) developing the parameters that would be required for
feasible sites, (2) evaluating the technical, economic, and environmental feasibility of and
con~rnunity support for such facilities, (3) identifying and contrasting potential Palo Alto
power generation sites with other alternatives outside of Palo Alto, and (4) reporting
findings and recommendations to UAC and Council.
The study is being conducted in two phases. Phase 1 addresses, "Should staff be
evaluating specific sites in Palo Alto?" If the Phase 1 recommendation is "yes",.and
Council approves going forward with the next phase, Phase 2 Will address, "Are there
sites in Palo Alto that are.suitable?" If the Phase 2 conclusion is "yes", staff will present a
recommendation as to whether to move forward with the permit application process for a
specific site to Council for action.
The feasibility study is progressing on Schedule: The initial steps in the study are being
completed by staff. The key focus to date has been (1) to establish the interdepartmental
project organization to ensure comprehensive review and oversight; (2) to establish a
public outreach plan to educate and engage residents, businesses, customers, community
organizations, advocacy groups, and other stakeholders. An all day public participation
planning workshop was held July 9, followed by focused half-day working sessions (July
12 and July 2I), coached by a leading local public outreach firm. The workshops
included staff from several City departments. The public participation plan will serve as
the core basis for an RFP to solicit outside expert assistance to help staff facilitate public
participation in the local generation feasibility study. The key next steps are (3) finalize
the public participation plan, (4) solicit and hire needed outside expert services, (5)
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develop outreach materials, and (6) implement the plan to solicit public input to gauge
support and concerns, and identifying approaches to accommodating the community in a
comprehensive manner.
The underlying need for the feasibility study is to make up the gap due to the loss of
Western power contract..The key questions being addressed in the feasibility study are
different for the two project phases, and the appropriate public outreach approaches also
differ. The fundamental question in Phase 1 is, ~°Do we want local natural gas-fueled
generation in Palo Alto, and if so, what criteria should it meet"? In order to answer, the
public will necessarily need to compare with other options. The fundamental question in
Phase 2, should the answer in Phase 1 be "yes", is, "What are acceptable configurations
for local generation (e.g. single unit, several smaller units, co-generation only, etc.) and
where should it be located"?
Participants will need to master a great deal Of information and understand the trade-offs
between options. As of the writing of this report, staff is developing a combination of a
plan expected to consist of a Task Force and public workshops to ensure adequate
representation and participation of interested parties while keeping the project
manageable.
The Basic Project Timeline is illustrated below in Figure 1. Detailed. tasks and timelines
for Phase 2 will developed in response to information gathered during Phase 1.
2005 [20O6
PHASEI=hasel Aooroval ’e’=’r’~ 5/10
-
~__
Establislr Ioterdeparlrneetal Cornmit~ee
Public Outreach
DeveloF Content
Hire Facilitat[ r/Ana ysls
Implement public discussions
Technical Ao alys~s
Policy Aoalysis
Develop Recommeodotioo
Internal Reviews
Progress Report ~
Progress Report ~
Recommendation
PRASE 2
Communi~ Adviso~ Panel Revie~
Intensive Public Meetings
Site-Specific Aoal~is
Progre~ Repodin9
Pbase 2 Recommeodation
Project Completion
Council Decision Points
/
/
Figure 1. Local Generation Feasibility Study Timeline
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The project organization and reporting structure consists of the following categories:
1. The Utilities Department, represented by the Director of Utilities, is the main
project sponsor.
o Core Working Team: Consists of three people: Project Coordinator (Karl Knapp),
Communications (Linda Clerkson), and a Planning expert (Susan Ondik). The
project may require an additional core member from Utilities Engineering later in
the process.
3. Management Assistance Team: The three Utilities Assistant Directors
(Engineering & Operations, Resource Management, and Administrative Services)
plus the Manager of Planning and Community Environment (John Lusardi).
Receives ongoing updates and reviews reports intended for the next level.
4. Executive Review Team: Represented by Utilities, Public Works, Finance,
Planning, City Manager’s Office, and the City Attorney’s Office. Receives periodic
updates and reviews reports intended for public distribution to Council.
o On-Call extended work team resources: numerous specialized in-house experts
responsible for contributing to specific tasks, comprising utilities, public works,
legal, planning, finance risk management, and water quality.
o Distribution List: receive all updates as needed or requested. These include all of
the categories above, plus interested groups and individuals, such as the Land Use
Committee and the Risk Oversight Committee.
The high-level work plan categories in the study are outlined below, with key
deliverables summarized in Table 1.
(1) Public outreach
(a) Develop public participation plan in progress.
(b) Develop information content in progress.
(c) Hire facilitator assistance
(d) Engage public
(2) Project Management
(a)Establish internal core team and key distribution list - done.
(b)Coordinate with other City proj ects/needs.
(c)Identif.v/hire/manage outside services.
(d)Communication
(i) Weeldy team meetings.
(ii) Monthly internal reports.
(iii) UAC and Council Communications.
(e) Track costs using SAP.
(3) Technical Analysis
(a) Clarify criteria.
(b) Environmental, economic and reliability impacts of alternatives.
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(c) Complete renewable Distributed Generation analysis.
(d) Identify and evaluate local resource integration issues.
(4) Policy/Legal Analysis
(a) Comprehensive Plan, municipal code, Master Plans, city policies, and
state and federal regulations.
(b) Bay Area Air Quality Management District requirements.
(c) Other jurisdictions considerations.
(5) Clarify Alternatives
(a) Summarize findings.
(b) Report findings to UAC and Council.
Table 1. Feasibility Study Deliverables Schedule
Title
LEAP report/analysis history
Council presentation by Richard Carlson -
Power Plants
UAC Report - Feasibility Study
Policy & Services Committee - Feasibility Study
Feasibility CMR -transmittal from P&S
Feasibility Presentatior
Phase 1 Progress Report #1
Phase 1 Progress Report #2
Phase 1 Recommendation’Report
Phase 2 Progress Report #1
Phase 2 Progress Report #2
Phase 2 Recommendation Report
ultimate
Customer
UAC & Council
Council
UAC
P&S Committee
Council
Council
Council
Council
Council
Council
Council
Council
Anticipated
Delivery Date
Several
27-0ct-03 (done)
11-Feb-04 (done)
13-Apr-04 (done)
l O-May-04 (done)
l O-May-04 (done)
9-Aug-04
15-Nov-04.
29-Ap~-05
TBD
TBD
23-Jun-06
Includes/notes
LEAP Analysis and recommendations
Power plant alternatives and benefits
Study approval recommendation
Study approval recommendation
Study approval recommendation
Study approval recommendation, not in packet
Outreach content, initial criteria, facilitator progress,
committee make-up, detailed project tracking
Above, plus initial public discussion findings, additional
criteria, initial concepts for key skills/representation for
CAP, initial technical & policy analysis findings, other
consultant contracts.
YES/NO recommendation for Phase 2, summary of all
alternatives, all needed criteria, discussion of feasibility
of meeting all criteria in town, discussion of outside
options, CAP composition and roles recommendation,
detailed Phase 2 schedule/project
Sites/alternatives considered, key criteria, high-level
screening, sites ruled out remaining tasks/schedule
Sites/alternatives considered, key criteria, high-level
screening, sites ruled out remaining tasks/schedule
YES/NO recommendation for a specific site or set of
sites, or no site. Summary of all alternatives, all
needed criteria, discussion of anticipated mitigation
measures, costs, discussion of outside options,
magnitude recommended net of efficiency and other
alternative resources.
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Specific resource requirements will continue to evolve as a result of feedback from the
community public outreach activities. During the two phases of the feasibility study, staff
expects to require assistance in the one or more of the following areas:
o Communications facilitator;
¯Engineering design;
~Environmental assessment and mitigation;
¯Economics and finance;
~Legal and policy analysis.
Portions of the energy planning and local resource integration work being conducted by
the Rocky Mountain Institute for CPAU will address some of the key issues relevant for
local generation alternatives as part of CPAU’ s electric energy portfolio, including
potential pros and cons of different generation alternatives as well as the potential for
alternatives such as energy efficiency and demand response. The local resource
integration activities are described in the LEAP update report under the energy efficiency
’ section of the report.
The next Council progress report is scheduled for November, 2004.
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