HomeMy WebLinkAboutStaff Report 3089
City of Palo Alto (ID # 3089)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 10/1/2012
Summary Title: Approval of NextEra Capacity Transfer Agreement
Title: Adoption of a Resolution Approving and Ratifying the Resource
Adequacy Transfer Agreement Transferring a Portion of the City’s Resource
Adequacy Capacity from the High Winds Energy Center to NextEra Energy
Resources, LLC, in 2013 and 2014
From: City Manager
Lead Department: Utilities
Recommendation
Staff recommends that the Council adopt the attached resolution, ratifying the City Manager’s
signing of the Resource Adequacy Transfer Agreement, which transferred to NextEra Energy
Resources, LLC (NextEra), on August 13, 2012, a portion of the City’s local resource adequacy
capacity rights derived from the High Winds Energy Center for the months of January to April
and September to December of 2013 and 2014.
Executive Summary
The California Independent System Operator (CAISO) requires the City to provide or make
available assets, including capacity rights, to ensure electric transmission system reliability in
California. The City partly meets that obligation with its renewable energy contracts’
commitments, including one contract for the High Winds Energy Center (High Winds) in Solano
County. Although the City normally needs to buy additional energy resources to meet the
CAISO’s requirements, unusual circumstances provided the City with an opportunity to sell a
small amount of its capacity resources and receive a significant amount of revenue (about
$200,000 net) for the City’s Electric Fund without materially and adversely impacting the City’s
ability to meet its obligations to CAISO. NextEra expressed a strong desire in the City’s rights to
High Winds project capacity in order to fulfill its contract obligations relating to a nearby large
wind project with another utility. As a result, NextEra was prepared to pay the City well above
market rates for this product, provided the City could make a contractual commitment during
the Council’s summer recess. The City will need to replace the capacity involved in this
transaction with a similar product, but the amount of capacity involved in the NextEra
transaction is relatively small compared to the City’s capacity needs that arise during those
months; therefore, this transaction will have little impact on the City’s capacity purchasing
needs.
Discussion
Since 2008, the CAISO has allocated to load serving entities, such as the City, the responsibility
for maintaining sufficient local generation capacity to maintain transmission grid reliability.
Like all load serving entities, the City is required to own or contract for local capacity every year
in an amount equivalent to about 50% of its summer peak load from generation resources
located in one of the CAISO-designated load pockets (such as the San Francisco Bay Area,
Stockton, or the Greater Fresno area) or be subject to an allocation of CAISO’s backstop
procurement costs to compensate for any shortfall in capacity to be procured by load serving
entities.
The City was recently presented with the opportunity to participate in a transaction that will
generate a significant amount of revenue (about $200,000 net) for the City’s Electric Fund.
NextEra expressed strong interest in rights to capacity derived from the City’s share of the High
Winds project for two eight–month periods of the year falling in 2013 and 2014, as it needed to
fulfill a contractual obligation to another utility related to a new nearby wind project. As a
result, NextEra agreed to pay well above market rates (about six times the current rates) for
this product. The total revenue that the City will receive from NextEra through this transaction
is $245,000, while the cost of replacing the capacity sold to NextEra is expected to be about
$40,000.
In the unlikely event that the City is unable to obtain capacity to replace the amount being sold
through this transaction and thus will be exposed to the CAISO’s backstop procurement costs,
the maximum expected charge that could be incurred as a result of that deficiency would be
about $80,000, or about one-third of NextEra’s compensation to the City. Of the $245,000
NextEra is obligated to pay the City, NextEra paid $185,000 (76%) soon after execution of the
agreement. The balance of $60,000 will be paid in four equal installments of $15,000 in April
and December of 2013 and 2014.
Under the City’s Energy Risk Management Policy, the City Manager has the authority to enter
into contracts for electric commodity purchases and sales for terms of up to three years with
counterparties with whom the City has an existing Electric Master Agreement. The current
transaction is with a counterparty with which the City does not currently have an Electric
Master Agreement in place, hence, the Council’s approval is required.
Because NextEra needed to obtain financing for its new wind project near the High Winds
project, NextEra was highly motivated to negotiate and execute this transaction with the City
on an expedited basis. That occurred during the Council’s summer recess. Staff informed
NextEra of the requirement to secure the Council’s ratification of the transaction.
Prior to this transaction, the City was already short 6 to 17 megawatts (MW) of local capacity
for the months January to April and September to December of 2013 and 2014. The sale
transaction with NextEra increased the deficit by a small amount (0.5 to 2.0 MW/month) such
that the transaction will have minimal impact on the City’s plan to purchase local capacity to
meet the CAISO’s requirements in the future.
Resource Impact
Without this transaction, local resource adequacy capacity purchases were expected to cost the
City approximately $2.0 million in calendar year 2013, and $3.0 million in calendar year 2014.
Net revenue received through this transaction reduces those cost estimates by approximately
$100,000 per year.
Policy Implications
This recommendation is consistent with the Council-approved Utilities Strategic Plan to ensure
a high level of system reliability in a cost-effective manner.
Environmental Review
Support of the recommendation to adopt a resolution approving the NextEra resource
adequacy capacity transfer agreement does not constitute a project for the purposes of the
California Environmental Quality Act.
Attachments:
Attachment A: Resolution Approving Transfer of RA Capacity (PDF)
Attachment B: RA Transfer Agreement (PDF)
Prepared By: James Stack, Resource Planner
Department Head: Valerie Fong, Director
City Manager Approval: ____________________________________
James Keene, City Manager
*NOT YET APPROVED*
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Resolution No. _____
Resolution of the Council of the City of Palo Alto Approving the Sale
of Local Resource Adequacy Electricity Capacity Products to NextEra Energy
Resources, LLC, for Calendar Years 2013 and 2014
A. The California Public Utilities Commission (“CPUC”) adopted a Resource
Adequacy (“RA”) program to ensure the reliability of electric service in California by requiring all
Load Serving Entities (“LSEs”) to file a resource adequacy plan with the CPUC, demonstrating
sufficient capacity resources (“RA Capacity”), including reserves needed to serve its aggregate
system load on a monthly basis.
B. High Winds, LLC, an affiliate of NextEra Energy Resources, LLC, a Delaware
limited liability company (“NextEra”), operates the 162 MW wind generation facility located in
Birds Landing, Solano County, CA (“High Winds Generation Facility” or “HW”), which meets the
CPUC’s requirements as a source of RA Capacity.
C. The City holds a 20 MW portion of output from HW, including but not limited to
the RA Capacity from HW for 2013 and 2014, pursuant to the “Long-Term Power Purchase
Agreement (Wind Power) made between PPM Energy, Inc., as Seller and The City of Palo Alto,
as Purchaser dated November 9, 2004” (“PPA”).
D. NextEra desires to obtain this HW RA Capacity from the City for the months of
January through April and September through December of both 2013 and 2014 (the “Transfer
Period”).
E. The Parties intend that the actions contemplated by this Agreement shall not
have an adverse impact on the High Winds Generation Facility in calendar year 2013 and 2014
or thereafter. NextEra and the City further acknowledge that the amount of RA Capacity as
determined by the CAISO for HW for calendar years 2013 and 2014 will be variable and
determined by future events unrelated to this Agreement.
F. Iberdrola Renewables, Inc. (“Iberdrola”) is the successor in interest to PPM
Energy, Inc. in regard to the PPA.
NOW, THEREFORE, the Council of the City of Palo Alto does hereby resolve, as follows:
SECTION 1. The Council hereby approves and ratifies the agreement between the City
and NextEra transferring the City’s HW RA Capacity to NextEra for the Transfer Period in
exchange for a total payment of two hundred forty-five thousand dollars ($245,000.00).
//
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*NOT YET APPROVED*
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SECTION 2. The Council finds that the adoption of this resolution does not meet the
definition of a project under the California Environmental Quality Act (CEQA) pursuant to
California Public Resources Code Section 21065, and therefore, no environment assessment is
required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENTIONS:
ABSENT:
ATTEST: APPROVED:
____________________________ _____________________________
City Clerk Mayor
APPROVED AS TO FORM:
_____________________________ _____________________________
Senior Asst. City Attorney City Manager
_____________________________
Director of Utilities
_____________________________
Director of Administrative Services