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  • Los Angeles Department of Water and Power & The Cost of Renewables

    Posted by Carl from Chicago on April 12th, 2010 (All posts by )

    The Los Angeles Department of Water and Power (LADWP is the most common acronym) is a publicly-owned utility that serves the city of Los Angeles with water and power. LADWP is in the news right now because of a dispute with the city over a transfer that LADWP usually makes in the amount of 8% or so of its revenues. Since the city of Los Angeles is essentially broke (per the article, their reserve fund that should be in the $220M range will be down to $25M or $30M) this delay in transferring funds is putting the city close to the edge. This article is titled “Los Angeles Faces Threat of Insolvency” from the 4/9/10 WSJ.

    Background on LADWP:

    LADWP is the largest municipal utility in the country. According to their annual report for the year ended June 30, 2009 which can be found here(most municipal entities end their year in June, not December like publicly traded companies), the power entity (not water) had the following key facts:

    – annual revenues of $2.8B / year
    – $6.6 billion in utility plant assets (net of depreciation)
    – approximately 7200 MW of useful capacity, of which the vast majority is coal, hydro, nuclear power, or natural gas (renewables are 270 MW, or about 4% of the total
    – in 2009 they transferred $223M to the City of Los Angeles, or 8% of revenues (of $2.8B)
    – their pension plan for employees is 70% funded when unrealized investment losses are taken into account (not great, but better than Illinois)
    – LADWP acquired natural gas assets in Wyoming in 2005. After the collapse of the California power market (where LADWP performed relatively better than their investor owned peers) they decided to go and get their OWN gas supply – the article from 2005 is here. I find it interesting that a non-profit electrical utility owns their own natural gas supply, but it probably seemed to be a good idea when the cost of natural gas was spiking up to $14 / unit (it is now down nearer to $4 / unit with innovative new exploration techniques)
    – LADWP has been “hedging” against the price of natural gas, to ensure that the utility has adequate funds available if there is a price rise. As of June 2008, the value of these hedges was $213M (favorable), and as of June 2009 the value of these hedges is ($168M) unfavorable. This is likely due LADWP “locking in” at the price of gas somewhere above its current price near $4 / unit… this method will result in continuing (unrealized) losses as long as the price of natural gas stays low, which it appears to be on track to do for some time

    LADWP is in dispute with the city because LADWP wanted to raise rates. LADWP said it needed to raise electric rates to pay for the new renewable energy commitment for the city of Los Angeles. The city wants to have 20% of electricity from “renewable” resources (this must include hydro, because their “true” renewable level is much lower, although no one can site new hydro plants anywhere due to environmental rules) which will require a massive increase in investment in generation and transmission assets because 1) renewables have a high cost / MW to install 2) most of the renewable generation sites (geo-thermal, solar) are not where the grid goes to today, so costly enhancements to the transmission grid are needed.

    Per the LADWP web site:

    Eligible Renewable Resources – LADWP’s RPS includes the following types of renewable resources: small hydroelectric, biomass, biodiesel, digester gas, landfill gas, solar thermal, geothermal, photovoltaics, fuel cells with renewable fuels, ocean wave technologies, wind, municipal solid waste, and other renewables. Under the state legislation, only “small hydro” (30 megawatts or less) is an eligible renewable energy resource. However, to help mitigate the impact of the RPS on ratepayers, the City Council will allow the LADWP RPS to include all existing LADWP Aqueduct hydroelectric power plants.

    According to this report (p13) commissioned to study the issue of the cost of moving to a 20% renewable standard:

    DWP adherence to the RPS requirement is estimated to result in an incremental cost of service increase of approximately $284 million annually, with an aggregate cost needed to achieve the 20% RPS target requirement projected to exceed $2 billion.

    In that same report (p11), they showed that the cost to build capacity of the actual renewable plants in use by LADWP was 82.2 cents / kWh while the cost of the “traditional” fossil fueled plants was 2.9 cents / kWh. Thus the “renewable” portfolio cost 28 TIMES as much as the non-renewable (traditional) portfolio for capacity; while the operating costs for the renewable facilities could be lower than the fossil fueled facilities, it would take a long time to make up this level of difference, especially after adjusting for reliability (which hits the renewable portfolio even harder).

    None of this should be taken to say that LADWP is a badly run utility; they came out better than their peers when the energy market in California collapsed and they have a diversified energy portfolio. Their goal is to keep their rates 15% lower than their peers, which is a positive goal. However, the City of Los Angeles and the high bar for renewables is going to cause a massive rush of investment essentially to create a very modest amount of generating capacity, costing the rate payers a big rise in energy rates.

    The City of Los Angeles rejected the rate increase, however, meaning that it is on hold for at least 3 months, per this article. This delay caused the utility to with hold their annual payment to the city, hence the article above.

    Merger of Mirant and RRI

    Mirant and RRI are merging to form one of the largest IPP (independent power producers) in the country. Here is a “fact sheet” about the newly announced merger.

    It is interesting to point out the cost / MW for capacity for traditional fossil fuels vs. the cost for the renewable portfolio (including transmission). The market value (stock market, not debt) of the combined company is about $3B, and it has almost 25,000 MW of power.

    To put it in perspective – the City of Los Angeles is pushing LADWP to move to 20% of its 7200 MW portfolio in renewables, or about 1440 MW. The cost of this (including transmission), is about $2B per the article above. However, they could have bought an entire fleet of working, reliable plants with 25,000 MW (about 17 times more) for only $3B on the open market. Now these aren’t “apples to apples” comparisons but ironically a lot of the assets, over 3200 MW, are in Southern California, per the fact sheet. Thus these assets traded hands for a pittance and WILL BE USED TO POWER CALIFORNIA and yet to build these new renewables they are going to spend $2B to offset a portion of these costs.

    Madness. Someday someone is going to look back on this as if we are all insane. We are spending billions to retire a tiny portion of capacity while we purchase more reliable assets already on the transmission grid and serving those same customers for comparatively pennies on the dollar.

    Cross posted at LITGM

     

    10 Responses to “Los Angeles Department of Water and Power & The Cost of Renewables”

    1. Michael Kennedy Says:

      Nothing that applies to the dysfunctional city of LA and its former gang member Mayor Villaraigosa is surprising. Fortunately, I don’t live in that city but the entire state is drinking the same stuff.

    2. Paul Milenkovic Says:

      The 270 MW of “renewables” — is this “nameplate” capacity or does this take into account “capacity factor” — that the sun does not shine 24/7 and neither does the wind? If this is “nameplate” capacity, the share of renewables is then below 1 percent.

    3. Carl from Chicago Says:

      They do take into account the capacity factor. The LADWP is pretty clean about that. Check out that report that was commissioned where they calculate the cost of installed renewables, too.

      But their current renewable total under the “real” model where they get rid of all hydro above 30MW is VERY low.

      And to think those assets right next to them are changing hands for a few cents on the dollar (comparatively) thanks to the merger.

    4. Nicholas Says:

      So basically what you’re saying is that the city of LA wants to have their cake and eat it too.

      They want to build expensive generation assets but not pay for it.

      Unfortunately, reality intrudes into whatever fantasy world they are currently inhabiting.

    5. Carl from Chicago Says:

      They need expensive generation AND transmission assets. Transmission is needed because these geothermal and solar sites are off the beaten path of the grid. This requires years of planning and permits in addition to lots of money. Generation, sadly enough, is the EASY part of this equation.

      It is futile to do this on a large scale.

      At least LADWP is being up front about the monstrous costs and the need for a rate increase.

      But I guess they are trying to have their cake and eat it too, a decent analogy, by demanding that they go forward with no rate increases.

    6. Michael Kennedy Says:

      Some of the gloss is off the geothermal potential since their first two experiments produced earthquakes. Here is the California story.

    7. Joseph Somsel Says:

      Chief Engineer Mullholland must be rolling over in his grave at what LADWP has become.

      An 8% cash dividend sounds pretty good too, compared to PG&E and SCE. Yet, the politicians want more cash AND they want their fanatasies made real.

      LADWP has three advantages – 1) low cost of capital due to municipal bonds (don’t think them tax exempt though), 2) no state or federal taxation, and 3) access to very low cost Federal power via WAPA – ie Hoover Dam – through the municipal preference.

      As to their hedge on natural gas prices by buying resources, this seldom works out for utilities. They get whipsawed both ways and catch heat from the public no matter what they do.

      I would add that current natural gas prices are down largely due to reduced demand, not huge new supplies. The time to bring new shale gas to market and the reluctance to make an up-front investment when prices are low argues against shale gas flooding the market and driving down the price. However, I’m willing to entertain a more detailed analysis of the current market, if you have some facts.

    8. Robert Schwartz Says:

      Quotation of the Day:

      “It’s so irrational; I’ve almost given up with New York. It’s like you’re in a village of Hottentots who look up and see an airplane — when everybody else is using airplanes — and they say, ‘No, we won’t do it, it’s too scary.’”

      NICKOLAS J. THEMELIS, a professor of engineering at Columbia and proponent of waste-to-energy plants, which convert trash into heat and electricity.

      From: “Europe Finds Clean Energy in Trash, but U.S. Lags” by Elizabeth Rosenthal in NYTimes on 13 April 2010 at p. A1.

      I do think the quote is grossly unfair to Hottentots. The people referred to by that name call themselves: “Khoi”. They belong to the Khoisan ethnic group, the native peoples of southwestern Africa, and are closely related to the San Bushmen. European settlers labeled them Hottentots (sometimes considered pejorative), in a mangled attempt to imitate the sounds of the Khoisan languages, which are best known for their use of click consonants.

      http://en.wikipedia.org/wiki/Khoisan
      http://en.wikipedia.org/wiki/Khoisan_languages

      However, there is no reason to believe that liberalism, environmentalism, or other stupidities that only afflict rich white people have infected the Khoisan.

    9. phwest Says:

      The data on natural gas does show a real increase in domestic production and only limited changes in overall demand. Industrial demand is down significantly over the past few years, but residential and commercial demand has been flat and eletrical generation demand has increased significantly.

      In particular – production was up 4% 2009 vs 2008 while total consumption was down 2% (the balance was made up by drops in imports and increased inventory, roughly 50/50). Since 2004, total consumption is up about 2% while total production is up almost 12%.

      http://tonto.eia.doe.gov/dnav/ng/ng_sum_lsum_dcu_nus_a.htm

    10. Joseph Somsel Says:

      Phwest,

      I looked at the data but the causes are still unclear. 2008 had bubble pricing, which crashed in 2009. Of course, the high prices stimulated lots of drilling but there is a lag from start of a project to delivery.

      I did see a significant drop in industrial demand but we have to remember that gas markets are somewhat isolated. The Henry Hub price in Lousiana is somewhat disconnected from the California-Oregon Border (COB) price we pay on the West coast.

      Even as a nuclear engineer, I welcome low (but stable) natural gas prices.