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Denton faces $240 million question

Profile image for By Peggy Heinkel-Wolfe
By Peggy Heinkel-Wolfe

If the Denton City Council approves the “Renewable Denton Plan,” it will face the largest capital equipment purchase in recent memory: where to buy and house a dozen giant natural-gas engines to generate electricity.

Denton Municipal Electric believes the engines will put Denton in the driver’s seat — buying, selling and trading electricity in Texas’ deregulated market on its own terms and keeping rates low. But critics say the engines are enemies of clean air and are noisy.

The estimated cost is $240 million plus financing. By comparison, consider another major capital equipment purchase of a $1.3 million ladder truck for the fire department in 2014.

Typically, electric rates are low in Denton compared to elsewhere in the state. However, rates have increased recently and are expected to inch up for a few more years, no matter what.

Right now, Denton ratepayers fork over about 10 cents for every kilowatt-hour of electricity they use. By 2019, that’s expected to climb to 10.75 cents. (Texans paid an average of 12.59 cents in 2014.)

In other words, the average electric bill for Denton households is about $150 per month today and will likely reach $161 in 2019.

DME expects the average monthly bill to hover at about $160-plus through the 2020s — if the utility can buy the gas-powered engines to generate power.

But this proposed big-ticket purchase has proven controversial. Activists have submitted more than 600 letters to the City Council opposing the engines. They want DME to buy only renewable energy, as much as possible and as soon as possible.

DME officials have said they could do that. They’ve got renewable energy contracts with more in the works. The utility estimates that going to 100 percent renewable would push the average monthly bill to $176 (or about 12.25 cents per kilowatt-hour) by 2019.

Yet, that also would be the high point for local rates, DME says. After 2019, the rate for 100 percent renewable energy would drop.

In other words, through the 2020s, electric rates for the no-engine plan would be a little higher than the go-engine plan.

It seems counterintuitive, but DME says to save about $7 a month for the average ratepayer, it has got to spend $240 million on a dozen engines.

Engines for sale

The city hasn’t issued a contract to purchase the engines or hire a power plant builder. In response to an open records request from the Denton Record-Chronicle about the project, DME attorney Mike Copeland said the city is “still shopping” and declined to release the information.

However, DME General Manager Phil Williams cited the foreign exchange rate when telling the City Council the project estimate has increased from $225 million to $240 million. And, when DME officials talk publicly about similar projects, they point to projects all built by the same company: Wärtsilä.

They don’t point to the Sky Global Power One power plant northwest of Houston with engines from General Electric, for example, or Sunflower Electric Power Coop’s plant in southwestern Kansas with Caterpillar engines.

Based in Helsinki, Finland, Wärtsilä is well known in the shipping industry. Its efficient, natural-gas fired engines power cruise ships and tankers.

When natural gas prices dropped about 10 years ago, Wärtsilä began aggressively marketing its engines to U.S. utilities as a flexible backup for wind and solar farms. It hosts a Flexible Power Symposium every year, inviting engineers and analysts to discuss the merits of Wärtsilä engines for such use.

Wärtsilä’s website has white papers aimed at helping sell the engines, which can be turned on quickly when electricity demand goes higher.

A Texas-specific paper showed how the state’s deregulated electrical grid creates a money-making opportunity for investors on hot summer days. The paper suggested to investors that power plants with fast-starting Wärtsilä engines could bring 10 percent to 20 percent internal rates of return.

Another paper is simply titled “Catch Those High Prices and Make Millions.”

DME employees Jim Maynard and Will Bunselmeyer traveled to Portland, Oregon, in August to attend Wärtsilä’s symposium, city records show. Other city records show Wärtsilä representatives were in Denton in May 2015 visiting with DME officials.

This past week, a consultant affirmed the need for the engines. The City Council asked for a consultant to conduct an independent review. The city manager hired Ira Shavel and his firm, the Brattle Group, to provide the independent review. Last week, Shavel affirmed the need for the engines.

It wasn’t the first time Bunselmeyer, Maynard or others at DME had heard from Shavel.

He was among the featured speakers at Wärtsilä’s symposium in Portland last summer. His presentation made the case for Wärtsilä’s natural gas-fired power plants as more wind and solar energy operations get built.

Brattle Group representatives have been featured speakers at Wärtsilä symposiums in the past. And the Brattle Group has prepared white papers for the Texas Clean Energy Coalition, making the case for engines, such as those Wärtsilä sells, to replace the state’s coal-fired power plants.

DIY insurance

During a joint meeting of the City Council and the Public Utilities Board this week, Shavel called the engines — which DME calls the “Denton Energy Center” — a marginal investment on their own.

In an interview later this week, he called that remark “unfortunate.”

“If the city were to say it’s not adding renewables, then the Denton Energy Center would not work,” Shavel said.

Electricity has to be made as it is being consumed, which can create supply-and-demand problems on the state’s grid. Too much demand and the grid fails, triggering blackouts. Too much supply — which has happened on cool Texas nights when the wind is blowing — and energy traders don’t meet their expenses.

The Texas market price to turn on natural gas engines, make electricity and sell it at a profit is currently about $25 per megawatt, Shavel said.

(One megawatt powers about 300 homes in Texas.)

However, that $25 per megawatt covers only the operating costs, not the capital costs of the plant, he said.

Electricity buyers and sellers — DME, for example — negotiate their contracts in private. It’s difficult to get specific numbers.

Shavel said the last time he heard a price for a wind contract, it was $50 per megawatt. The American Wind Energy Association has reported recent contracts negotiated at $31 per megawatt. Austin Energy recently announced it expects to buy solar power below $20 per megawatt.

Energy contracts can contain more costs than the price per megawatt. They can also require guaranteed delivery, which usually comes at an additional cost.

If, for some reason, the wind or solar farm cannot deliver the electricity at a certain point, utilities must buy it from the grid.

The Electric Reliability Council of Texas, or ERCOT, which operates the Texas grid, will allow prices to go as high as $9,000 per megawatt under certain circumstances. But that hasn’t happened in a long time, Shavel said.

The rare time a price spike has occurred in the past few years, it’s hit about $1,000 per megawatt.

DME can negotiate for the best price from wind and solar farms if the utility doesn’t have to pay extra for guaranteed delivery, Shavel said. It can buy on the market when renewables fall short, or in the worst-case scenario, the utility can turn the engines on to meet local demand.

In other words, DME plans to use the engines like a name-your-price tool in contract negotiations and a do-it-yourself insurance policy against price spikes.

During Tuesday’s meeting, council members, consultants, utility board members and staff agreed not to discuss any specific numbers — dollars or megawatts — publicly. Several council members appear convinced the engines make a good choice over 100 percent renewable sources of power.

At least one council member remains skeptical the engines are the best option. Keely Briggs is not buying DME’s assertion that using the gas-fired generators will be cheaper than going 100 percent renewable over the long haul.

She asked Shavel whether a new report from ERCOT changed his mind about the purchase.

ERCOT regularly analyzes and reports on the state’s electric grid. The report releases some figures about the cost to make electricity along with educated guesses on whether power suppliers are recovering their costs in Texas.

Both the capital and operating costs for the newest natural gas-fired power plants in Texas comes to $80 to $95 a kilowatt-year. Currently, such new plants are earning $23 to $29 per kilowatt-year, ERCOT says.

(ERCOT’s kilowatt-year measurement helps compare the total, lifetime costs of the different kinds of power over the life of the plant.)

DME says it can buy, sell and trade enough electricity to make up the difference. Shavel told Briggs it’s still possible for DME to come out ahead buying engines, because of favorable conditions right now.

But, according to ERCOT officials, the Texas market appears to have a surplus supply of electricity. ERCOT expects investors to shelve any plans to build new gas-fired plants for a while. Austin Energy recently announced it has postponed its plans to build a controversial new gas-fired power plant.

The wild card

DME’s math includes selling energy back into the grid. Only a fraction of the locally made electricity would be used locally, officials said.

In order to catch those high prices and make millions, DME had to get permission from the Texas Commission on Environmental Quality to run the engines.

To do that, the utility borrowed a time-tested strategy used by local oil and gas operators: Avoid scrutiny for a major new source of air pollution by building small.

Denton and the rest of the Dallas-Fort Worth region has some of the worst air quality in the nation. That usually means careful review of new projects that can bring more air pollution.

DME got the permits by pledging to build small and not operate the engines all the time. The utility also claims the engines will reduce emissions, but no one really knows how the engines will affect local air quality. DME initially agreed to pay for an air quality study, but later backed away.

The utility plans to run the engines in the summer, when local air quality is already at its worst.

Buying engines

State purchasing laws require governmental bodies to issue requests for proposals. Businesses bid on the product or service and compete to win the project. Usually, the government contract goes to the lowest bidder and saves the taxpayer — or in this case the electricity ratepayer — as much money as possible.

City leaders either didn’t expect public opposition to buying the engines, or they expected to address and overcome the opposition quickly.

In September — a month before announcing the project publicly — they asked engine manufacturers to submit bids. They also asked for firms interested in designing and building the power plants to submit their qualifications.

The purchasing office didn’t hold a pre-bid conference. Such conferences aren’t typically held for equipment purchases, but they are often held for construction projects.

Any sign-in sheet for such a conference is considered a public document.

According to officials in the purchasing office, three companies have bid to supply the engines. Four companies submitted their qualifications to be the builder.

It’s not clear how long the bids would stand. Typically, bids on construction projects are good for about six months because costs fluctuate.

But, at this stage of the purchasing process, the names and details of the submitted bids are not considered public information because no bid has been awarded, purchasing officials said.

The Denton City Council has asked for a staff presentation Tuesday on financing options for the engines. A vote on the project could come as soon as June 21.

PEGGY HEINKEL-WOLFE can be reached at 940-566-6881 and via Twitter at @phwolfeDRC.

 

In The Know

Read the Brattle Group’s full report endorsing the Denton Renewable Plan online at http://www.cityofdenton.com/Home/ShowDocument?id=28178.