City Council faces major decisions on IPL operations

The City Council faces major decisions involving Independence Power and Light.

  • Do you close the only city-owned Blue Valley power plant?

  • How would you replace lost capacity by closing the plant?

  • What happens to IPL production staff?

  • What impact do the related decisions have on future utility rate reductions or increases?

And none of this takes into account the turmoil and ongoing controversy related to "smart meters" - a $30 million Advanced Metering Infrastructure (AMI) project to replace all electric and water meters. (More on the later)

Will we close Blue Valley?

IPL is moving closer to closing the 98 MW city-owned Blue Valley power plant because it is an old, inefficient, expensive to operate and rarely used to generate power.

In recent years, IPL has generated less than 2% of its power needs which are met through long-term coal contract, partial ownership of a natural gas plant, wind, solar and market purchases.

The decision to close Blue Valley is a MAJOR DECISION. 

Closing would take out production three different gas-turbine generators (which began operating between 1958 and 1965) which together can generate 98 MW of capacity.

Loss of the Blue Valley capacity, as costly is it might be, needs to be replaced.

IPL is required to have 12% capacity above its historic peak demand. That is a requirement of the Southwest Power Pool of which IPL is a member.

The 2020 IPL peak demand is projected at 300 MW. Providing a 12% margin above that results in a total capacity requirement of 336 MW.

What are the options?

IPL could meet its capacity basically through contracts and ownership.

There are several considerations involved:

  • How much capacity does IPL need in the near-term and long-term?

  • Will IPL peak demand in the future increase, decline or plateau?

  • Should IPL maintain some flexibility to account for changes in the energy market or lock in fixed pricing for an extended period?

  • What are the risks and rewards of securing additional energy which could be profitability resold?

The 16-page staff evaluation report stated:

"Based on the results of the RFP, IPL should choose one or more options that provide IPL the flexibility to adjust to future electric industry market conditions, such as demand response, energy efficiency, and energy storage. Securing large or long-term resources may be detrimental to providing IPL the flexibility it needs to adapt to future conditions."

Three primary options are:

  1. continuing operating Blue Valley,

  2. increase IPL ownership in Dogwood

  3. contract for power and/or energy with Oneta Power.

Both Dogwood and Oneta are natural gas plants constructed in 2002. Dogwood is located nearby in Pleasant Hill and Oneta is located in Oklahoma.

What will the City Council do?

Who knows?

Recent experience shows the City Council has disregarded the recommendations of its staff, paid consultants and the Public Utilities Advisory Board (PUAB) on several occasions.

The PUAB last month voted 5-1 in favor of an IPL staff recommendation for a 20-year contract to purchase capacity only from Oneta Power effective June 1, 2020. This was the unanimous recommendation of the seven-member staff Evaluation Committee.

The City Council held an April 8th study session on its option and will have a first reading of an ordinance for Oneta Power at its April 15th.

Monday's meeting will also include a full public hearing on the Oneta contract.

The estimated annual cost is $1.5 million per year or potentially $32.8 million over the 20-year period.

What is being considered is a contract for 45 MW of capacity but those costs do not include transmission costs. If transmission service proves unavailable or is cost-prohibitive, IPL can get out of the Oneta agreement. The contract includes a provision that would allow IPL to increase capacity to 70 MW if desired.

The 20-year agreement with Oneta was recommended because it offered the lowest overall costs with “minimal risk of market fluctuations.” The advantages, cited in the staff recommendation, were fixed pricing for 20 years.

The diagram shows a key slide in the cost comparison: Blue Valley (blue bar), Dogwood (green bar) and higher than various Oneta options (orange bar). The Oneta options are for various lengths 10, 15 or 20 years and offer capacity only or capacity and energy.

Blue Valley and Dogwood in all scenarios costs more on an annual basis the any of the Oneta options. The slide show is for medium market revenue in which the energy options reflect the net cost after project energy sales. 

The evaluation report mentions "energy market revenues can vary widely by year" so it provided variations in which energy sale profits were low, medium or high based on actual recent historic results. See slides (above) showing low, medium and high energy sales.

The various Oneta options, in all but one case, cost less than Dogwood and especially Blue Valley. The master energy study projects eliminating over 20 IPL power production staff with significant annual savings of over $3 million. Plans would have to be made for staff who lose their power plant jobs.

What about Dogwood?

Some City Council members have favored increasing the city’s ownership interest Dogwood.

In 2012, the city paid $48.5 million for 75 MW and a 12.3% ownership interest in Dogwood. The Dogwood purchase was financed by bonds which mature in 2037. As of last fiscal year, IPL still owed $33,095,000 on the bonds.

IPL staff told the PUAB that Dogwood had only been profitable in one of the previous 36 months - financial data which was factored into the comparative analysis.

The evaluation reports notes taking a larger Dogwood ownership interest "presents additional risks related to any future maintenance, repair, environmental compliance, and decommissioning costs of the plant; all of which reduce long-term cost certainty."

Owning more Dogwood also offers the opportunity make money by selling electric power, if natural gas-generated power consistently costs less than other power options in the Midwest energy market.

And that is precisely the challenge ... betting on long-term trends in energy production and related costs.

Changes in the Energy Market

The energy industry is undergoing major technological change and economic disruption.

There was a time when coal was king and utilities sought out and locked up long-term power contracts. IPL has current coal contracts that last until 2049 (Nebraska City 57 MW) and 2050 (Iataan 52 MW).

In 2012, IPL needed more energy. It explored coal power but decided it was become costly and instead diversified by purchasing an ownership interest in the Dogwood natural gas plant.

That was just seven years ago. And things have continued to change.

There has been tremendous growth in renewable energy, particularly wind. On the horizon is industrial scale battery storage which can store intermittent renewable energy (wind and solar) and deliver the energy when needed.

One of the respondents to IPL capacity RFP actually recommend a new battery storage option within the city. 

As a Southwest Power Pool Integrated Market member, IPL has access to low-cost, reliable power by combining the generating capacity of providers within a large geography. SPP includes over 750 generating plants with approximately 61,000 miles of transmission lines.

SPP serves 18 million people in all or parts of Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming.

In a media release marking its fifth anniversary of the Integrated Market, SPP noted it had saved members $2.7 billion in energy costs while providing more access to renewable energy - primarily wind. Wholesale energy costs in the SPP region are the lowest in the nation.

“SPP dispatches the most reliable and lowest-cost generation to meet load, remaining agnostic to fuel sources (i.e., SPP doesn’t favor fossil fuels, renewables or any other particular generation type over another),” the release states.

Wind is a growing part of that. The release notes:

“In 2008, wind energy made up just 3 percent of SPP’s annual energy production: about six gigawatt-hours (GWh) of the 176 GWh produced that year. In 2018, SPP produced 276 GWh of energy, of which wind made up 23 percent or 65 GWh. At a given moment, SPP has reliably met as much as 69 percent of its load with renewable resources and 64 percent with wind alone: a level that would have been unthinkable just a few years ago.”

Over the past decade, SPP has invested $10 billion in transmission infrastructure to move wind and solar energy to where it is needed.

These trends are expected to continue.

What's Next?

The City Council could take formal action on energy capacity ordinance as early as May 6.

This is a complicated decision - short-term or long-term, lock in costs or try making money through energy sales all which is affected by future demand and energy generating options.

There is a May 31st deadline to notify SPP so it can study transmission costs and provide cost estimates to proceed. If costs are acceptable, the city could close its Blue Valley power plant by June 2020.

This is an ambitious schedule and recent experience has shown policy decision involving IPL are difficult at best.