Neil F. McAndrews, Senior Principal, Enterprise Risk Consulting, LLC
Larry G. Lawrence, President, Enterprise Risk Consulting, LLC
Editor's note: This is the second of a two-part series by the City of Georgetown's Chris Foster and consultants Larry Lawrence and Neil McAndrews examining how Georgetown, Texas became a 100 percent renewable city while pursuing least-cost economic goals. This post was originally published by the Cynthia and George Mitchell Foundation.
Georgetown Utility Systems (GUS), can serve as the basis for a sustainable power supply solution.
In part two of our series on how Georgetown, Texas became a 100 percent renewable city, we examine how market opportunities and the supply portfolio decisions of Georgetown’s municipal utility, Georgetown Utility Systems (GUS), can serve as the basis for a sustainable power supply solution. Georgetown’s renewable power supply helped the city in a surprising way, as it has engendered new thinking about the city’s future. Georgetown now embraces a longer term planning vision, and being a 100 percent renewable city underpins more dynamic marketing and branding opportunities.
We focus first on Georgetown’s local market, the Electric Reliability Council of Texas (ERCOT) and then on opportunities in other markets throughout the U.S.
The ERCOT Market Structure
Two important aspects of the ERCOT market structure allowed GUS to make the switch to a 100 percent renewable supply of power.
First, ERCOT operates an electric grid where wholesale generators are in open competition and consumers like GUS have access to this market. Generators are rewarded only if they produce energy (as opposed to other markets, where generation, some of it noncompetitive, is also rewarded simply to be available).
This allows a simpler path to introducing competitive new technologies like renewables because old technologies are not rewarded on a legacy basis.
The second aspect is that ERCOT operates a very reliable transmission grid. The state of Texas directed ERCOT to invest billions in transmission lines to connect wind and solar farms from optimal sites in west Texas. ERCOT routinely conducts economic analyses to determine whether building new generation or building new transmission is more efficient. The ERCOT grid allows renewables to be a large part of the future energy supply in Texas.
Portfolio Management Opportunities
GUS was free to shop around ERCOT for resources, considering any kind of generation resource connected to the ERCOT grid, with market tools available to efficiently manage a renewable supply portfolio.
GUS’ power supply evaluation framework considers power prices along with related direct and indirect costs. As an example, the intermittency of renewable power resources is a challenge because of the cost of dealing with inherent production uncertainty. This cost was considered in GUS’s evaluation process.
To manage this uncertainty, GUS developed a daily process using tools available within the ERCOT market. For wind, GUS needed to purchase power when wind is limited and sell excess production when the wind is stronger.
Fortunately, ERCOT provides real time and day-ahead markets to help manage short-term supply imbalances. Although this adds operational complexity, the exercise is a more solvable challenge compared to that of managing short-term fossil fuel supply imbalances and price uncertainty, as well as the environmental impacts and regulation associated with fossil fuel power resources.
Renewables Reduce Fossil Fuel Supply Cost and Operational Risks
Renewable energy reduces the large risk and cost exposures of a traditional fossil fuel supply contract.
Traditional power supplies and resource planning studies include an extensive fuel supply analysis. These studies (will) include location (basis) exposure, transportation costs, price forecasts and environmental impacts.
It’s crucial to match the type of supply required to the output characteristics of the power resource. For example, for a natural gas fired power plant, purchasing natural gas supply from a producer must also be done in conjunction with a gas transportation contract. The gas contract will have provisions for how much volumetric change is allowed each day, and the related cost impacts (including substantial penalties). The contract is also likely to include natural gas storage, which is a seasonal asset requiring management of excess capacity during non-seasonal demand periods (in order to reduce the overall cost impact).
GUS experienced fossil fuel delivery problems in its former power supply contract. Natural gas had been interrupted due to severe winter weather in February 2011. Outages at over seventy power plants caused power to be rationed statewide.
GUS was also exposed to delivery shortages from its long term coal contract: railroads faced floods in the Midwest during the early 1990s, a merger caused shortages in the late 1990s, and competition with higher value deliveries produced shortages during this decade.
Renewable energy avoids virtually all of these expensive complications.
Another cost saving aspect is that the planning process is minimized with renewables because there is no fuel infrastructure to develop and maintain. Delivery cost adders include all sorts of fuel infrastructure costs like railcar maintenance and pipeline annual outages.
Unlike fossil fuel contracts, there were no cost escalators in many of the renewable energy contracts offered to GUS. And, minimal regulatory compliance costs are required with renewable energy— important to Georgetown’s goal of minimizing administrative costs.
Avoiding Water Consumption
Water was the most important sustainability-related issue for GUS. During the historic drought of 2011, many power plants were in danger of shutting down because their cooling lakes’s water levels were too low. GUS placed significant emphasis on power that does not require additional water use and water rights. Texas is a growing state that has increasing need for water resources and a history of conflicts related to water rights. GUS wanted a solution that took this into consideration.
Opportunities for Sustainable Economic Development and Branding
The Texas economy has been dependent on oil for most of the 20th century. Georgetown’s leadership was concerned that the city needed to diversify in order to maintain a vibrant economy.
Georgetown found that a 100 percent green message offered a significant benefit in its efforts to attract tech sector and innovative research and development-skewed businesses, along with highly educated professionals. The brand value of the Georgetown’s subsequent media attention hasn’t been quantified by an independent third-party, however, the city estimates the decision to go green has generated positive impressions equal to a multi-million dollar worldwide advertising and public relations campaign, a figure that continues to grow.
Applications in Other Markets
How do others replicate Georgetown’s success?
First, consumers and producers need to be involved in making the transmission grid work. Renewables need to be cost competitive with fossil fuel generation resources. Finally, a solid set of plans and procedures are needed for proper integration and management of renewables in supply portfolios.
GUS’ story can do a lot to break down theoretical, cultural, and even political barriers within some institutions and municipalities in regard to the viability of renewable sources of power, although each utility will continue have it own unique challenges. Not all will be able to cost effectively integrate renewable technologies, or to go 100 percent renewable; however, many should be able to take significant elements of GUS' model and approach and replicate them while successfully increasing both the proportion of renewables in their supply portfolios and the efficiency of these portfolios.
© Copyright 2016 Enterprise Risk Consulting, LLC