Power Purchase Plays

Securing the right power purchase agreement is essential to the success of a bioenergy project.
By Anna Simet | July 03, 2012

The fate of Russell Biomass, a biomass power project under development in Russell, Mass., revolves around a power purchase agreement (PPA) that hasn’t yet been secured. Project partner Peter Bos admits the PPA is the most important component in bringing a project to fruition, but he says it’s unattainable for now, at least until the final Massachusetts Department of Energy Resources renewable portfolio standard (RPS) regulations are out.

This isn’t Bos’s first renewable rodeo, however. He is the founder and CEO of ARS Group, formed in 1982 to develop and own independent power plants. ARS’s New England projects include a hydropower plant and a 40 MW wood-fired power plant. Russell Biomass has been in development since 2005, and though it has faced a myriad of obstacles along the way, Bos and his partners have forged ahead.
While Massachusetts released its long-overdue proposed final RPS legislation in early May, the law is still looming, leaving developers like Bos, foresters and anyone else who has a stake in the biomass industry anxious and frustrated. But Bos says a new bill being proposed in the state appears to be good for renewable energy, as it would double the amount of green power that would be supported by long-term PPAs.

But there’s a catch. Unless it specifies a certain amount of energy to be derived from each renewable resource, it will be extremely difficult to compete with cheap onshore wind.  “The average [gross] cost of onshore wind per kilowatt hour (kWh) [in Massachusetts], for a 15-year contract, might be in the 10- to 11-cent range, 9 cents at the best,” Bos says. “The average biomass power cost over 15 years is around 17 to 18 cents, the average offshore wind costs around 24 to 25 cents, and solar is up around 40 cents.”  

Prices are different in each state and region and depend on multiple factors, including financing, incentives, technology, project location and perhaps most significant, fuel availability and logistics. According to U.S. DOE estimates, a typical U.S. direct-fired biomass plant can produce electricity at a net cost of 9 cents per kWh, but that can vary greatly. For example, the Oregon Department of Energy reports that using conventional combustion technology without cogeneration, the estimated net cost to generate electricity from biomass in Oregon and the Pacific Northwest ranges from as low as 5.2 cents per kWh to 6.7 cents, significantly lower than in Massachusetts.

That may not be surprising to most, as electricity rates consumers pay in the Northeast are generally the highest in the country. Costs in Massachusetts, New Hampshire, Connecticut and New Jersey are typically greater than 15 cents per kWh, according to 2010 National Renewable Energy Laboratory data, and in other states such as Washington, Idaho and Wyoming, rates dip anywhere from 5 to 7 cents per kWh.

Bos says right now, 80 percent of renewable energy proposals in Massachusetts are for onshore wind projects, and with gas-fired power as cheap as it is, no power buyer wants to purchase renewable electricity that starts at 10 to 11 cents per kWh. It is possible to lower the price a little though, he adds, if the developer sells heat or low-pressure steam. “You can get more revenue and lower the price per kWh, but probably not more than 2 to 3 cents, not to the price of wind,” he says.

So with that disadvantage, how does a biopower project developer make its case to power buyers?

Convincing the Customers

 “You have to point out that it’s the only 24/7 reliable power; wind and solar aren’t,” Bos says, explaining that with peak demand for electricity, a utility can count on biomass.

Todd Taylor, energy and corporate attorney with Fredrickson & Byron, agrees. “[It’s] reliability of power supply, coupled with alignment with power needs,” he says. “If the bioenergy project does not have the ability, in terms of both long-term feedstock agreements and technical reliability, to consistently deliver power, a power buyer won’t be interested.”

Taylor reiterates that many power buyers have been acquiring wind PPAs to meet their RPS requirements, so bioenergy PPAs will need to fit within existing RPS power PPAs.

It’s assumed that power buyers won’t buy renewable electricity unless it is mandated, but Santee Cooper, a South Carolina-based power utility, is going against the grain. The state doesn’t have an RPS, yet the utility currently has more than 200 MW of biomass, biogas and landfill gas-derived electricity, mostly contracted through long-term PPAs, according to Mollie Gore of Santee Cooper.

“That’s a key point—we’re doing all of this voluntarily,” she says. “In our part of the country, biomass is the most abundant renewable resource in terms of cost and availability. With solar, the technology is changing, but it’s still considerably more expensive. We’ve had good luck finding cost-effective biomass projects—it has been a good resource for us.”

Cost-effectiveness is one of two key attributes Santee Cooper looks for in a perspective power supplier, Gore says, adding that the utility also needs to be able to get all of the environmental attributes with the project.

In his experience, Taylor says power buyers will be most concerned about pricing, as they are usually regulated entities and have to manage pricing to consumers. Long-term contracts are important as well, but that goes back to the price again—only if it is right. “The trend now is long-term contracts at lower prices, as bioenergy projects must compete against low-cost natural gas,” Taylor says. “Power buyers are trying to lock bioenergy projects into long-term, low-price contracts, in part, because most long-term natural gas projections show the cost rising, and cheap bioenergy now will help offset those rising costs.”

For the developer, Taylor says both length of contract and price are critical, but length of contract is slightly more important, as it gives assurances to financing sources that there is a long-term revenue source, assuming the price is enough to pay all costs and generate a sufficient return on investment for equity investors. 

Bos says there is a trade-off between price and length of the contract. “The shorter the contract, the higher the price you need to have to cover the debt service you have,” he says. “If you have a 15-year contract, which is the max in Massachusetts, then you can only have debt for 15 years because the lender wants to see that your assured revenues will cover the debt of repayment.” If one has a 20-year contract, he can spread that out and lower the price a little, but sooner or later when the length of the debt is stretched out, it doesn’t allow you to lower your price as much with interest costs.”

A First Step

    “A developer should begin seeking out potential PPA partners as one of the first steps to any development projects,” Taylor says. “Understanding PPA pricing, structure and interest from potential PPA partners is critical to assessing the feasibility of any bioenergy project.”

    Without a PPA, a project won’t be financed, he adds, and bioenergy developers right now are facing a tough power market. “Power buyers have purchased or committed to purchasing a great deal of wind power such that bioenergy projects have been squeezed hard,” Taylor says. “But wind energy has significant challenges due to transmission problems that distributed bioenergy projects often do not face.”

 While large, utility-scale bioenergy has the same challenges as wind, the smaller, more local bioenergy projects are being developed far more rapidly. But the market varies by state and region. “Some states are hostile to bioenergy, usually based on a misunderstanding of bioenergy as simple burning versus more advanced bioenergy technologies such as gasification or anaerobic digestion,” Taylor adds. “The key always is to find a great customer willing to buy your power.”

Author: Anna Simet
Contributions Editor, Biomass Magazine
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