Hal Harvey: Guest opinion
Aspen’s plan to build a new hydroelectric facility, using water diverted from Castle and Maroon creeks, doesn’t pencil out. It is a money loser – big time. Unfortunately, the assumptions Aspen used in promoting the project are flawed, and they disguise the real economics. Let me explain.When a large construction project is proposed, a city agency typically does some basic math: What will it cost to build? How much money will it generate or save? What will it cost to maintain and operate? Add these together, put in some intelligent assumptions about interest rates and inflation, and you have a financial model that argues for or against the economics of the project.I have spent my academic and professional career steeped in the economics of energy projects, so I took a look at the spreadsheet Aspen used to justify the Castle/ Maroon hydro projects. It has a few big problems – and together, they wipe out the economics of the proposal. I found three serious problems:1) The city assumes the hydro project can be built for $5.5 million. Already we know the number is more like $7.5 million. My guess is it will rise further, but I re-ran their spreadsheet with a $7.5 million capital cost. It costs more interest, and more principal, to pay off a $7.5 million debt than a $5.5 million debt. 2) Electricity costs (which represent the revenue from the dam) would rise 5 percent per year, compounding, for each of the next five years. That’s unlikely, so I dialed it down to 3 percent per year – which is probably still high.3) Total operation and maintenance costs were set at $69,000 per year. The Aspen model made this assumption dividing all federal dams’ operating costs by their total electricity consumption, to produce an O&M cost of .009 cents/kilowatt-hour. Well, that might be a reasonable assumption if you are operating the Glen Canyon dam or some other huge, mature facility, but it is silly to take that number for a project of the Aspen scale, and with Aspen prices. The city’s financial model would barely hire a full-time worker, nevermind pay for her truck, shop, parts, consultants, specialists, etc. So I nudged this up to $128,000 per year; still low, I would wager.If you correct these three factors, you see that the dam can never repay the bonds. In fact, after 27 years, the debt load is still almost $6 million. That’s more than $1,000 per citizen. Have you got your share ready to ante up? The thing has negative cash flow – forever. And note that my assumptions are themselves deeply conservative. I don’t count any soft costs in the project. I presume an electricity inflation rate that is highly favorable, but unlikely. I stipulate all the city’s revenue numbers. In fact, even after the adjustments I make, I predict the economics will end up being worse negative. I’ll stake some money on it: If the economics of the hydro plant are better than what I project, I will donate $1,000 to the Aspen Center for Environmental Studies. The hydro project is a money loser. We are going to lose north of $5 million on it.And that’s the rub: I strongly agree with the goals of the Canary Initiative. We need to transition away from fossil fuels. I have spent my professional life promoting green energy. But I have also learned that you only get to spend a dollar once, so you better make your best buys first. There are ample opportunities to spend money in Aspen on energy efficiency, and they will reduce fossil fuels at a far lower cost than this project.
Hal Harvey was born and raised in Aspen, and keeps a cabin in the valley. He is CEO of the ClimateWorks Foundation, a network of philanthropies and expert groups working on energy policy in the dozen largest countries (www.climateworks.org). He has undergraduate and graduate degrees in engineering, specializing in energy planning.
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