Maurice Emmer: Guest opinion
December 27, 2011
Aspen seeks to convert city electricity to renewable sources (the Canary Initiative). To provide 8 percent of city needs, Aspen plans a hydroelectric plant on Castle Creek. The projected cost has escalated from $6.2 million three years ago to currently $10.5 million. Critics claim it could be $15 million to $18 million. Application to the Federal Energy Regulatory Commission (FERC), whose approval is required to build the plant, is long and uncertain. Environmentalists and landowners on Castle Creek are opposed. There is litigation over the project.
When this project began, the economy boomed; money was no object in Aspen. Economic reality has struck. Who knew there might be financial limits? Here’s what I found when I examined the city’s financial models.
The city says the Castle Creek hydroelectric plant is a small stage of Canary; it dismisses questions about electricity rates or the environment as immaterial (“this is only 8 percent”). When will financial sanity become material to the Canary Initiative? In the last 8 percent?
The Castle Creek hydroelectric plant is to replace coal-generated power now purchased by Aspen. Aspen justified the project by comparing what it guesses coal-generated electricity will cost over the next 50 to 80 years with what it guesses the hydroelectric plant would cost. Assuming the city’s guesses are right, the plant would not create cumulative savings until between 2030 and 2036. That’s more than 20 years after the plant would begin operating. But how can such guesses be reliable? Any financial projection beyond five years is a fool’s errand. How good are projections based on full-plant capacity if the plant has to operate below full capacity for long periods?
The analysis ignores effects on electricity rates. It seems to assume a happy ending as long as coal prices rise enough over 50 years. But if coal prices don’t rise that much (or fall), rates will have to be increased to pay for the plant. Shouldn’t we care about that?
The cost of generating 1 kilowatt hour at the plant for the first 20 years will be about 10 to 11 cents at full-plant capacity and at the city’s present guess about project costs. This is 10 to 20 percent more than it costs to buy renewable energy from outside sources today. As the project costs continue to rise, that gap will widen above 20 percent.
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Aspen guesses about or ignores many risk areas – risks that could be mitigated by purchasing renewable power rather than generating it. Can the city reliably predict the outcome of such risk areas as:
• Project costs (already revised repeatedly)?
• Having to issue more bonds as costs escalate, resulting in additional interest costs?
• Costs of FERC process?
• Costs of changes required by FERC?
• Litigation costs over water rights, environmental issues, etc.?
• Lost Castle Creek water rights (at issue in litigation)?
• The coal-generated electricity cost curve?
• Reduction from full-plant output possibly required given uncertainties about:
• Environmental effects of removing water from Castle Creek and Maroon Creek?
• Future weather conditions (e.g., rainfall)?
• Possible limitations imposed by FERC?
• Possible limitations from litigation outcome?
The hydroelectric plant’s financial projections are only as good as the assumptions. Reality puts the lie to assumptions. Movement in a few assumptions could make the plant a financial disaster. Consider, for example, the 70 percent increase in project costs already acknowledged.
Why is Aspen marching down this risky road? It claims that the success of existing aged hydroelectric plants proves the wisdom. But the facts of the city’s other hydroelectric sites are entirely different.
Aspen can buy renewable electricity generated elsewhere at affordable rates and resell it to Aspen’s residents. This could happen in months, not years. Large utilities, capturing much greater economies of scale than Aspen’s tiny operations, employing professional utility management that knows how to mitigate risk, could provide reliable streams of renewable energy indefinitely. Such utilities’ future rates might increase – or decrease, given that supplies of traditional and renewable energy are increasing.
Moreover, any price risk from buying energy should be compared to the numerous risks of constructing another city-owned hydroelectric plant and being stuck with the costs and uncertainties associated with it for 50 to 80 years. It’s not as if there isn’t a price issue with the plant itself; even now there is strong evidence that hydroelectricity will be more expensive than other renewable electricity.
Let’s get greener now: Buy existing renewable energy from a
reliable source, shut down the hydroelectric-plant boondoggle, and, this being Aspen, prepare for the next one.
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