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HomeMy WebLinkAboutDevil Canyon - 10-15-86WHITE PAPER ON THE DEVIL CANYON HYDROPOWER PROJECT PREPARED BY THE ANCHORAGE CHAMBER OF COMMERCE ENERGY COMMITTEE OCTOBER 15, 1986 the Anchorage Chamber of Commerce Energy Committee has been addressing railbelt electrical energy issues for several years. Its group is composed of Anchorage business leaders who meet on a twice monthly basis with the objective of formulating energy policy on behalf of its full Chamber membership. It has been very active in working to insure that its adopted policies are implemented at the Local and State levels. Over the years, it has been instrumental in helping to secure funding for the Anchorage/Fairbanks transmission intertie, the Bradley Lake hydropower project, and exploration funds for the Susitna hydropower project. It has helped forge and supported critical State legislation designed not only to benefit railbelt consumers, but consumers throughout rural Alaska and in particular those that are benefiting from the "four dam pool." Members of the Energy Committee have committed not only their time to this effort, but considerable dollars as well. In addition to their own out-of-pocket expenses associated with travel and time lost for attendance at key Legislative and utility meetings, they have been successful in raising private financing to assist in meeting Chamber objectives. One such example was the raising of some $200,000 from private sources for an independent assessment of the financing for the Susitna hydropower project. Another was the funding and production of an objective 30 minute documentry film on energy alternatives for the railbelt. Continual assessment of the viability of the Susitna hydropower project has been a major objective of the Energy Committee. Susitna holds the promise of long term energy independence for railbelt consumers, and a near term source of construction jobs for at least sixteen years. While the project appears to make long term economic sense for the railbelt, it is beyond the ability of the State and local utilities to finance at this time. Thus, the Energy Committee has undertaken a review of the much smaller Devil Canyon hydropower project as a possible near term alternative to the full Susitna development. This "white paper" is an attempt to encapsulate the technical, economic, and financial issues associated with the Devil Canyon project. The information present in this paper is a product of existing documents and reports in the public domain and of personal interviews with key political and utility officials. Considerable information is available for review. Millions of dollars have been spent or exploring the technical and environmental aspects of Devil Canyon, but only scant attention has been given to studying Devil Canyon as a stand alone element of the total electric utility system. Much of the Devil Canyon site specific information was obtained from investigations conducted over the years by the U. S. Army Corps of Engineers, the U. S. Bureau of Reclamation, and more recently Preface Continued by the State of Alaska particularly through the efforts of the Alaska Power Authority. In evaluating Devil Canyon, it has been necessary to compare it to energy alternatives which would be developed in lieu of Devil Canyon. Coal or natural gas fired thermal generation appear to be the most probable alternatives; and hence, these alternatives have been used as the economic yardsticks by which to evaluate Devil Canyon in this paper. This report, however, does not attempt to review these options to the same depth as Devil Canyon. Rather, these alternatives have been reviewed from the standpoint of resource availability and long term cost, but no effort was made to assess the technical, financial and environmental aspects of these alternatives. The main objective of this report is to review the relative strengths and weaknesses of a Devil Canyon project so that Energy Committee members may determine if the project warrants more in-depth consideration by State leaders. In the backwash of the demise of Susitra, much effort is being exhibited by the coal industry to induce the railbelt utilities to start planning for conversion to coal fired generation. At the same time, natural gas generation is being recognized for its economic attractivness in the wake of the collapse of worldwide energy prices, and in recognition of the availability of Cook Inlet natural gas since the demise of the Pacific Alaska LIG project. Perhaps from the chagrin of the Susitna exercise, no one appears willing to conduct an assessment of the Devil Canyon project at this time . The absence of this analysis has been a motivating force for the Anchorage Chamber of Commerce Energy Committee to produce this "white paper.' DEVIL CANYON SUMMARY CONCLUSIONS 1. Devil Canyon is technically feasible and there is a high probability that the project can be built for a cost of $1.32 billion (1985$) not including finance charges. The project would take six years to design and construct and it could be completed as early as 1997. 2. The environmental impact associated with the development of Devil Canyon appears to be minimal in comparison to full basin development. The largest impact could be from human encroachment into what is now a wilderness setting. 3 Devil Canyon and its surrounding environment could offer a significant new recreational site for tourists who would normally travel to Denali Park from Anchorage by way of automobile or train. The project could complement State plans to develop the recreational potential of Curry Ridge. 4. Devil Canyon could produce approximately 2.2 billion kilowatt hours per year of electricity to meet a portion of the railbelt energy needs. The railbelt presently consumes roughly 3.5 billion kilowatt hours annually. The annual distribution of energy from the project does not match the seasonal energy demands of the railbelt; however, development of upstream storage or retiming the output from Eklutna, Bradley Lake, and Cooper Lake hydropower projects would change the situation. Retiming of the small hydro projects or development of upstream storage would increase the cost of the revil Canyon option, but additional energy benefits would accrue as well. 5. All of the existing thermal generation in the railbelt will need to be replaced by the year 2012. A large portion will. need to be replaced before the year 2000. Devil Canyon generation could meet a portion of this replacement capacity. The existing hydrogeneration at Eklutna, Bradley Lake, and Cooper Lake would not need to be replaced. 6. In the absence of Devil Canyon, continued generation using natural gas appears the most probable near term source of electricity to meet Southcentral energy demands. There appears to be a high probability of at least a 30 year supply of gas in Cook Inlet to meet the domestic and export commitments at our present use rate. However, given an annual growth in demand of Only 1.3 percent over the present domestic and export commitments, there is only a 23 year supply of this same gas. 7. One year of Devil Canyon generation will conserve the equivalent of 10 months supply of natural gas annually for home heating purposes in the Anchorage area. CO azXu PREFACE 2Lf& iv SUMMARY CONCLUSIONS TECHNICAL INFORMATION 1 9ACKGROU ND 1 PRESENT STATUS 2 TECHNICAL ASPECTS OF DEVIL CANYON 2 ENVIRONMENTAL IMPACT 3 LAND STATUS 3 ENERGY OUTPUT 4 LICENSING REQUIREMENTS 5 ENERGY P-ND GENERATION REQUIREMENTS 7 NEED FOR NEW GENERATION 7 FUTURE ENERGY DEMAND 8 REVIEW OF OTHER ENERGY ALTERNATIVES 10 NATURAL GAS 10 COOK INLET NATURAL GAS AVAILABILITY 11 NATURAL GAS CONSUMPTION FORECASTS 12 NATURAL GAS PRICING 13 COAL FIRED GENERATION 15 COAL PLANT COSTS 16 COAL PRICING 17 FINANCIAL ANALYSIS 18 TECHNICAL INFORMATION BACKGROUND The Devil Canyon project has been studied on numerous occasions in previous years but never as a stand-alone project. Instead, it was always studied as an element of a combination of dams to be built on the Susitna River. Interestingly, while various proposals for full basin development have been proposed over the decades, Devil Canyon has always remained an element of those proposals. In fact, the proposed project features for Devil Canyon have changed very little over the initial proposal for developing the dam site in the early 1950's Initial investigations were performed by the U. S. Army Corps of Engineers and the Bureau of Reclamation in the 1940's. In the 19�0's the Bureau focused its efforts on the Devil Canyon site and conducted an extensive core drilling effort there. They built a runway at the damsite and a 15 mile road to the damsite from the railhead at Gold Creek. They submitted a report to congress in 1962 that recommended developing Devil Canyon as the first dam in what would eventually be a 4-dam development of the Susitna River to include Watana, Vee, and Denali dams located up -stream from Devil Canyon. The proposal languished pending resolution of the Corps of Engineers thrust to build the Rampart hydropower project on the Yukon River. In 1972, Congress requested that the Corps of Engineers review the 4-dam Bureau of Reclamation proposal and report its findings to Congress. The Corps initiated its investigations in the fall of 1974 and completed its assignment in December of 1975 with a recommendation that the project appeared to be economically feasible and that the environmental impacts associated with the projects development appeared acceptable. The Corps scheme for developing the basin differed slightly from that of the original Bureau proposal. Instead of four dams, the Corps recommended the construction of only two dams: Devil Canyon and a high Watana. The Corps proposal would include Devil Canyon as originally proposed by the Bureau of Reclamation, but Watana would be increased in height over the Bureau design. By increasing Watana's height, the Vee damsite would be eliminated by the Watana reservoir, and the Denali damsite would become superfluous. The 2-dam scheme could produce 95 percent of the energy of the 4-dam scheme, but it would directly inundate only 60 percent as much area as the 4-dam proposal. Furthermore, the cost of the 2-dam proposal was less than that of the 4-dam scheme. The State of Alaska through the Alaska Power Authority took over sponsorship of the Susitna project in January of 1980. The Power Authority hired Acres American Inc., to conduct a detailed investigation of the upper Susitna River and to Devi). Canyon Anchorage Chamber of Commerce Ener.gy Committee October 15, 1986 Page 2 establish base -line environmental data to support a license application to the Federal Energy Regulatory Commission (FERC). The investigations included additional core -drilling at Devil Canyon as well as at Watana, and other basin locations. After two and a half years of study and the expenditure of $35 million, the Power Authority confirmed that the Devil Canyon and Watana projects did indeed represent the optimum way to meet the railbelt future energy needs and applied for a license to construct the project. The plan was to have Watana power on line by 1993 and Devil Canyon power on line as future demand dictated. As State revenues fell, it became apparent that it would be difficult to finance the $3.5 billion Watana first stage development without substantial assistance from the earn`ngs from the perminent fund. Consequently the entire project N _ put on hold despite the fact that a $1.3 billion Devil Canyon project appeared to be economically feasible on its own merit. Although both projects are presently stalled, Devil Canyon has never been seriously considered as a stand-alone project to meet the energy needs of the railbelt. Preliminary analysis indicates that it warrants this consideration. Furthermore, the cost associated with making this evaluation is quite minimal. The majority of the field investigations needed to address the Devil Canyon project have already beer. performed. No other energy project in the railbelt can be studied with the same level of confidence as Devil Canyon without significant field explorations. In addition to the work performed �)y the Corps of Engineers and the Bureau of Reclamation, the Power Authority spent roughly $150 million on its investigations. The Power Authority estimates that roughly 85 percent of the Susitna investigations can be directly usable for the Devil Canyon project. It is estimated that a prefeasibility investigation of the Devil Canyon project can be conducted for approximately $300,000, and that a FERC license application could be prepared for another $1.5 million. Additional geotechnical work would also need to be performed during the licensing phase. The most recent studies by Harza-Ebasco, the firm selected by the Power Authority to license and design the Susitna project, indicates that Devil Canyon as a stand-alone project Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 3 would cost approximately $1.323 billion in 1985 dollars not including capitalized interest. Licensing could take two to three years to complete and construction is estimated to require six years. Access to the damsite would require the construction of a new road from the parks highway through Chulitna pass or by way of upgrading the existing road from Gold Creek. The dam would consist of a concrete thin -arch structure in the main canyon and an earth -fill cut-off dam on the .left abutment. The thin -arch structure would have a maxim,.,:,' structural height of roughly 645 feet and it would be 90 fe-, wide at its base and 20 feet wide at its top. The earth -fill structure would be roughly 245 feet high. The combined crest length of the two structures would be approximately 2100 feet long. The environmental impact associated with the project has been studied extensively. While the lower Susitna River supports an extensive anadromous fishery, few salmon have been found to migrate above the Devil Canyon damsite. While the variability of flow could be detrimental from a power consumption standpoint, it will have positive environmental consequences. Because the project will be operated in a run -of -river mode, the downstream habitat will not be seriously altered. Thus the impact on downstream fisheries should be minimal. Upstream impact should also be minimal. The Devil Canyon reservoir will be roughly 26 miles long and no more than one half mile wide at its widest point. The reservoir will be confined to a steep -walled canyon and the area flooded will amount to only 7800 acres at maximum pool elevation. Some big game habitat will be lost. Perhaps the biggest environmental impact will be from the human pressure that would result to what is presently a wilderness area. The land in the project area and south of the river is generally in the ownership of Native corporations, while the Bureau of Land Management owns much of the land to the North of the river. The Devil Canyon cost estimate includes $23 million for lands and right of way purchases. The Natives have generally been supportive of the project as they see it as a means for opening up the economic potential of their lands. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 4 The present design calls for an above ground powerhouse with an installed capacity of 460 W. Future investigations could result in the powerhouse being located underground. The project would be capable of producing roughly 2.2 billion kwh of electricity annually. This amounts to roughly half of the present energy consumption in the railbelt today. The distribution of the energy from Devil Canyon would vary considerably throughout the year. The Devil Canyon reservoir is very small in comparison to the average annual streamflow of the river. Consequently, there is little opportunity to store the heavy summer flows for later release during the winter months. Devil Canyon as a stand-alone project would essentially be operated as a run -of -river project. Listed below is the estimated year 2000 annual railbelt energy demand and the corresponding energy capability of Devil Canyon stand-alone. RAILBELT YEAR 2000 ENERGY DEMAND AND DEVIL CANYON CAPABILITIES (GIGAWATT HOURS) MONTHLY OTHER RESIDUAL DEVIL MONTH DEAD 1LUROPOWER DEMAND -CANYON JAN 485 59 426 125 FEB 404 54 350 55 MAR 408 46 362 51 APR 360 39 321 47 MAY 331 35 296 271 JU N 304 28 276 300 JUL 312 34 278 309 AUG 322 45277 309 SEP 344 55 289 302 OCT 399 52 347 176 NOV 422 57 365 123 DEC 468 __44 409 _Ila TOTAL 4559 563 3996 2191 (Other Hydropower includes Eklutna, Bradley, and Cooper) It is obvious that most of Devil Canyon could be absorbed ty the year 2000, and the remainder would be used as energy demand grows. The major question that arises from the above table involves the impact of Susitna on existing natural gas fired Devil Canyon Anchor age Chamber of Commerce tic't�bei i�, i3c6 Page 5 ytrlerortivvl-, A +�oy-9 5, inN(cs49e"ta4 oT �-4,2 Ir+,p�[«i.r(AN5 vT '.YC^�Y'-r��l-�.� .^ate.. i_ '�l.;L:1- .y . i • i, - �, _ �Ii. �i .S'13'`►�`o; tM`� delav�ra.� _eN�f,;r 5qs hte perfor�ea. There are obvious ways to enhance the operation of Devil Canyon. One method would be to construct additional storage upstream of the Devil Canyon reservoir. This could result in a significent additional expense, but it would also result in additional energy output at Devil Canyon. The most apparent method would be to change the operation of the existing hydropower in the system to augment the low periods of Devil Canyon output. This would require that both the Eklutna and Bradley Lake reservoir capacities be slightly enlarged to be able to store almost the equivalent of their respective basin's natural runoff. The Cooper Lake reservoir is already large enough to accommodate its basin's full annual runoff. The full reservoir capacity of the three projects would allow them to be operated at full continuous capacity during the winter when Devil Canyon power is at its lowest, and they could then be shut down for the balance of the year. Operation in this manor would not diminish the energy output of the three projects it would just alter the time of year that they are producing power. By operating in this manner, gas generation could continue at a more uniform rate throughout the year. :4*6119 9:..� The Federal government maintains jurisdiction over virtually all hydropower 3evelopment in the United States. Those projects that are not directly developed by one of the major Federal dam building agencies such as the Corps of Engineers, Bureau of Reclamation, or the Tennessee Valley Authority, must, with rare exception, require a license from the Federal Energy Regulatory Commission (FERC). FERC is the agency established to carry out the intent of the Federal Power Act (FPA) of 1920. FERC is a Congressional Commission administered under the Department of Energy. The criteria established by FERC to define its jurisdictional authority over hydropower is very broad and appears designed to give FERC total regulatory authority over its development. The FERC jurisdiction appears premised on the view that hydro sites are public resources and contain significant attributes to classify them as being for the public good. Thus it is viewed that the allocation of this resource should be made by the government rather than by market considerations. Because hydropower is viewed as a public resource, it is viewed that the public has the right to decide how the resource will be allocated and therefor the state property law system becomes Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1956 Page 6 superseded by the Federal Governments right of eminent domain as articulated by FPA and administered by the FERC. In order to assert its authority, FERC has established four criteria under which it views all hydropower projects: (A) is federal land involved in the project, (B) is the river considered navigable, (C) is interstate transfer of power involved, and (D) is the project resource of national interest? While there would be no interstate transfer of power from the project and there may be no federal land involved, and there may even be a strong argument against the river being navigable, it would appear difficult to argue against the national significance of the water resource. In fact there is still a federal power -site withdrawal for the entire Devil Canyon reservoir as a result of the earlier intentions of the Bureau of Reclamation. Consequently, it is extremely doubtful that the state would be given an administrative exemption from the FERC process. This would imply two courses of action: either seek a Congressionel exemption from the FERC process, or submit a FERC license application as before. It is estimated that it would take only six months and approximately $1.3 million to submit a FERC license application for Devil Canyon. Furthermore, because project financing and the need for power will not be as difficult to prove to FERC as was the case with full Susitna, and since the environmental impact of Devil Canyon is significantly less than for the full Susitna development, the prospects for receiving a timely FERC licensF are greatly enhanced. It could very well be that with all of the previous studies conducted on Susitna that a FERC license could be secured in a two year time frame once submitted if the new governor an6 *he administration get behind the project. The alternative would be to convince Congress and FERC that there is no overriding public interest in the project and that it should be exempt from the FERC process. The argument would be that Devil Canyon would be built almost entirely on state and private land, that there will be no interstate transfer of power from the project, that the Devil Canyon stretch of river is surely not navigable (a doubtful legal argument), that the federal government will be under no financial obligation for the project, and that since the project will have a single purpose (power) there is no overriding national interest in the project. It would also be pointed out that the project would it help conserve valuable depletable energy hat would lessen United States dependance on foreign oil and help reduce the national trade defecit. Finally, it would be argued that the project is needed to help stimulate a sagging Alaskan economy. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 7 ENERGY AND GENERATION REQUIREMENTS The need for the Devil Canyon project or any major energy project is driven by the desire to provide service at the lowest possible cost and the need to meet future energy requirements. Future energy requirements are driven by increased demand as the economy expands and by the need to replace obsolete plants. New generation needed to replace retired facilities is relatively easy to project. The design life of various types of generation is well documented. The design life of the type of generation facilities in the railbelt is as follows: DESIGN LIFE OF POWER GENERATION FACILITIES DESIGN LIFE (YEARS) COAL FIRED STEAM TURBINE 35 GAS FIRED COMBUSTION TURBINE 25 GAS FIRED COMBINED CYCLE Ski OIL FIRED INTERNAL COMBUSTION 20 HYDROPOWER 100± Power generation in the railbelt is of various age and type. With the above retirement schedule it is possble to predict with reasonable accuracy the need to replace existing units to meet present energy demands. Hydropower is generally viewed as having a very long life because the major sunk costs are in the long lived items such. as the dams, tunnels, and spillways. The equipment in the powerhouse is replaced as needed, but this represents a relatively small cost in comparison to the total value of the facility. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 8 Based on the railbelt utilities retirement schedule, the Power Authority has estimated that by the year 00, the railbelt utilities will retire and need to replace at least 2025 t mw of existing power generation. Furthermore, by Year all of the existing thermal generation will have reached its useful life and will need to be replaced. This represents a combined total of 1097 MW of generation requirements. hat will V e to be The only replaced to accommodate existing p generation that will not be replaced will be the three hydropower projects: Eklutna, Cooper Lake, and Bradley Lake. Devil Canyon would have an installed capacity of 460 tM- However, because of the limited winter storage capacity o- its reservoir, it would generally be credited with only 230 W for firm capacity purposes. It is appa ve as energy demand does retirement schedule, however, that so long not diminish, new generation of Devil Canyon's magnitude will be needed in the time -fame that it could be brought on line. ��1 RF ENER�_Y__DEMAI�I� The need for generation to meet an increasing energy demand is difficult to predict. The prior practice was to estimate the future needs based on historical trends. This proved When a acceptable and accurate technique up until the 1970 shift in national output and an energy conservation awareness altered demand patterns. In the absence of historical trend analysis, it has become necessary to disagregate the end uses for energy in an attempt to develop future composite estimates. This has generally been accomplished by developing econometric computer models which attempt to simulate the demographic setting and use characteristics of the marketplace. In short, future plant additions for the railbelt were projected by econometric modeling and by estimatingthe useful life of existing generation facilities. Load projections generally remained the responsibility of railtheibelutilities, but the underlying assumptions which g projections usually a product of economic modeling. The Institute of Social and Economic Research has been recognized as having the best the railbelt and the state overall grasp of the demographics for in general. The ISER work has remained the underlying demographic input to the Devil Canyon analysis. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 9 The Power Authority utilized the ISER demographic data in making its energy demand projections as presented in the following table: FORECAST OF RAILBELT POPULATION AND ENERGY DEMAND (Compound Annual Increase) APA $ISTORIC FQ.�CAST STATE POPULATION GROWTH 3.5 1.0 RAILBELT POPULATION GROWTH 4.1 1.1 RAILBELT ENERGY DEMAND 9.6 1.6 RAILBELT PEAK DEMAND 9.6 1.6 It is obvious from the above forecasts that the Power Authority estimates a maturing of the Alaska economy. This is an opinion which up until the most recent oil price decline was not shared by the railbelt utilities. The combined Utility forecast for both energy and peak demand is 3.8% in comparison to the Power Authority's 1.6% annual growth forecast. However, informal discussions with area utilities have indicated that the present economy has resulted in an adjustment downward in their estimates of future energy demand increases. Present railbelt annual energy and peak demand are 3,300 GWH and 700 MW respectively. These are projected to reach 4,300 GWH and 850 MW by the year 2000, and to 6,200 GWH and 1,200 MW by the year 2020. It is clear that the market area will be of sufficient size to absorb the majority of the 2,200 GWH which Devil Canyon could provide annually. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 10 REVIEW OF OTHER ENERGY ALTERNATIVES The economics of the Devil Canyon project are established by comparing its life -cycle present worth costs to those of the next lowest cost energy alternative. It has generally been recognized that natural gas and coal generation options are the two most probable alternatives that will be developed to meet our electricity needs if Devil Canyon does not proceed. A third option would be to develop a number of smaller hydropower projects to meet the railbelt needs. This option has has been rejected because of the high cost of such a plan and the attendent environmental impact associated with new transmission lines and access roads to the numerous small dam sites. Other energy options considered and rejected include: tidal, oil, nuclear, biomass, geothermal, wind, solar, and others. - Most study efforts indicate that natural gas is the most probable intermediate rangy option to meet railbelt needs and that coal would meet our longer range needs in the absence of Devil Canyon. Thus the economics of Devil Canyon is very dependent on the projected future cost of these fuels and in particular natural gas. The two primary sources of natural gas for power generation are from the North Slope fields and from the Cook Inlet area. Most studies of North Slope gas generally indicate that the price of the fuel for electric power generation makes it noncompetitive when compared to a hydro or coal generation resource. Furthermore, while it is the general opinion that some sort of pipeline system will be developed to bring this gas to market, no infrastructure presently exists nor are their sufficient plans for its development to warrent the consideration of North Slope gas for prudent power planning. Finally, when world wide gas economics are such that a gas pipeline is feasible, it is doubtful that United States energy policy would allow the use of natural gas as a feedstock for base load power generation. It is probable that fuel use restrictions similar to those imposed under the Fuel Use Act of 1978 would be enforced. Cook Inlet natural gas, however, is both price competitive and readily available for power generation and other purposes. The reserves are somewhat limited, but by imposing restrictions Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 11 on the future use of this resource, there could be cuff icient supplies for long term local consumption. Thus while there is an estimated 36,129 billion cubic feet of proven natural gas reserves on the North Slope, the focus of this discussion will be on the availability and price of Cook Inlet natural gas supplies. COOK INLET N T(7 RAL GAS AVAILABILITY There are 4,664 billion cubic feet of proven reserves of natural gas in Cook inlet. This gas is contained in some 15 different deposits throughout the area, and most of the gas was found incidental to the exploration for oil. In addition to these proven reserves, it is estimated that there is a 75% probability of another 1,980 BCF of undiscovered but commercially available reserves of natural gas in Cook Inlet. With a present local use rate of roughly 65 BCF per year for power generation and space heating, the proven and recoverable Cook Inlet gas reserves represents a 100 year supply for future domestic energy needs. However, there are substantial other obligations for the use of this natural gas which significantly precludes its availability for long term domestic energy needs. Only 30% of the natural gas that is being produced in the Cook Inlet area is being utilized for domestic purposes such as home heating and k,cwer generation. The majority of the remainder is being exported in the form of Liquefied Natural Gas (LNG) or as ammonia and uria to Pacific Rim markets. In fact, 4,742 BCF of Cook Inlet natural gas has already been produced and consumed for all purposes in the 20 year period that the fields have been in operation. The 1985 Cook Inlet natural gas use rate was roughly 215 BCF. A summary of the 1985 natural gas consumption by use category is provided in the table below according to figures presented in a 1986 report by the State Department of Natural Resources. Assuming this level of use for the duration of the gas fields, the existing known reserves will be fully utilized by the year 2008. The undiscovered reserves would extend the life of the Cook Inlet field to the year 2017. Or in other words, at our present use rate and assuming that no additional demands would be placed upon the fields, there is a high probability that there is at least a 30 year supply of natural gas to meet the needs of Southcentral Alaska. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 19R6 Page 12 1985 COOK INLET NATURAL GAS CONSUMPTION (Billion Cubic Feet/Year) PURPOSE —BCF Field Operations 17.780 Power Generation 40.096 Gas Utilities 24.470 LNG 65.381 Amonia - Uria 53.977 Producers 21.341 Unaccounted for (8,275) TOTAL 214.770 II4rmal Demand Increases. Based on demographic data provided by the Institute of Social and Economic Research (ISER), the Department of Natural Resources estimates that the demand for natural gas will increase by 1.3 percent annually. Thus, they estimate that the 215 BCF 1985 demand will increase to 262 BC, by the year 2000. This will have the effect of slightly shortening the life -span of the existing Cook Inlet gas fields and any future reserves. Assuming that this use rate were to prevail beyond the year 2000, the present known reserves of gas would be depleted by the year 2003 and the probable reserves would be exhausted by the year 2010; thus indicating that Southcentral has a 23 year gas supply rather than 30 years at our present use rate. Undiscovered Reserves. A Division of Geological a,id Geophysical Survey, Department of Natural Resources 1983 inventory of oil and gas in Alaska summarised the petroleum resources estimated throughout the State. The report estimated probable Undiscovered Natural Gas in Cook Inlet as follows: DNR ESTIMATES OF UNDISCOVERED NATURAL GAS IN COOK INLET Probability That Quantity Is Billions Of At Least The Given Value Cubic Feet 7 5% 1,980 50% 3, 07 0 25% 4,380 Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 13 No indication of the threshold at which the above natural gas is economically feasible to develop was given. Since most of the gas would have to be explored for exclusive of the prospects for contiguous oil discovery, it is assumed that the cost of the natural gas would be considerably higher than that presently available to Cook Inlet consumers. tnral Gas to FaiYhazlia. Present studies are being conducted to assess the viability of constructing a natural gas pipeline from Wasilla to Fairbanks. Department of Natural Resources estimates that natural gas space heating could eventually capture 75% of the market presently being supplied by fuel oil and coal. Thus DNR assumes that gas for Fairbanks space heating could require 25 BCF by the year 1997. This is a relatively small amount in comparison to the total gas demand at that time. Under active consideration is a plan to build a 20" gas pipeline from Wasilla to Fairbanks at a cost of'roughly $150 million. The gas would be used to displace existing oil and coal fired generation. The local Fairbanks utilities would be responsible for their own retrof iting and approximatly 40 BCF of gas may be needed initially. Once in place for local power generation, local feeder lines for space heating could be developed. revel q��nt S) D_y_iJ Can: ��n Hydropower. it is estimated by the Alaska Power Authority that Devil Canyon could produce roughly 2.2 billion RWH of electricity annually. If this amount of electricity were to displace an equivalent amount of gas fired generation, 20 BCF per annum of gas would be freed up for other uses in Southcentral Alaska. This would have the effect of slightly increasing the Cook Inlet gas supplies, but it is less than the 24.5 BCF of natural gas used for space heating in 1985. If Cook Inlet gas were to become totally obligated to other uses through supply contracts, and if natural gas reserved today for future power veneration could be resold for home heating purposes, Devil Canyon could significantly increase the availability of natural gas for local consumption. The alternative would be to negotiate obligations of natural gas from the local producers to meet long term domestic needs. One of the major issues involved in the Devil Canyon project has been the estimate of the price of natural gas against which Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 14 to compare the hydropower option. This has been particularly difficult during this period of energy price volatility and natural gas availability. It is generally conceded that the power generation industry will not be able to receive new gas from the producers at the favorable rates that Chugach Electric Association presently enjoys under its existing gas contracts ($0.21/MCF). Instead it is assumed that new Chugach contracts will be closer in terms to those negotiated by Enstar two years ago. Under the: Enstar contract, new gas would cost $2.32/MCF and it would increase or decrease in cost in accordance with the cost of Cook Inlet oil. There would also be a peak demand charge and an additional charge to cover the cost of capital development associated with the pipeline feeder system. It is generally assumed that future Cook Inlet contracts wi.11 have some sort of indexing value that reflects either the cost of future oil or perhaps some sort of local consumer price index. The Alaska Power Authority in its analysis developed two scenarios for future gas prices. one is based on what the Power Authority assumes is the netback price of natural gas. That is, the price that gas would raise to if the gas were sold on the international market, less the transportation costs from the well head. The second set of values is based on the Wharton estimates in the light of the most recent Enstar contracts. A third estimate which the Power Authority generally has rejected f rom consideration are those the State of Alaska Department of Revenue uses to estimate future State revenue. A forth estimate which has recently been introduced are those which are reflective of the negotiations which CEA is presently conducting with the producers of Cook Inlet natural gas. The CEA figures were obtained from their analysis of the Devil Canyon project and do not reflect the ultimate prices which may be agreed upon as a result of negotiations. The CEA numbers imply that an escalator of at least the rate of inflation is being considered in the negotiations. It is premature to determine what escalation factor will ultimatly be agreed on by both partiEs. It is assumed however, that the CEA values are within the ballpark of what may ultimately be negotiated. A summary of the various gas price estimates in 1985 dollars is presented below. The CEA values reflect the numbers presented in the CEA report adjusted to 1985 at their assumed annual inflation rate of 5.5%. In the year 2010 and beyond, Chugach assumes an annual escalation rate of 0.5% over inflation. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 15 ESTIMATED COOK INLET NATURAL GAS PRICES (1985$) Composite Wharton ADOR Year Netback En 1.ar__ EnLIL.Z_ CEA 1985 $2.00 $2.00 $2: 00 $1.70 1990 2.37 2.35 1.98 1.64 2000 3.53 2.83 2.00 1.72 2010 5.37 3.53 2.09 1.80 2020 7.85 4.57 2.18 1.88 2030 8.70 5.96 2.29 1.97 Application of the four sets of natural gas assumptions indicates that the Devil Canyon project is economically feasible under the Netback and Wharton projections and economically unattractive when compared to the DOR and CEA values. The figures do not reflect the impact of mid -east manipulations on oil prices or on the artificial impact which may result from federal government restrictions on the use of natural gas. It is quite possible that the ultimate indexing factor would result in new CEA gas prices similar to that of the recent Enstar contracts. The ultimate price will be strongly reflective of the value that the producers believe other gas users would be willing to pay. Therefore, LNG exports may actually result in netback pricing. If this occurs, Devil Canyon energy could become an attractive alternative to natural gas fired generation. At any rate, Devil Canyon becomes more attractive when deferred to a power on line date commensurate with the depletion of Cook Inlet natural gas supplies around the turn of the century. There are significant deposits of price competitive coal available for power generation in the railbelt. Before the discovery of Cook Inlet natural gas, coal was the predominant source of power generation for all railbelt utilities. With the discovery of natural gas, however, the utilities that had access to natural gas quickly converted their plants to provide for the new feed -stock. Now, with the dwindling supplies of Cook Inlet natural gas, the utilities have renewed their interest in returning to coal fired generation. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 16 Conventional coal fired generation is characterized as having moderately high capital and operating costs, and fuel costs that are less than natural gas depending on transportation requirements. Present day environmental impacts from coal generation are significantly less than its past reputation. In addition, there have been significant break-throughs in the generation technology which may make coal generation even more environmentally acceptable and cost competitive in the future. These include coal gasification, fluidized bed, and insitu generation technclogies. These technologies are in the developing and early commercial stages and may be premature for application in the Alaskan environment at this time. Diamond Alaska has made public its study on conventional coal plant generation for the railbelt, and it is presently reviewing the other coal generation technologies. The results of these latter studies are not presently available. In their analysis of Susitna, the Alaska Power Authority assumed that the most logical coal addition would be a conventional 200 MR mine mouth plant located at Beluga. The following table summarizes the Power Authority estimate for coal fired generation in comparison to the estimates provided by Diamond Alaska and the Matanuska Power Project: COAL PLANT COST ESTIMATES (1985 dollars) APA MATANU SKA DIAMOND BELUGA POWER PROJECT ALA.G. KA CAPACITY OF PLANT (MW ) 200 153 141 CAPITAL COST ($/KW) $2593 $2451 $2261 0 & M COST (CENTS/KWH) 1.3 0.7 1.8 The above cost estimates for the Matanuska Power project and the Diamond Alaska project do not include tra<ismission line costs. All three estimates assume an 80% capacity.factor for operational costs, and no finance charges are included in the capital costs. As mentioned above, the newer technologies may result in capital costs even lower than those shown above. At a Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 17 recent Railbelt Energy Committee meeting, one representative of the coal industry indicated that it may be possible to develop an 80 hW fluidized bed coal fired plant for as little as $10001KW. However, while the technology has been successfully demonstrated, it has received little commercial operational experience. CRAL PR I C I NG Like natural gas pricing, the cost of coal has generally been tied to some form of price escalator. Because of this Golden valley Electric Association has reported a 2.2% real rate (over and above the rate of inflation) of increase for coal during the cast twenty years. Fairbanks Municipal Utilities has reported a �.0$ rate of .increase during the past 10 years. For its economic assessment of the Susitna Project, the Power Authority assumed a coal price escalation rate of 1.5%. The coal industry has generally objected to this rate and feels that it is too high. They point out that historical coal price increases between 1860 and 1970 have generally tracked the rate of inflation for this period. They acknowledge that Alaska coal rate increases paralleled the U. S. market in general between 1970 and 1985, but that this is reflective of the oil crises of the 1970's. While the coal prices have not dropped with the recent decline in oil prices, and while future price upsets are certainly possible, because of the large Alaska coal supply, the existance of several coal competitors, and because of a large world overage in supply, they believe that future price escalation will be closer to the historic rate. The actual 1985 cost of coal reported by Fairbanks power consumers has been $1.30/14MBTU for Golden Valley Electric Association mine -mouth generation at Healy, and $2.40/MMBTU for the U. S. Military in Fairbanks. The differerr�e in t:ie price of the coal for the two consumers has generally been for transportation costs from the mine to the power plant. By combining the fuel prices and construction costs presented above, both the Power Authority and Chugach Electric Association concluded that Devil Canyon is economically superior to conventional coal fired generation. No attempt has been made to review the economics of Devil Canyon against one of the emerging coal technologies. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 18 FINANCIAL ANALYSIS The ability to finance a Devil Canyon stand alone hydro project has many of the same problems that plagued the larger Susitna Project. Initially, the $5 billion necessary for the construction of Susitna was to be obtained from grants from the State. As revenues declined and alternative uses from funds were identified it became apparent that the state would not be able to honor its commitment to fund the project entirely with State grants, and a fall back plan requiring a $2 billion contribution from the State, plus any interest accrued thereon, was proposed by the Power Authority. The Power Authority suggested that the balance of any necessary project funds would be raised by the sale of bonds, but they recognized that for the State to successfully sell such a large bond issue, the moral obligation of the State would be required. By early 1985, it was apparent that State contributions of this magnitude were not likely, and the Power Authority developed still another concept to finance the project. The new concept incorporated : mechanism whereby the State contribution was viewed as a debt service subsidy in the early years of the project rather than a construction grant. This concept resulted in a significant reduction in the amount of money necessary from the State and provided the additional benefit of delaying the timing of such a contribution. Unfortunately under such a concept the "mo_al obligation" of the State was no longer considered adequate for the magnitude of the bond issue and additional security was deemed necessary. Analyses of the ability of the railbelt utilities to pay for the retirement of the bonds indicated that revenue fonds were not likely to provide more than a limited amount of the funding required. As a result, the Power Authority concluded that it was necessary for the State to dedicate other resources as additional security for the bonds. The most likely resource for this purpose was determined to be the permanent fund, which while technically possible is politically impossible. Accordingly the Susitna Project died because of the failure of the State to honor its commitments for grant funds and the inability of the railbel t utilities to finance a project of this magnitude. Devil Canyon Anchorage Chamber of Commerce Energy Committee October 15, 1986 Page 19 The demise of the Susitna project did not change the fact that the residents of the railbelt would need new generating capacity, it merely shifted the problem from the Power Authority to the railbelt utilities. Consequently, large projects the size of Susitna necessarily must yield to smaller projects that can be added incrementally as needed. The State has indicated that the monies previously allocated for Susitna could be used by the railbelt utilities for projects which would benefit railbelt consumers. Studies are presently underway to determine the best use of the funds deposited in the Railbelt Energy Fund. With the demise of the Susitna Project, and the establishment of the Railbelt Energy Fund, the possibility of building a stand alone hydro project at Devil Canyon which would be financed entirely by the utilities was proposed. A preliminary analysis of the project by E. F. Hutton indicated that the project could be financed though significant issues still need to be addressed: 1. The utilities would need a significant investment in the project which would be obtained from the monies in the Railbelt Energy Fund. 2. The "dry -hole" or noncompletion risk would have to be minimized, and if possible, eliminated. 3. The State would have to assume some liability in the project, either in addressing the "dry -hole" risk or in guaranteeing the bonds issued by the utilities. 4. Ownership of the project would have to be clearly determined, and power sales agreements signed by all utilities. None of these items are insurmountable, but all are important. The good news is that the project most likely could be financed, but unless the utilities develop strategies to minimize the risks assumed by the bond holders, the cost of financing the project could easily tip the scale from an acceptable project to an unacceptable project.