HomeMy WebLinkAboutSchubee Lake Hydroelectric Project Economic Analylsis - Mar 2013 - REF Grant 7040067
ECONOMIC ANALYSIS OF THE
SCHUBEE LAKE HYDROELECTRIC PROJECT
By
ALASKA POWER & TELEPHONE COMPANY
MARCH, 2013
RENEWABLE ENERGY FUND GRANT #7040067
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ECONOMIC ANALYSIS OF THE
SCHUBEE LAKE HYDROELECTRIC PROJECT
BACKGROUND
Alaska Power & Telephone Company (AP&T) provides electric service to Haines and Skagway,
with a 15.1-mile long submarine cable linking the two communities. Currently, the bulk of
has been actively
studying the development of a new hydroelectric project in the Haines area for several years.
storage-type hydroelectric project are:
To be able to provide renewable resource generation in the Haines portion of the
system in the event of an outage of the submarine cable (which was installed in 1998
and is now over 15 years old).
To provide additional generation to meet increasing loads in the ULC system, especially
levels because of
low inflows.
AP&T has considered development of Connelly Lake of Connelly Lake in the Chilkoot River
basin, which would require reconstruction of a road in the Chilkoot Valley. Because of the
perceived environmental risks associated primarily with that road, some Haines residents have
suggested development of Schubee Lake as an alternative storage hydroelectric project. In July
2011, AP&T obtained a $80,000
Fund program to partially fund a feasibility study of the Schubee Lake site. In September 2011,
AP&T contracted with HDR Engineering for a reconnaissance study of the Schubee Lake site,
including:
Field reconnaissance
Review of available documentation and related information
Development of conceptual alternatives
Evaluation of project hydrology
Estimation of energy production and new facility costs
Report
AP&T did not authorize HDR to conduct an
economic analysis of the Schubee Lake project. Instead, AP&T has conducted the economic
analysis of the Schubee Lake site itself, as documented herein.
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ECONOMIC ANALYSIS METHODS AND ASSUMPTIONS
An economic analysis is fundamentally a comparison of the benefits and costs of a proposed
undertaking. For a generation project, the benefits are determined as the costs associated with
the most likely alternative for providing the same capacity and energy. For AP&T, the most
likely alternative to development of Schubee Lake (or Connelly Lake) is generation with existing
diesel generators.
Economic analysis of a generation project with a long life, such as a hydroelectric project, can
be problematic because of the need to forecast loads and alternative fuel prices well into the
future. Fortunately, the recently-completed Southeast Integrated Resource Plan (SEIRP)
provides a reasonable basis for the projections. The SEIRP load and fuel price projections for
the Upper Lynn Canal system are summarized in the following two subsections, as well as AP&T
modifications to those projections.
Load Forecasts
The SEIRP included a reference forecast for the Haines/Skagway system, as well as a low and
high forecast. The reference forecast estimated the following compound growth rates in
energy, based on historical patterns and near-term expectations for fuel prices:
Short Term (2011-2015).....................................................................2.7%
Intermediate term (2016-2035) .........................................................0.5%
Long Term (2036-2061)......................................................................0.3%
The high forecast assumed loads would grow 1% faster than the reference case, and was meant
to reflect additional economic development in the region and electric vehicle charging. The low
forecast assumes adoption of the Demand Side Management (DSM) and Energy Efficiency (EE)
measures proposed in the plan. For the Haines/Skagway system, this resulted in a forecast
gradual reduction in generation until about 2020 (to about 93% of 2011 loads), and then
growth at the same rates as the reference forecast.
AP&T believes there are two scenarios which could significantly increase loads on the system.
One scenario is shored-based generation to supply cruise ships while docked in either Haines or
been that each shore-power connection results in an annual load of about 5 GWh. To estimate
increase of 10 GWh above the SEIRP reference forecast (i.e. two shore power connections).
The increase is assumed to occur in 2022, concurrent with the start of operation of the hydro
project. A 2013 capital cost of $28,000,000 has been estimated as an incremental cost required
to increase the hydro project capacity ($21,000,000 based on adjustment of the HDR cost
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estimate) and construct shore power facilities that would be necessary to supply the cruise ship
loads ($7,000,000 based on the actual cost of the installation in Juneau).
The second scenario for high growth would be supply of power to a new mine load.
Explorations are currently underway for a mine in the Upper Chilkat Valley near the Canadian
border (the Palmer mine), and reportedly could be on the scale of the Greens Creek mine south
of Juneau. To estimate the economic impact of providing a mine load mine scenario
assumes an increase of 50 GWh above the SEIRP reference forecast, also to start in 2022. A
2013 capital cost of $37,000,000 has been estimated as the incremental cost required to serve
the mine load ($16,000,000 for the transmission line and $21,000,000 to increase the hydro
project capacity). The mine load is estimated to last for 20 years.
The SEIRP load projections and the two scenarios added by AP&T are shown in Figure 1. Note
that the SEIRP discussed the possibility of new mine loads, but specifically excluded them from
their high load projection.
Diesel Fuel Prices
The SEIRP forecast diesel fuel prices for Haines and Skagway separately, although they are very
similar. The SEIRP forecasts are based on work by Institute for Social and Economic Research
(ISER) for the Power Cost Equalization (PCE) program. The low, medium, and high diesel price
projections from the SEIRP are shown in Figure 2.
AP&T believes it is not realistic to assume the SEIRP/ISER diesel price projections as the basis
for this economic analysis. Although diesel fuel prices are likely to increase, and quite possibly
at the rates indicated, it is also likely that AP&T would move to an alternate fuel to minimize
the cost of electricity to its customers. At the current time, the most likely alternative fuel to
diesel is liquefied natural gas (LNG). Although LNG is not currently available in Alaska, there are
efforts underway to create LNG from North Slope gas fields and bring it to parts of the State.
There are also many proposals to ship LNG from terminals in the Prince Rupert area. Because
the LNG business is still developing, prices are nearly impossible to forecast. For the purposes
of this economic analysis, AP&T has developed low, medium, and high price projections for LNG
(expressed as the diesel equivalent) that follow the SEIRP forecast for diesel closely until about
2030 when SEIRP prices begin to climb very rapidly; after 2030, the LNG prices are projected at
the same rate at the previous years (3.0%, 5.0%, and 6.0% per year, respectively).
ECONOMIC ANALYSIS MODELS
An economic analysis must consider both the capital costs of a project as well as operating
costs (fuel, operation and maintenance (O&M)). The analysis model used by AEA to evaluate
potential projects calculates the present worth of the capital and operating costs over the
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expected project life, with the capital costs lumped into the construction period early in the
project life, followed by the series of annual fuel and O&M costs. This treatment of the capital
costs may be appropriate for a government agency such as AEA, but does not take into account
the financial realities of a utility such as AP&T, which must fund projects through a combination
of loans, equity investments, or grants if available. For the purposes of this economic analysis,
AP&T has calculated benefits and costs with both the AEA model and with a second model that
includes financing by varying amounts of loans, equity, and grants. The assumptions and input
values used in the models are summarized below:
Table 1
Economic Analysis Assumptions and Input Values
AEA Model AP&T Model
Analysis term 50 years 50 years
General inflation rate 3.00% 3.00%
Discount rate 8.00% 8.00%
% of capital costs by loan 70% N.A.
% of capital costs by equity 30% N.A.
% of capital costs by grant 0% N.A.
Loan interest rate 5.00% N.A.
Loan term 30 years N.A.
Regulated rate of return on equity 10.75% N.A.
Depreciation method Straight line N.A.
Depreciation term 30 years N.A.
Existing diesel capacity 8.4 MW 8.4 MW
Diesel reserve requirement 25% 25%
Diesel capital cost (2013) $500/kW $500/kW
New diesel unit capacity 2.0 MW 2.0 MW
Diesel efficiency 14.4 kWh/gal 14.4 kWh/gal
Diesel variable O&M cost (2013) 0.030 $/kWh 0.030 $/kWh
Diesel fixed O&M cost (2013) $2/kW $2/kW
Existing hydro energy production1 35,000 MWh 35,000 MWh
Schubee capital Cost (2012)2 $74,772,000 $74,772,000
Schubee O&M Cost (2013) 0.025 $/kWh 0.025 $/kWh
Schubee minimum O&M Cost (2013) $50,000 $50,000
Schubee annual generation 37,100 MWh 37,100 MWh
Schubee development period 6 years 6 years
Schubee construction period 3 years 3 years
First year of Schubee operation 2022 2022
1 Goat Lake 20,600 MWh, Dewey Lakes 3,400 MWh, Kasidaya 10,200 MWh, Lutak 800 MWh
2 Capital cost estimate by HDR Alaska, Inc.
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HYDRO PROJECTCONSTRUCTION COSTS
The Schubee Lake project is at a preliminary stage of development, with only a reconnaissance-
level cost estimate. Frequently, as design progresses on a project the estimated construction
cost estimate changes as more information becomes available about the site. Usually, the cost
change is an increase. To determine the influence of that possibility, the economic analysis has
included three scenarios for the construction cost: 90%, 100%, and 125%.
SUBMARINE CABLE FAILURE
insulate Haines from the economic impacts that would come from a failure of the submarine
cable linking Haines and Skagway. To determine the influence of that possibility, the economic
analysis has included scenarios with and without a cable failure, as follows:
No cable failure
Cable failure in 2025, cost to repair the cable is $2 million (2012 cost level), one year
duration of outage
Cable failure in 2025, cost to replace the cable is $10 million (2012 cost level), two year
duration of outage
The cost to repair or replace the cable is included in the analysis as a maintenance expenditure
spread uniformly over the duration of the outage. The Haines load is assumed to be 55% of the
ULC system load.
RESULTS AND CONCLUSIONS
The analysis includes 135 combinations of the primary variables (5 load growth cases, 3 fuel
price cases, 3 construction cost cases, and 3 cable failure cases). The analysis has assumed that
the primary variables are independent, but in reality some of them are not. For example, high
fuel prices would be expected to restrain load growth, and vice versa. Also, stable electric rates
that would be expected if a new hydro project were built might stimulate load growth.
The benefit-cost ratios for the 90 combinations are shown in Tables 2 and 3 (for the AEA model
and AP&T models, respectively). Inspection of these results reveals that the Schubee Lake
project would be economical to develop only under the following scenarios:
High loads and medium or high fuel prices
Mine loads and medium or high fuel prices
Cruise ship loads and high fuel prices
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In an effort to lessen the ambiguity that can come from so many combinations, AP&T has
assigned probabilities to the various scenarios, and a weighted average benefit cost ratio has
been calculated. The assigned probabilities are as shown below:
SEIRP low load ....................................................................................10%
SEIRP reference load ..........................................................................30%
SEIRP high load ...................................................................................5%
Mine load ...........................................................................................30%
Cruise ship load ..................................................................................25%
Low LNG fuel price .............................................................................25%
Medium LNG fuel price ......................................................................50%
High LNG fuel price ............................................................................25%
Low construction cost ........................................................................10%
Reference construction cost ..............................................................50%
High construction cost .......................................................................40%
No cable failure ..................................................................................60%
Cable failure, repairs only ..................................................................25%
Cable failure, replace cable ................................................................15%
Based on these probabilities, the calculated weighted benefit cost ratios are as follows:
AEA model ..........................................................................................0.67
AP&T model .......................................................................................0.81
These weighted benefit cost ratios indicate that Schubee Lake should be considered for
development primarily if a large new industrial load (such as a mine) can be reasonably well
assured and there are no better alternatives for meeting that load.
It should be noted that the analysis for the cruise ship and mine load cases implicitly assumes
that the power would be sold to the cruise ships or mine at a rate equal to the cost of diesel
generation. That may be optimistic, particularly if the power is sold on an interruptible basis.
This circumstance is addressed in the analysis by adding in the capital cost of the diesel
generators necessary to make the power firm.
Potential failure of the submarine cable does not in itself economically justify construction of
the Schubee Lake project because of the short duration of the impact; comparison of the cable
failure scenarios shows a difference in the benefit-cost ratios of about 0.1 if the cable can be
repaired and 0.2 if the cable needs replacement. This is not to say that the impact on Haines
would not be severe for the duration of the repair or replacement.
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 2010 2020 2030 2040 2050 2060 2070 ANNUAL LOAD, MWh YEAR FIGURE 1 HAINES/SKAGWAY LOAD PROJECTIONS Low load Reference load High load Reference+Mine Reference+Cruise Ships
0 20 40 60 80 100 120 140 160 2010 2020 2030 2040 2050 2060 2070 FUEL PRICES (EQUIVALENT DIESEL $/GAL) YEAR FIGURE 2 HAINES FUEL PRICE PROJECTIONS SEIRP Low diesel SEIRP Medium diesel SEIRP High diesel AP&T Low LNG AP&T Medium LNG AP&T High LNG