JUICE: Tricky Power Projects

By Published On: October 17, 2008

It is going to be an extended Halloween season for power projects. Independent power producers, utility subsidiaries, and public agencies planning to build new natural gas-fired power plants hear “boo” these days. In the generation-constrained Southern California it’s even scarier. Some projects got sweets in the form of utility contracts, but all are struggling to dodge the rotten eggs from the toxic market and financing uncertainties. At this time, cash is king–and the only edible treat. “It will probably be difficult to put together a development deal with a significant amount of debt underlying it, at least for the time being,” said Steven Kelly, Independent Energy Producers policy director. In addition, Southern California power projects could become rattling skeletons as the nails in the South Coast air emission offset coffin hammer down. Furthermore, aging power plants along the coast that pull in huge quantities of sea water to cool spinning turbines may be put to rest because of an inability to comply with more stringent federal Clean Water Act rules expected to be out in a few months. The dated once-through cooled plants wreak havoc on aquatic organisms, and rules to ameliorate those impacts have been in the works for a few years. Modernizing plants to hybrid or dry cooling may be cost prohibitive for some generators. For the California Energy Commission and grid operator this is a reliability Harrow-een. The dearth of offsets has created a virtual moratorium on projects, affecting a few thousand megawatts of new generation Large generating projects by Edison Mission, the City of Vernon, Competitive Power Ventures, and Reliant, for example, cannot be certified by the Energy Commission nor constructed until the developers identify air emission offsets to mitigate project air quality impacts. Until the certification treat is in the bag, financing decisions will not go forward. And, no one knows whether access to capital will be within reach at that time. The months-long choke hold in the Southland has turned emission credits into hanging skeletons. Few credits are available on the market and the South Coast Air Quality Management District was forced to halt selling credits from its Priority Reserve to power plants after being successfully sued by the Natural Resources Defense Council. (The reserve was traditionally limited to necessary local projects, such as sewage treatment plants. It was expanded to allow include new generation but the environmental group sued because of air pollution impacts in the smoggy region). At the end of this month, the air district and NRDC will submit their proposed plans to the Los Angeles Superior Court judge for satisfying the requirement that the district do a full environmental analysis prior to providing the emission credits. If an agreement is reached, processing the air permits will take a number of months, said district spokesperson Sam Atwood. The timing of a resolution could cause project construction delays and turn the region’s less than stellar reliability into a ghostly proposition. For a number of years, federal, regional, and state regulators have warned of power constraints in the southern half of the state. Energy Commission chair Jackie Pfannensteil told me the lack of emission offsets for needed projects was a major concern. In fact, the commission took the unusual step of issuing a press release October 10 noting approval of the Sentinel peaker project slated for Palm Springs hinged on resolution of the air emission offsets. The Energy Commission staff “does not have sufficient information to complete the air quality analysis of the proposed CVP Sentinel Energy Project and therefore cannot recommend licensing the 850 MW facility at this time,” stated spokesperson Percy Della. CVP project director Mark Turner said that the planned $440 million peaker project’s construction groundbreaking has not been impacted. But, if the emissions credit issue takes months to resolve it could eat into the building schedule. CVP, which is headquartered in Maryland, signed contracts with Southern California Edison for the output of its eight peaking units. Five of the units are to come on line in August of 2010, and are expected to help fill in supply gaps when wind power generation drops on hot days. Mission Energy’s Walnut Creek 500 MW project, which was certified by the Energy Commission, is also in limbo. The company planned to offset its emissions with credits purchased from the South Coast air district. However, until the legal issues over the viability of district offsets are resolved the project is on hold. Construction is scheduled to begin September 2009. Another Mission Energy project that could have the blood sucked out of it is the 500 MW Sun Valley peaker, which awaits certification approval from the Energy Commission. The two projects are to replace aging, inefficient coastal power plants expected to be retired, said Mission Energy spokesperson Charlie Parnell. Sentinel and the two Mission Energy projects won’t tackle financing issues until the offset issue is settled. Impacts to other projects not as far along in the Energy Commission’s siting queue are unclear. They include Reliant’s 656 MW San Gabriel project in Rancho Cucamonga. A preliminary staff assessment is expected to be released at the end of this October and a final proposal is not expected before next spring. At this point, its progress has not been affected, said CEC project manager Shaelyn Stratton. But, midnight is approaching and the combination of the failure to quickly resolve the emission credit problem, the need to meet Clean Water Act goals, and persistent financial instability could turn power coaches into pumpkins.

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