Bluewater Makes First Move Towards “The kavips Compromise”

Courtesy of REPower

Today Bluewater Wind took the first step towards “The kavips Compromise”. They removed from negotiation, all cost incrementals, to which the PSC and the Independent Consultants had objected. Thanks to Maria Evans of WGMD, we have the actual hard copy of this proposal to show.

Bluewater proposes to go beyond the IC’s suggestion and eliminate such escalators entirely.

Overheard on Loudell’s evening news, however, is that the price was less than a dollar ( “a few cents”) over their original (2006) proposal.

Wow!

Bluewater has stepped up to the plate, bat in hand. As things stand right now, as of this minute, all Delawareans will benefit for the next twenty-five years, by paying less for electric, than twenty states do now…. Imagine locking into a deal in 1982 for gasoline at $1.30 a gallon….Worthwhile investment would you say…….?

Not to mention, the lack of mercury embedded in our children’s lungs from sucking in coal smoke. Not to mention the CO2 savings our source of cheap stable energy will keep from being burned for our benefit. Not to mention, the drop in demand for medical services, as we raise a new generation of human beings who lack the carbon-pollution “huffin’ tendencies of their parents……These are just perks that come with the package. “Paying our bills, with a little more extra for ourselves, is where it is at baby……!”

Now that Bluewater has stepped up, it is time the public side of our government to do the same. Our part of the deal was to allow Bluewater wind to build the 600MW farm they had originally proposed, and selling any excess to the grid………As  Americans, they have as much right to earn a living as I do. Putting power where it is needed, equidistant from DC and NYC, will do much to benefit the PJM grid that supplies us.

On a side note, unless we want to repeat the mistakes of Denmark and Germany, those high density transmission lines need to be built ASAP. More about that in a future story……

Right now, the immediate problem at hand, is to continue supporting the 600MW option, with excess over the 300MW designated for Delmarva, going to fill the power sucking vortex of DC/Baltimore. If that can happen, all Delawareans can BREATHE a sigh of relief………

Bluewater is warmed up, ready to bat. Will representatives of our state government, throw them a slider right up the middle into the sweet zone?

They better. Perhaps you would like to tell them yourselves?

Arnetta McRae, Chair
Public Service Commission
861 Silver Lake Boulevard
Cannon Building, Suite 100
Dover, DE 19904
Fax: (302) 739-4849
Email c/o Karen Nickerson: Karen.Nickerson@state.de.us

PSC Indirectly Hints It May Back the kavips Compromise

In Aaron Nathan’s News Journal article Sunday morning, there was a surprise. It was this…..

But Burcat, the PSC director, said he didn’t agree. Bluewater wasn’t told to build a smaller wind farm; it was told to supply Delmarva with less power, he said.

Bluewater could have driven down the price of wind power by building the extra turbines and arranging power purchase contracts with customers other than Delmarva, Burcat said.

Having followed the details rather closely, reading all the PSC’s publications at the source, this was the first time I had heard a government source sanction this… Ever since the PSC’s May ruling was complete, all attention focused on the hybrid plan and intricate negotiations between unwilling partners over Delaware’s future energy supply.

Upon rereading, the PSC ruling does not say Bluewater Wind must deal only with Delmarva, so in a sense Burcat’s statement is true. The intriguing question, is why is this idea coming out now? Those of you who read me often, may recognize that this new tack parallels nicely with what, for lack of better nomenclature when I first penned the name, is humbly called “the kavips Compromise.”

Paraphrased it says this: allow Bluewater Wind to build a giant wind farm, capable of selling extra power to the grid, and in return, Bluewater wind does not pass escalating costs, if any, onto Delaware’s subscribers. Other posts of mine have delved into the win, win situation which this compromise provides.

It is intriguing that Burcat’s comment surfaced in a publication covering the entire state (albeit it was on page 2 of the B section), the first weekend after the PSC pulled the plug.

A large wind farm would do wonders for our state. The initial proposal originally based on 600MW worth of wind generating capacity, hovered below the $7 mark. The term letter raised the proposal to $10.59. The cost escalators and the “Delmarva Inflationary Index” of 2.5%, could possibly raise costs as high as the mid $20 range.

So if were again to allow the return of the 600MW capacity wind farm, we could again capture electricity at rates lower than what we pay today…..

It is time for “the kavips Compromise” to be seriously considered…..hell call it a different name if you have to….but look at the options. With a revenue stream greater than that which existed with Delmarva alone, the burden of cost escalations would also be borne by a customer base much wider then those few living in Delaware alone……

I was comfortable with the $10.59 cost that is already less than twenty states pay now. I was comfortable paying that same price in 2032 and beyond…..As previously posted, if I had been given the opportunity to lock into a price of gasoline at $1.30 a gallon back in 1982, all today would consider it a very good investment.

One will hear environmental cost, health cost, carbon cost, and commodities’ cost all need to be considered. But like buying a new car, too much information, makes the deal fuzzy and nebulous opening options for screwing us later. But by keeping it simple, just focusing on one thing, price, can make a great deal drivable…

The kavips Compromise applies the KISS principle to this current dilemma (no, not Gene Simmons). The acronym stands for Keep It Simple, Stupid! The Kiss principle applies here. Lock down a $10.59 cents per Kw across twenty-five years. Allow Bluewater Wind, to sell excess power to a power hungry grid in order to cover all other expenses. Allow Bluewater wind the 600MW option to trim their costs per unit, and with every breath of air, put less carbon into our lungs and the air above……..

Perhaps it is fitting that the PSC’s Burcat brought this option up today. Applying the kavips Compromise, can fast track this process once again………Time is our new enemy…..

More on the kavips Compromise

Here is the problem with Bluewater Winds term sheet. They want to pass on increases caused by rising costs of materials used for turbines, and changes in the foreign exchange rate.

They also asked for a 2.5% cost of living increase per year………

Without those two roadblocks we could be moving forward as we speak……

That may not sound like much. But due to the very inflationary cost of those materials needed to make turbines over the last five years, by 2013 when the deal is expected to go forward, the cost of turbines could be off the charts. According to the deal with Delmarva, those costs would have been spread over twenty five years. And if the worse case scenario were to occur, those costs, times the accumulating 2.5% per year, would have had us paying 2.5 times more than the most expensive state pays now…….

Rarely does the worst case scenario happen. But if it were to materialize, the valid question remains. Should we be the ones to pay, or should Babcock and Brown, which now has ownership of Bluewater Wind be the ones who pay up… ? The staff at the PSC, after reading the Independent Consultant’s report, has decided that the potential risk to Delaware citizens is too high……

But one should note that this report exists in a vacuum. It is accurate in assessing some of the potential risks that may occur. However, all of us should realize that great risks abound in our oil and gas markets as we speak.. Are the potential risks of building a wind farm dwarfed by the possible risks caused by new tensions in the Middle East? Perhaps. Obviously speculators have read the tea leaves over the debacle with Iran, and have considered today’s price of $94 a barrel to be a good investment……based on what is coming………

So whereas we may pay more for wind, the report fails to consider that we may pay even more for natural gas, which will have to be shipped from the Mideast in liquid form. To restate the obvious, war with Iran could recast Bluewater Wind in an even better light……

The PSC and the Independent Consultants both note that requesting such a cushion as was done by Bluewater Wind, is rather rare in energy regeneration bids….It would make sense if one were attempting new technology, but one of the defenses of Bluewater, was that this technology had been tested in Europe and was performing well.

If it is doing well, why should Delmarva customers pay the cost overruns of the investment? Anyway, isn’t that the idea of investment that one puts down one’s own money, then collects enough premium back to remain profitable?

Bluewater was also stung by a credibility issue. The problem was this. It’s initial proposal of a six dollar bid per Kw/hour at the outset of the independent consultant’s number crunching, rose to a potential of $55 a Kw/ hour. Probably prices would have settled in the $20’s, but competitively, that cost is still too high……

The reason for the initial change, from $6 to $10.59, was the trimming done by the PSC which removed 50 turbines. The loss of 50 turbines increased the cost per turbine, and by reducing the power created by the wind-farm, meant fewer homes could be serviced and fewer dollars could be brought in. Obviously if Bluewater’s costs increase, and their revenues drop, they will have to charge more per person for pay for electricity…Duh!

(This factor was not under Bluewater’s control. The PSC mandated this….Bluewater cannot be blamed.)

Another huge factor causing cost overruns is the time stretching from the initial go ahead to the point of actually providing electricity. Just a year or two difference in pulling the switch, can create huge cost increases that are passed on to us…..The real tragedy is that “Waiting for Godot” has cost us tons of money. Had we started with the studies on June or July, our costs and future prices could have been reduced even further.

The contract specified that Bluewater would provide up to the cap of 300 MW. Anything over that amount could be sold on the PJM (grid) for others to by. This amount is sold much cheaper than the contracted amount, because investment costs are not included, and would because of its cheap cost, drive down the overall price of electricity for everyone across the grid. Meaning less carbon sources would need to be burned to replace that energy.

There are times when the wind can provide only 60MW of power. That means 240MW will have to be made up by other means. Two gas turbines at NRG., if built, would require a natural gas line to be built across Delmarva. That would have added benefit for everyone down state except higher priced propane suppliers.

But this additional power could also be bought off the grid, particularly if land base wind farms start producing a greater chunk of the grid’s power. Just buying from the grid in that case, may use less carbon overall than firing up a gas turbine located somewhere in southern Delaware.

So here is the genius behind the compromise. If we return to the 600MW wind farm, with a 25% increase of wind generated power, on those slower wind days of summer, instead of 60MW our minimum would be 75 MW, meaning we need to outsource only 225MW instead of 240MW. Again less money spent, less carbon burned. On days when the wind does blow, Bluewater sells the extra to the PJM grid at that moment’s price. With more turbines, they stand to have more overage to sell, increasing their profit margins enough to cover any cost rise that the commodities’ market may experience.

In return for allowing them more of the turbines, and the potential for a greater revenue stream, they need to agree that all increased costs will be eaten by them……as is done when one opens a restaurant, or car dealership, or radio station……

Bluewater benefits from increased revenues. Delawareans benefit from receiving for twenty five years, less expensive electricity, than twenty states pay now………Delmarva benefits from not having to worry about consumers switching power supplies due to wind power’s high cost overruns, and everyone benefits from a little less CO2.

A win, win. Since time is critical, all parties should begin negotiating in earnest……

the kavips Compromise

“The obvious choice then, is to go back to their original proposal, a 6ooMW wind farm, allowing them a greater revenue stream, and then have them absorb all of the cost overruns, if any, that occur.”

On October 29th, the PSC report chose to protect Delaware citizens from a potential disaster. There were clauses within the term letters proposed by Bluewater Wind, which could, if a certain series of events occurred, cost us much more than we were led to believe originally.

However, if anything can be learned from this experience, it is that transparency within government is a rather amazing thing. Watching this process go forward, one must extend heartfelt thanks to the public servants carrying out this analysis, and their willingness to publish their results immediately, torpedoes be damned. The lesson learned by all, is that those Democrats in the General Assembly who wear their pants too high, need to allow FOIA to go forward , ASAP, so that each of our governmental actions can function as fully in the clear view of such transparency, as did this proposal for self generation of our own power. Anyone like me, watching this process go forward, can come to unabashed conclusion that the ONLY REASON those Democrats would vote down FOIA is because their hands are in our coffers and they want no one to know. There can be not other.

So we learned that some stipulations, placed in good faith by Bluewater wind, could, if commodities shot up as they have in the last 5 years, cost us considerably more for our electrical power.

I will echo what Tommywonk said in his WDEL(aware) Address. Paraphrased: We have to remember it is just one step in a negotiation……… Feeling the disappointment, and anger toward those political toadies who pushed this towards fruition, I can sympathize with Mike Castle’s ancestor, Benjamin Franklin, who watched the Constitutional Convention slide towards a divisive oblivion. “If we don’t all hang together, we shall surely hang separately.” The Great Compromise, also known as the Connecticut Compromise after those state’s delegates came up with it, passed by one vote and rallied the delegates to give us the government we have today……..

That compromise worked because it benefited the small states in the Senate (we have two Senators, the same as California), and large populous states in the House (where we have one). Both sides were happy and we moved on to other things.

Bluewater needs to make money on their investment. They also need to shoulder some risk and not have those costs added to our electric bills. The obvious choice then, is to go back to their original proposal, a 6oo MW wind farm, allowing them a greater revenue stream, and then have them absorb all the cost overruns, if any, that occur. Their cost per unit drops, and we again are guaranteed what we were led to believe, that we will continue forward for the next twenty- five years, paying less for electric, than twenty states now…..

Such a compromise meets all the objections proposed by the October 29th PSC Staff report. It benefits Bluewater Wind. It benefits Delmarva. It benefits us.

More to come.