HomeMy WebLinkAboutMinutes - April 7, 2009 SSLODI CITY COUNCIL
SHIRTSLEEVE SESSION
CARNEGIE FORUM, 305 WEST PINE STREET
TUESDAY, APRIL 7, 2009
A. Roll Call by City Clerk
An Informal Informational Meeting ("Shirtsleeve" Session) of the Lodi City Council was held
Tuesday, April 7, 2009, commencing at 7:02 a.m.
Present: Council Member Hitchcock, Council Member Johnson, Mayor Pro Tempore Katzakian,
and Mayor Hansen
Absent: Council Member Mounce
Also Present: City Manager King, City Attorney Schwabauer, and City Clerk Johl
B. Topic(s)
B-1 Lodi Energy Center Update (EUD)
City Manager King briefly introduced the subject matter of the Lodi Energy Center.
Electric Utility Director George Morrow provided a PowerPoint presentation regarding the Lodi
Energy Center. Specific topics of discussion included background, 14 participants, aerial
photograph, Phase 2A and 213, status of the project, milestones, development costs, Fuels
Committee, Financing Committee, land and water for the Center, current issues, power island
and related vendors, plant comparison, cost estimates, cost comparison, commodity index,
financing changes, economics, general thoughts and summary, and next steps.
In response to Mayor Hansen, Mr. Morrow stated the issue with Kingdon Airport appears to be
that the owners would like more money or the City to buy the airport in light of any impacts they
may incur as a result of the extended gas line being put on their property alongside the runway
and access rights. Mr. Morrow stated staff will continue to work with the property owners on those
issues.
In response to Council Member Hitchcock, Mr. Morrow stated the route for the gas extension is
similar to the previous related work and there is little to no real impact in the area.
Interim Community Development Director Rad Bartlam provided an overview of an issue
pertaining to landscaping the new Lodi Energy Center as brought forth by the California Energy
Commission (CEC). Mr. Bartlam specifically discussed CEC as the lead agency charged with
regulatory permitting and environmental review, CEC staff approach to City for letter of support
for requirement to landscape power plant, concern of visual impact from I-5 based on photo
simulation, ongoing discussion regarding screening a larger stretch of area versus meeting
the intent to break up the visual impact, and the questions of where the landscape will be and
who will maintain the same.
In response to Mayor Hansen, Mr. Bartlam stated landscaping from an environmental viewpoint
is standard operating procedure for the CEC and staff is merely trying to drill down the exact
location.
In response to Mayor Hansen, Mr. Bartlam stated the landscaping could be as simple
as planting certain trees, but the question is what exactly is being screened since the view of the
plant exists for an approximate five mile stretch along 1-5.
Continued April 7, 2009
In response to Council Member Hitchcock, Mr. Bartlam stated CEC is not concerned with
screening all around the center and is focused on the view from 1-5.
In response to Council Member Johnson, Mr. Bartlam stated staff is concerned with what kind of
precedent will be set for future City facilities and screening based on what is required for the new
Energy Center.
In response to Council Member Johnson, City Attorney Schwabauer stated that, with respect to
the Lodi Gas Storage facility, the airport area is above ground, the gas lines are underground,
and the property owner eventually embraced the landscaping.
In response to Council Member Johnson, Mr. Morrow stated the second water source discussion
with CEC is fairly new, the City intended to drill the well regardless, there may be some costs with
both pulling the water out and putting the water in, and it is a good idea to have in the event that
the water treatment facility is not available temporarily.
In response to Myrna Wetzel, Mr. Morrow stated the stacks are not necessarily appropriate
because they get hot.
In response to Council Member Johnson, Mr. Morrow stated the larger participants such as the
California Department of Water Resources (CDWR), State of California, and Modesto Irrigation
District sometimes like to operate more independently.
In response to Mayor Hansen, Mr. Morrow stated the largest stakeholders currently are the State
at 60, CDWR at 60, Modesto at 50, and the City at 30.
In response to Council Member Hitchcock, Mr. Morrow stated he is not aware of others who may
jump in if someone pulls out as the coalition was tough to put together but there may be someone
else.
In response to Council Member Johnson, Mr. Morrow stated the smaller participants would like to
see the Northern California Power Agency (NCPA) take a more active role in procuring fuel.
In response to Council Member Johnson, Mr. Morrow stated all the participants approved the
$15 million to get in line, the bids are in and evaluated, it is now time to pick one bidder, and it
looks like the bidder will be Seimens because the participants will get more for less.
In response to Mayor Hansen, Mr. Morrow stated the costs have gone up because there is
an increased cost per kilowatt, financing costs have gone up, and in today's market the cost of
carrying the financing has gone up considerably.
In response to Council Member Johnson, Mr. Morrow stated he is also concerned with
the experts missing the sales tax. Mr. King stated there is some misunderstanding in regard to
the sales tax exclusion and the need to educate is there but the timing is not.
In response to Council Member Johnson, Mr. Morrow stated the City's costs of 11 % of the project
will generally remain the same even if another participant pulls out because the costs are
proportional.
In response to Council Member Hitchcock, Mr. Morrow stated he agrees that the contingency
costs of 10% are a bit low and harder numbers will be available at the end of the year after
the specific plans are put together.
In response to Mayor Hansen, Mr. Morrow stated the commodity cost is bundled together and
N
Continued April 7, 2009
could include gas, oil, steel, copper, and other items. Mr. Morrow confirmed it is based on a world
economy perspective but mostly on the U.S. index.
In response to Council Member Johnson, Mr. Morrow stated if two or three of the larger
participants become uneasy about the project, there may be a need to delay the project a bit or
stretch it out.
In response to Council Member Johnson, Mr. Morrow stated he is not aware of anyone waiting in
the wings through NCPA if a current participant falls out and there was a concern expressed
about including the private entities such as PG&E.
In response to Council Member Hitchcock, Mr. Morrow confirmed that building a power plant is
always a difficult decision with the costs and over the last 50 years it has been good that several
power plants were built to meet the ongoing need.
In response to Mayor Hansen, Mr. Morrow confirmed that generally most everyone understands
the need for new generation and demand and that it is only an agency's specific situation that
may cause them to rethink.
In response to Council Member Johnson, Mr. Morrow stated he will be coming back to the City
Council with a status report after the participants meet on April 27, 2009. Mr. King stated that,
based on his conversations with Donald Dame at NCPA, all the agencies appear to be staying in
the project; although, everyone is concerned about what everyone else is going to be doing.
C. Comments by Public on Non-Aaenda Items
None.
D. Adjournment
No action was taken by the City Council. The meeting was adjourned at 8:09 a.m.
ATTEST:
Randi Johl
City Clerk
AGENDA ITEM B-01
CITY OF LODI
COUNCIL COMMUNICATION
AGENDA TITLE: Lodi Energy Center Update (EUD)
MEETING DATE: April 7,2009
PREPARED BY: Electric Utility Director
RECOMMENDED ACTION: Receive information related to the present status, cost estimates
and economics related to the Lodi Energy Center.
BACKGROUND INFORMATION: Lodi is one of 14 public entities pursuing the licensing and
development of the Lodi Energy Center, a 255 -megawatt combined
cycle gas turbine facility owned by the Northern California Power
Agency. The project is planned for construction on City property at the White Slough wastewater
treatment plant. Lodi has subscribed to 11.8 percent, or 30 megawatts, of the power plant's energy
output.
Project licensing and development activities commenced in March 2008. The Phase 2 Development
Agreement provides a $25 million budget for initial design and development activities, with an additional
$15 million approved by participants in late 2008 to acquire an option on Power Island facilities. Lodi's
share of this $40 million budget is $4.7 million.
The current project schedule anticipates securing financing and commencing construction during early
2010 followed by project completion and commercial operation in April 2012.
The most significant current issue is the project's escalating cost. Project engineer WorleyParsons
recently revised the cost of the Lodi Energy Center to approximately $433 million, far greater than the
prior $319 million estimate. The increase is largely attributable to higher sales tax, increased financing
and bond reserve costs (with little arbitrage opportunity); higher material costs and labor charges;
enlarged project contingency amount; and increasing the plant's capacity to as much as 302MW.
Despite this roughly 30 -percent increase, the overall cost has increased by less than $3 per megawatt -
hour, or 0.3 cents per kilowatt/hour to the consumer, due to a 20 -percent increase in baseload output and
improved efficiency. Projections indicate that the project remains an economically feasible resource for
participants based on its projected average power cost of less than $70 per megawatt.
The attached Lodi Energy Center White Paper provides a detailed overview of current project issues, and
market conditions and project economics.
The California Energy Commission is overseeing required environmental assessments for the project.
The current timeline calls for the Commission to issue a license for construction of the project in
November 2009. At that time, Lodi Energy enter participants will eit er reaffirm their interest by
consummating long-term project agreement
or take other actions, includi liquidating existing project
assets, to meet future electrical needs. *1\ I � /)
Moribw, Electric Utility Director
APPROVED:
BI ity Manager
White Paper
Lodi Energy Center (LEC)
Prepared by LEC/NCPA Staff
April 1, 2009
EXECUTIVE SUMMARY:
Issue: Lodi Energy Center cost estimates have recently risen due to added financial conditions,
project contingencies, sale tax, and manufactured materials cost escalation.
• Assessment: Although Project capital cost estimates have risen about 30%, the overall project
cost has increased by less than $2/MWh, or less than 3%, mitigated by nearly a 20% increase in
project baseload power output and improved fuel conversion efficiency. The Project remains an
economically feasible resource to serve Participant end use loads.
Recommendation: Continue current Phase 2 Project efforts including: contracting for power
island equipment and completing detailed engineering and design; completing the CEC and all
related licensing processes; preparing requisite financing, operations, and fuel supply
agreements; and bidding out Project construction and materials on schedule at the end of 2009.
At that time, Project Participants will then either reaffirm their interest in consummating Project
development or take other actions, including liquidating then existing Project assets, to meet
future load service needs.
BACKGROUND INFORMATION:
Lodi is one of fourteen public entities pursuing the licensing and development of the Lodi Energy Center,
a 255 MW combined cycle gas turbine facility to be located adjacent to an existing Northern California
Power Agency (NCPA) 50 MW gas turbine facility (STIG) located the White Slough Treatment Facility in
Lodi California. Lodi has subscribed for an 11.765 percent, or a nominal 30 MW, Participation Share of
this Project (see Chart 7).
Project licensing and development activities formally commenced in March 2008 after all Participants
received necessary approvals from their governing bodies and executed Phase 2 Agreements with
NCPA. The Phase 2 Agreement provides a $25 million budget for Project initial design and development
activities including the procurement of needed ERCs (Emission Reduction Credits); late in 2008 and
upon the recommendation of the Project Participant Committee, and the subsequent approval of NCPA
and all Project Participants, Amendment 1 to the Phase 2 Agreement was executed providing up to an
additional $15 million to prepare an RFP to secure cost certainty and delivery timing on essential Project
power island equipment (the large key components of the generating station). Thus the total currently
authorized LEC budget is $40 million ($25 million plus $15 million) and Lodi's proportionate share of this
budget is $4.7 million.
The current Project schedule anticipates securing Project financing and commencing construction during
early 2010 followed by Project completion and commercial operation in April 2012.
CURRENT ISSUES:
1) Power Island Equipment Bid - Project staff has been negotiating with GE and Siemens -
Westinghouse (SW) to secure cost and delivery certainty on key LEC power generating
equipment. In order to remain on schedule, the vendor will need to be selected within the next
Lodi Energy Center White Paper
April 1, 2009
Page 2
two months. Upon selection, a substantial deposit (which funds have already been received from
Project Participants) will be made to the selected vendor.
2) LEC Project Cost Estimate - WorleyParsons (WP), the engineering firm providing detailed
Project design and engineering, recently completed a preliminary revised Project cost estimate
suggesting a total Project cost of approximately $433 million; significantly higher than the most
recent prior Project cost estimate of $319 million. The primary components of the increased cost
estimate are: addition of sales tax; increased financing and bond reserve costs (with little
arbitrage opportunity); higher material costs and labor charges; enlarged project contingency
amount; and greater Project power supply capability.
MARKET CONDITIONS:
Before re-evaluating Project economics, it is important to review the various market sectors which affect
the need for, and viability of, any new large generation asset. Project Participants joined together to
investigate, plan and license the Lodi Energy Center to attain the necessary scale economies to build a
very fuel efficient and environmentally responsible natural gas fired combined cycle facility. During the
last 12 months however, multiple market sectors have exhibited volatile swings and the U.S. national
economy appears to be in its most precarious position in decades. Nonetheless, energy decision makers
must make decisions as to how loads will be served and how to replace less efficient and retiring power
plants.
1) Energy Market Volatility — Past, present and future anticipated energy prices should help to
guide decision maker expectations regarding the "value" of a given new generation project, and
whether to participate in such a project or to seek future energy supplies elsewhere or from "the
market." Securing future power supply from a third party exposes the purchaser to significant
"counter party risk;" that is, the risk that the party will default on its end of the transaction or
perhaps go bankrupt, a situation which becomes more probably when market prices swing widely,
away from the price at which a supplier has committed. Most of us can recall the ENRON
debacle, the PG&E bankruptcy, and more recently, the virtual collapse of many once mighty
financial institutions and banking houses.
Chart 1 below shows the rise and decline of 5 -year forward energy prices over the last twelve
months. Note that forward prices peaked in the July 2008 timeframe at between $100 and $130 per
MWh, followed by a relatively steep and steady decline. During the July—September 2009 period
(the highest, solid black line) forward prices peaked at $130/MWh and are currently running at about
$50/MWh, a price drop of over 60%. This trend very much tracks the rise and fall of oil prices over
the same period and the ongoing decline in macro economic conditions. As market prices decline,
utility decision makers often question whether a policy shift from self financed, constructed and
operated power projects to "market supplied power' is warranted — despite the well known difficulties
to attaining "project equivalent" market supply dependability, favorable contract terms and conditions,
counter -party credit reliability, long-term durability, and the assurance of local control.
CHART 1
Lodi Energy Center White Paper
April 1, 2009
Page 3
$130.00
NP15 Forward Peak Prices
-
TFS
-Apr-09
$120.00
_Q2.09
-Q3.09
$110.00
_Q4.09
-YR10
$100.00
- YR11
-YR12
$90.00
-YR13
-YR14
$80.00
$70.00
$60.00
%A-
$50.00
$40.00
$30.00
Jun -08 Jul -08 Aug -08 Sep -08 Oct -08 Nov -08 Dec -08 Jan -09 Feb -09 Mar -09
2) Natural Gas Market Volatility — Past, present and future anticipated natural gas fuel prices
should also help guide decision maker expectations regarding the "value" of a given new natural
gas fired generation project. In the case of the LEC, higher natural gas prices increase the value
of project output versus both market alternatives and other less efficient gas fired plants. Current
power island equipment vendor information specific to the LEC suggests a net heatrate (the rate
at which fuel is converted to electrical energy) of about 6800 Btu/kWh; average implied heatrate
for market power purchases are closer to 10000 Btu/kWh, although this can vary depending upon
time of year and the composition of power plants providing such supplies. Note also that the "size"
of the LEC is the minimum plant size necessary to attain efficiencies below 7000 Btu/kWh. New,
smaller units, in the 50 to 175 MW capacity range, typical have heatrates between 8500 and
10500 Btus/kWh.
Chart 2 shows NYMEX gas futures prices together with PG&E City -Gate (CG) prices since July
2007. Focusing on the CG price, which offers a good proxy for daily gas purchases and
associated fuel only production cost for the LEC, note that the CG price was at $7.00/MMBtu in
July 2007, dropping to about $5.50/MMBtu in August 2007, and then starting nearly a year long
climb to $13.00/MMBtu in July 2008, and then plummeting to less than $4.00/MMBtu currently.
These are very wide swings over a less than two year period and significantly affect the actual
and perceived value of the LEC. In a $13.00/MMBtu gas market, LEC's fuel only production cost
is estimated to be about $88/MWh versus an energy market price (at a 10000 Btu/kWh heatrate)
of $130 / MWh, resulting in a positive margin to LEC owners of $42/MWh. Given $4.00/MMBtu
gas prices, however, LEC's fuel only production cost becomes about $27/MWh versus a market
alternative price of $40/MWh, producing a positive margin to LEC owners of only $13/MWh,
almost a $30/MWh reduced benefit from the high gas cost situation. The paradox is that while the
LEC owners' retail customers obviously benefit from the lower gas price situation, the LEC Project
"looks" much better economically under a high gas price scenario. In reality, the LEC Project
provides one additional vehicle for Project owners to use to protect against high and volatile fuel
prices, as well as to predictably serve retail loads.
Lodi Energy Center White Paper
April 1, 2009
Page 4
CHART 2
3) Financial Markets - The current "meltdown" of the financial marketplace adds further uncertainty
and cost to the development, construction and financing of a large power project. To the extent there
is a bright side to this situation, it is that currently long term tax free bond rates appear to be in the 5-
6% range. On the negative side, short term investment earnings rates are close to 0% and thus the
anticipated earnings on funds on hand during the construction process (along with carrying a one
year debt service reserve add significantly to Project costs), costs that previously were largely offset
by interest earnings on funds on hand.
4) General Economic Conditions - The general condition of the U.S. economy is said to be worse
than at any time since the Great Depression of the 1930s. This has translated into cash strapped
federal, state and local government entities, including pubic power companies. For electric utilities,
this situation often extrapolates to flat or declining loads for a period of time, placing further hesitation
or uncertainty on the necessity for constructing new generation facilities. With regard to the LEC,
these circumstances are at least partially mitigated by the significant plant efficiency along with the
ongoing need to replace aging power plant infrastructure. In addition, the downturn in the economy
should translate into a lower overall project construction cost than if such tasks were performed in
more booming economic conditions. A further side benefit is that a construction project over the next
several years will provide a beneficial injection to local/statewide employment and income. And
although economic activity is forecasted to slow over the next several years, growing population and
pent up demand will eventual increase economic growth and the demand for energy. (see the short-
term EIA forecast below which shows electricity consumption demand growing again in 2010)
CHART 3
HISTORICAL NYM EX FUTURES- GAS CONTRACT PRICES vs. PG&E CG Spot Price
$13.00
$12.50
$12.00
APR09
$11.50
JUL09
$11.00
AUG09
AUG10
$10.50
$10.00
AU
— — $5.5050 Ref.
$9.50
$9.00
$8.50
$8.00
$7.50
$7.00
$6.50-
6.50$6.00$5.50___
$6.00-
$5.50--
_�__�_�__�_�_________�____
$5.00-
$4.50
$4.00
--------------------------------------------------------------------------------------------------------------------------
$3.50
$3.00
Jul -07 Aug -07 Sep -07 Oct -07 Nov -07 Dec -07 Jan -08 Feb -08 Mar -08 Apr -08 May -08 JurW8 Jul -08 Aug -08 Sep -08 Oct -08 Nov -08 Dec -08 Jan -09
Feb-09Ma-09
3) Financial Markets - The current "meltdown" of the financial marketplace adds further uncertainty
and cost to the development, construction and financing of a large power project. To the extent there
is a bright side to this situation, it is that currently long term tax free bond rates appear to be in the 5-
6% range. On the negative side, short term investment earnings rates are close to 0% and thus the
anticipated earnings on funds on hand during the construction process (along with carrying a one
year debt service reserve add significantly to Project costs), costs that previously were largely offset
by interest earnings on funds on hand.
4) General Economic Conditions - The general condition of the U.S. economy is said to be worse
than at any time since the Great Depression of the 1930s. This has translated into cash strapped
federal, state and local government entities, including pubic power companies. For electric utilities,
this situation often extrapolates to flat or declining loads for a period of time, placing further hesitation
or uncertainty on the necessity for constructing new generation facilities. With regard to the LEC,
these circumstances are at least partially mitigated by the significant plant efficiency along with the
ongoing need to replace aging power plant infrastructure. In addition, the downturn in the economy
should translate into a lower overall project construction cost than if such tasks were performed in
more booming economic conditions. A further side benefit is that a construction project over the next
several years will provide a beneficial injection to local/statewide employment and income. And
although economic activity is forecasted to slow over the next several years, growing population and
pent up demand will eventual increase economic growth and the demand for energy. (see the short-
term EIA forecast below which shows electricity consumption demand growing again in 2010)
CHART 3
Lodi Energy Center White Paper
April 1, 2009
Page 5
I
Billion j. -
kilowatt
hours
per day
U.S. Total Electricity Consumption
Forecast
1 Consumption
0
9
$ Annual Growth
3.7%
2.8% 2.8% 2.8%
1.746 2.1°%
0.846 1.2°% 1.2°%
0.2%
-0.7% -0.7°%:
-1.7%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
3%
0
1% Change
from
016 Prior
0
Year
_2%
-3%
wwiwau aeegev
Short -Term Energy Outlook, March 20090
5) Commodity and Labor Markets - More particular to the LEC is the intuitive expectation that the
poor macro economic conditions should translate to reduced labor and materials costs during the
LEC procurement and construction phase. Unfortunately, this expectation is not yet manifesting
itself as reduced labor and materials costs in the relatively specialized power equipment and labor
sector. Observing Chart 4 on the next page shows that the general Producer Price Index (PPI) for all
commodities (the blue line) shows the anticipated result in an economic downturn, a swift and steep
decline of about 30 percent, and it perhaps may go lower yet. On the other hand, Turbines, finished
goods and related equipment (red line) and construction labor (yellow line) are still increasing
although the rate of increase appears to have diminished somewhat, and may start to track the
decline in commodity prices over the next 6 to 18 months. These latter two indices directly impact
the LEC construction cost estimates and help to explain the near term increase in estimated LEC
construction cost in the face of a declining general economy.
CHART 4
(February 2009)
Lodi Energy Center White Paper
April 1, 2009
Page 6
100
95
90
85
80
75
70
65
as reported by Bureau of Labor Statistics
Producer Price Index Commodity Data
of Max
LODI ENERGY CENTER COST ESTIMATES:
6.9%
Approx. $18.5 M
-Commodity
-Boilers. Turbine. Pipe.
Structure, Wire. Pumps.
Valves
—Construction Labor
— — Last Price Analysis
Before comparing the two most recent cost LEC cost estimates, it should be noted that the actual cost of the
Project will not be certain until the detailed Project design and engineering has been completed (underway
now and being performed by WorleyParsons); the Project completes the bid and contract process for
materials, construction, and staff support; and when the Project ultimately enters commercial operation. Up
to this point in time, estimates have been based on the cost of similar facilities, applying materials and labor
escalating factors and adjustments based on known or expected differences between the LEC and other
projects. This section will review: 1) LEC cost estimates as of December 2008; 2) LEC cost estimates as of
March 2009; 3) a summary of the primary cost differences; 4) attributes of the Project site in Lodi; and 5) a
comparison of LEC estimated costs to other recent combined cycle facility costs or cost estimates.
1) LEC Estimate as of December 2008 - During the participant decision process, project/NCPA staff
have attempted to utilize the best available data to estimate the cost of the LEC and to compare this
derived cost against other alternatives. For the December 2008 period, the following assumptions
were used:
• 255 MW plant capacity
• 78% annual capacity factor
• 30 year project life
• $320 Million total capital cost (no interest earnings offset, and including "owners' costs)
• 5% financing rate
• $6.00 / MWh fixed and variable O&M
• $1.25 / MWh dispatch and scheduling cost allocation from NCPA
• $7.00 / MMBtu natural gas cost
• 7000 Btu / kWh project heatrate
Resulting Projected Unit Cost:
• Capital Cost $11.95/MWh; ($1,255 / kW)
• Fuel Cost $49.00/MWh
• F&VOM $ 7.25/MWh
Total Unit Cost (Yr 1) $68.20/MWh
Lodi Energy Center White Paper
April 1, 2009
Page 7
2) LEC Estimate as of March 2009 - This estimate reflects the preliminary estimate by
WorleyParsons, the LEC Project engineering firm which is still being refined. The following
assumptions were used:
• 280 MW plant capacity (with no credit for capacity between 280 and 302 MW)
• 78% annual capacity factor
• 30 year project life
• $422 Million total capital cost (no interest earnings offset, and including owners' costs)
• 5% financing rate
• $6.00 / MWh fixed and variable O&M
• $1.25 / MWh dispatch and scheduling cost allocation from NCPA
• $7.00 / MMBtu natural gas cost
• 6800 Btu / kWh project heatrate
Resulting Projected Unit Cost:
• Capital Cost $14.35/MWh; ($1,507 / kW)
• Fuel Cost $47.60/MWh
• F&VOM $ 7.25/MWh
Total Unit Cost (Yr 1) $69.10/MWh
3) Summary of Cost Differences - On a unit cost basis, the more recent estimate is $0.90/MWh
greater than the estimate used during December 2008, or a 1.3% increase in the projected cost of
first year energy output from the Project. Estimated capital cost have increased $102 million
primarily as a result of adding in sales tax, added materials and labor costs, increased project
contingency amounts, increased project financing costs due to minimal arbitrage opportunity and the
addition of a one-year debt service reserve. These added capital costs were partially offset by the
improved project heatrate and the increased project baseload capacity which can either be
subscribed proportionately by existing Project Participants or allocated to other public agencies or
third parties to assure existing Project Participants attain the unit cost shown above.
4) LEC Site Attributes - The proposed LEC Project site is near ideal for power plant operations. Site
benefits include: a) staff and facilities economies with the existing NCPA STIG combustion turbine
plant; b) proximate high pressure PG&E natural gas supply line; c) existing switchyard and
interconnection to the CAISO grid with 280 MW of incremental transfer capability available; d)
availability of Project make-up water from the City of Lodi's White Slough Treatment Plant; e)
utilization of underground injection wells to dispose of project blowdown (and thus avoid troublesome
ZLD technology); and land availability, without proximate residential and commercial activity, via an
existing lease with the City of Lodi. A potential minor negative associated with the site is the
footprint size of available space which may require additional engineering, design and materials
fabrication for various cable and piping runs.
5) Other Comparable Facilities - This section will compare several projects either recently completed
or in the planning stages with the LEC facility. It should be noted, however, that no two projects are
"identical" in that all will vary by time, location, equipment selected, size of the plant, and other factors
particular to a given technology or sponsoring organization. The primary point of comparison is the
expected cost per kW for the project.
• PJM "CONE" Plant - The PJM Interconnection is a regional transmission organization
(RTO) that coordinates the movement of wholesale electricity in all or parts of 13
states and the District of Columbia. PJM at least annually updates its Cost of New Entry
("CONE") Combustion Turbine Power Plant Revenue Requirements to reflect the cost of
new capacity additions within the PJM interconnection. The most recent update was
Lodi Energy Center White Paper
April 1, 2009
Page 8
calculated on August 26, 2008 based on a new 480 MW combined cycle facility consisting
of two GE Frame 7s coupled with 2 HRSGs and one steam turbine generator. The
estimated capital cost in January 2010 dollars is $1,230/kW. For capital cost escalation
purposes, PJM's CONE calculation uses the average rate of increase over the last three
years as shown in the Handy -Whitman Index, which is 10.4% year. Continuing this
escalation trend for the CONE plant for two additional year's results in an estimated capital
cost of $1,500 kW as of January 1, 2012, virtually identical with the current LEC cost
estimate without attempting to normalize for the expected construction economies
associated with building a plant significantly larger than LEC.
Tessenderlo, Belgium 420 MW CCGT - On March 12, 2009, Siemens -Westinghouse
reports that it has secured a turnkey order for a 420MW (1 gas turbine, 1 steam turbine and 1
generator) combined cycle plant in Belgium; the project targeted on line date is mid 2011.
The total turnkey cost is reported to be EUR320 million, which converts to a turnkey cost of
$438 million in U.S. dollars. Assuming owner's cost will add another 30% to this amount, the
total cost would be about $570 million U.S., or about $1,360/kW. Again, this does not
normalize for the 9 month later on-line date or the lower project capacity associated with
LEC.
CPUC 2008 Market Price Referent (MPR) - The California Public Utility Commission
annually updates its reference gas fired alternative generation cost to establish a cost
benchmark for IOUs to gauge potential green power purchases. The 2008 MPR is based on
a 500 MW facility with a total capital cost of $1,242 (in 2008 dollars). Escalating this total
capital cost at 5% per year for four years results in an estimate year 2012 total capital cost of
$1,51 0/k .
6) LEC Evaluated versus Power Market - NCPA staff has evaluated the LEC against the current
power market over the anticipated LEC 30 -year project life. As identified previously, the power
"market" is not equivalent to project ownership and control, and there are virtually no counter parties
currently available that will enter a contract for a duration greater than five years; and if there were,
there would be significant credit, contract and performance issues. Moreover, as power industry
decision makers have observed since "deregulation," price and performance volatility seem to be the
new norm and self ownership of generation plant helps to mitigate some of these concerns, although
fuel supply and price can and do vary with market conditions. The benefit of owning a very efficient
power plant is its protection value against spiking "spot" market prices which in California are driven
primarily by the least efficient gas plant on line to meet load and the inherent gyrations in an
unregulated market. Note that the "new" price caps under the MRTU environment are effectively
$2,500/MWh.
NCPA staff takes two approaches to evaluating Project economics: 1) estimating the breakeven
Project cost / kW as a function of forecasted market conditions; and 2) estimating the net present
value benefit over Project life.
Breakeven Project Cost - Apart from self and local ownership and control over a long term power
generation station, and then owning the project outright after the project financing period, in the
California energy environment there are three primary measures of the "value" of generation
hardware: value of energy versus alternatives; value of ancillary services products that can be sold;
and the value of capacity for meeting resource adequacy and local capacity requirements (along
with the more traditional value of simply assuring the retail customer base that its utility company
intends to meet its load obligations under all foreseeable circumstances).
Chart 5, on the next page, show the estimated value of a generation resource as a function of project
heatrate and resultant expected annual operating capacity factor. This particular analysis is run
Lodi Energy Center White Paper
April 1, 2009
Page 9
using a conservative historic $5.58/MMBtu natural gas price; future higher average natural gas prices
will commensurately increase the imputed value of project capacity. The "blue vertical bars" indicate
the percentage of a year a project is expected to run given a project net heatrate. LEC's heatrate of
6800 Btu/kWh falls about half way between the 6500 and 7000 heatrate bars (the second and third
from the left of the graph). Splitting the difference between these two bars suggest an annual
capacity factor of about 84%. The "red line" on the chart shows the value of this more efficient
heatrate versus the market, translated to $/kW at the time of construction. Applying this assessment
technique to LEC indicates a breakeven capacity equivalent value of about $1,100 per kW (about
half way between $1,321 and $933/kW for bars two and three, from the left). The LEC also has the
capability to provide ancillary services into the CAISO markets, primarily Spinning Reserve, RegUp
and RegDn. Focusing only on RegDn, the estimated value of providing 75 MW of RegDn, based on
actual CAISO prices during the 7/1/04 through 2/28/09 period, converts to about a $200/kW
equivalent at the time of project construction. The third component of value focuses on resource
adequacy and local area capacity values that can either be sold on the market or retained by project
owners in lieu of having to procure the same capability. Although the value of such capacity is
somewhat malleable at this point in time, it is estimated to be between $425 and $700 per kW at the
time of construction.
Thus, adding up these three value aspect converted to time of construction equivalent $/kW indicates
a project value of between $1,725 and $2,000 per kW, which can be weighed against the currently
estimated the currently estimated $1,518 LEC Project cost estimate.
CHART 5
Project Lifecycle Cost - NCPA staff also estimated Project value using a year by year view over
the 30 year Project financing life (actual project life will be a function of resource supply and demand
conditions thirty years hence, however there are many thermal projects operating today well beyond
30 years of operation). It was mentioned earlier that apart from self/local ownership and control over
Value of Heat Rate Savings & Annual Us under Historical Mkt Heat Rates @NP15 w/ GasP-historical $5.58
/mmbtu
100%
$1,800
90
$1,600
80%
$1,400
70%
$1,200
60%
Y
w
u
$1,000
L
y. 50
0
n
$800
y
a 40
m
Q
$600
=
30%
0
d
$400
j
20%
10%
$200
0%
$-
6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000
Plant's net Heat Rate (HHV) - btu/kwh
AGF —V.1-1 Heat Rate Savings
Project Lifecycle Cost - NCPA staff also estimated Project value using a year by year view over
the 30 year Project financing life (actual project life will be a function of resource supply and demand
conditions thirty years hence, however there are many thermal projects operating today well beyond
30 years of operation). It was mentioned earlier that apart from self/local ownership and control over
Lodi Energy Center White Paper
April 1, 2009
Page 10
a long term power generation station, and then owning the project outright after the project financing
period, in the California energy environment there are three primary measures of the "value" of
generation hardware: value of energy versus alternatives; value of ancillary services products that
can be sold; and the value of capacity. An additional element of value in a carbon sensitive
environment is the reduced carbon emissions associated with a more efficient natural gas project.
Chart 6 shows annual estimated fixed cost (the dark blue shaded area) along with fuel plus fixed and
variable O&M cost (the grey shaded area) over 30 year project life, starting at about $65/MWh in
year 1, growing to about $100/MWh in year 30. The solid red line represents the value of energy
only against market alternatives; the multi colored dashed and dotted line shows estimated project
value including ancillary services revenues and capacity value (assumed to be about $30 per kW
year). Although there is a "CO2 Cost" category and the net CO2 value has a positive impact on
Project economics, CO2 value has conservatively not been included in this chart.
The net result is a NPV lifecycle benefit/cost ratio slightly greater than 1, resulting in a total net
present value benefit of over $145 million.
CHART 6
LODI ENERGY CENTER PARTICIPATION AND PHASE 2 BUDGET SHARES
For reference purposes, Chart 7 displays the LEC Project participation percentages and total funding
obligations for Phase 2 Project activities.
CHART 7
Lodi Energy Center
Cost(shaded areas) vs Benefits(lines)
$140
$120
$lop
Fuel+VOM
>_
$80
CO2—Cost
� Fixed—Cost
H
$60
--------- Value CO2
--- Value—Other
$40
Value Pwr
$20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
LODI ENERGY CENTER PARTICIPATION AND PHASE 2 BUDGET SHARES
For reference purposes, Chart 7 displays the LEC Project participation percentages and total funding
obligations for Phase 2 Project activities.
CHART 7
Lodi Energy Center White Paper
April 1, 2009
Page 11
7/16/2008
Lodi Energy
Center Participation Percentages, Capacity
and Budget Allocation
(including the Pro sed Amendment No. 1 Budget Increase
Project Member
Azusa
Project Member
Participation
Percentage %
2.745%
Project Member Initially Approved
Capacity Share Phase 2A Budget
MW $ 16,000,000
7.0 $ 439,216
Initially
Approved
Phase 2B
Budget
$ 9,000,000
$ 247,059
Amend. No. 7
Phase 2B
Bud et Increase
$ 15,000,000
$ 411,765
BART
5.882%
15.0
941,176
529,412
882,353
Biggs
0.392%
1.0
62,745
35,294
58,824
CDWR
23.529%
60.0
3,764,706
2,117,647
3,529,412
Gridley
1.961%
5.0
313,725
176,471
294,118
Healdsburg
1.569%
4.0
250,980
141,176
235,294
Lodi
11.765%
30.0
1,882,353
1,058,824
1,764,706
Lompoc
1.961%
5.0
313,725
176,471
294,118
Modesto
23.529%
60.0
3,764,706
2,117,647
3,529,412
Plumas-Sierra
0.784%
2.0
125,490
70,588
117,647
Port of Oakland
1.176%
3.0
188,235
105,882
176,471
PWRPA
1.961%
5.0
313,725
176,471
294,118
Silicon Valley Power
19.608%
50.0
3,137,255
1,764,706
2,941,176
Ukiah
3.137%
8.0
501,961
282,353
470,588
Total
100.000%1
255.0
$ 16,000,000
$ 9,000,000
is 15,000,000
SUMMARY, CONCLUSIONS AND NEXT STEPS
LEC Project Participants are currently on time and budget within the Phase 2 Project development
process. All requisite permits and applications have been either received or are in process, the CEC
AFC approval is anticipated by November 2009, negotiations are nearly complete related to securing
Project power island equipment delivery timing and cost certainty, and needed Project design,
engineering and contract preparation is underway and anticipated to be ready well in advance of the
Project March 2010 financing date.
Recently issued Project cost estimates reflecting the addition of sales tax, financing costs, and labor and
materials escalation suggest an increase in Project capital cost in the range of $100 million. This
potential added cost, coupled with general economic uncertainties, has resulted in Project Participants'
desire to review expected project benefits based on these changing conditions.
NCPA economic assessments indicate that the Project remains economically viable under likely future
circumstances. In addition, the cost components of a combined cycle project tend (about 25% capital
cost, 75% fuel plus variable O&M) to temper the overall impact of capital cost increases when expressed
in $/MWh value.
Recommendation
LEC/NCPA Staff recommends that Project Participants maintain the momentum and existing schedule for
LEC Phase 2 activities by completing Project detailed design and engineering, selecting a power island
equipment vendor, and preparing all necessary documentation and paperwork to issue the LEC Project
construction RFP at the end of 2009, and to finance the Project in early 2010, given Project Participant
affirmation. The RFP will ultimately provide the single most reliable indication of Project cost and, if such
cost is deemed to be unacceptable to Project Participants at that time, Participants will then have the
opportunity to package up the accumulated assets (AFC approval, permits, air credits, interconnection
approval, power island equipment, engineering design, and the like) and market this package to
interested buyers. Halting or hesitating current LEC activities will not likely yield quicker or better
decision making cost information and may significantly reduce or hamper the overall success of the
Project.
W OF
Lodi Energy Center
City Council
April 7, 2009
Background
• Lodi and 13 other public electric utilities are
participants in Lodi Energy Center
• The LEC is to be a 255MW combined cycle
natural gas fired power plant with additional 25
MW of peaking capacity
• Located adjacent to existing NCPA STIG plant at
White Slough Water Treatment Project
• LEC is in detailed development phase (permitting
and detailed engineering)
2
14 Participants
• Azusa
• BART
• Biggs
• CDWR
• Gridley
• Healdsburg
• Lod i
• Lompoc
• Modesto
• Plumas Sierra
• Port of Oakland
• Santa Clara
• Ukiah
3
Lodi Energy Center
7
4
Phase 2
• Phase 2A (through December 2008)
— Initial engineering studies
— CEC permitting evaluation
— Equipment specification
— Updated cost projections and timelines
— Acquisition of air pollution credits and air permit
• Phase 2B (through December 2009)
— Detailed engineering
— Option on Power Island Equipment
— Acquisition of permits
— Development of Phase 3 agreements
— Preparation of construction RFPs.
5
LEC Status
• Project development is progressing well
• Site layout and plan completed
• Application for permits submitted to Air District
and to California Energy Commission
• Developing facility sharing agreements with
existing STIG owners
• Agreement for acquiring land & recycled water
from Lodi in process
• Preparing detailed equipment specifications
• Established Fuels and Finance subcommittees
0
• AFC to CEC:
Milestones
•Application to SJVAPCD:
• CEC Data Adequacy:
• Power Island Option:
• Funding Structure Decision:
• Final CEC Decision:
• Project Commitment:
• Project Financing:
• Start Construction:
• Commercial Operation:
Sept2008
Sept2008
Nov 19, 2008 ✓
April 2009
June 2009
Nov 2009
Dec 2009
Jan -Apr 2010
Apr 2010
Apr 2012
7
Development Costs
($ millions)
0
LEC
Project
Lodi's
Share
Phase 2A
16
1.882
Phase 2B
9
1.059
Subtotal
25
2.941
Amendment 1
15
1.765
Total
40
1 4.706
($ millions)
0
Fuels Committee
• Purpose is to develop fuel procurement
strategies
• Has met twice to date
• Addressing roles of NCPA versus Participants
• Concept so far:
— Obtain 3rd party Gas Manager (GM)
— GM will assist in acquiring physical gas hedges
— GM will coordinate physical fuel deliveries by
participants (if any)
0
Financing Committee
• Selected Financial Advisor — PFM
• Selected Bond Counsel — Orrick
• Developing Underwriter RFP for issuance
in April
• Detailed development of funding strategies
and implications on contracts
• Reviewing availability of stimulus funding
for LEC project
10
LEC Land/Water
• Need to update existing NCPA lease w/
City of Lodi for LEC project
• Need by LEC Project to contract for
recycled water from Lodi
• Discussions on-going between Lodi and
LEC project representatives
• Scheduled for City Council review on April
15 Executive Session
11
Current Issues
• Power Island Equipment Bid
— Negotiations ongoing with two manufacturers
— Contract needs to be awarded soon to keep
project on schedule
• LEC Cost Estimate
— WorleyParsons Engineering has updated
construction cost estimate
— Projected cost increase of ~$100 million
12
Power Island
• RFP bids opened on December 1, 2009
for major equipment (~$150 million)
• Bids from G.E. and Siemens received
• Currently finalizing contract with evaluated
lowest and best bidder
• Option price expected to be under $15
million budget
13
Power Island Vendors
14
GE
Siemens
Base Load Power
271
302
Base Load Heat Rate
61606
61579
Maximum Power
288
316
Heat Rate @ Max
Power
6 670
6 611
Turndown %
55%
50%
14
Plant Comparison
• Original Plant
• 255 MW CC baseload
• 25 MW duct burner
• 7000 btu/kwh
• $319.7 million
• $1145/kw w/o financing
• $1254/kw w financing
• Current Plant
• 302 mw CC baseload*
• No duct burner
• 6560 btu/kwh
• $433 million
• $1170/kw w/o financing
• $1424/kw w financing
15
Cost Estimates
Previous Current
Project Cost $319.7 $433.0
Labor/Materials $234.6 $267.7
Sales Tax $0 $15.8
Owner's Costs $48.1 $57.4
Finance Cost $27.0 $77.1
Contingency $10.0 $15.0
16
Cost Comparison
(Millions)
Old
Estimate
Estimate
Difference
Materials/Labor
$234.6
$267.7
$33.1
Sales Tax
0
15.8
15.8
Owner's Costs
48.1
57.4
9.3
Contingency
10.0
15.0
5.0
Finance Cost
27.0
77.1
50.1
Total
$319.7
$433.0
$113.3
17
1C0
05
C_0
85
80
75
70
C5
Commodity Index
as reported by Bureau of Labor Statistics
Producer Price Index Commodity Data
% of Max
to Un Un Un Ln n co 0 co co n co r_ r` r` r` r_ m co oa m m m rn
o a o 0 0 o a o 0 0 o a o 0 0 o a o 0 0 o a o 0 0 o a o 0 0 0
Q o Q Q Q Q o Q Q Q Q o Q Q Q Q o Q Q Q Q o Q Q Q Q o 4 4 4 4
N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N
r [Y] L_Tr_Tz _T% Tr-_z _T%
6.9%
Approx. $18.5 M
- Commodity
- Boilers, Turbine, Pipe,
Structure. Vl ire. Pumps.
Valves
-Construction Labor
Last Price Analysis
18
Financing Changes
Original Financing Plan
- All Bonds are sold January 2010 (-4% rate)
- Bond moneys are invested and used as needed
(5%)
- Surety could be purchased for debt reserve
• Current Financing Plan
- All Bonds are sold January 2010 (-6% rate)
- Bond moneys are invested and used as needed
(0.1%)
- Debt reserve is now financed in lieu of Surety Bond
19
Economics
NPV -$178 million
20
$140
$120
Lodi Energy Center
Cost(shaded areas) vsBenefits(lines)
$100
_
Fuel+VOM
_——���--�
s
$80--�—
—
002 Cost
3
—
Fixed_Cost
$60
Value 002
--- Value—Other
$40
Value Pwr
$20
$-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
20
Thoughts
• The majority of the contracts and material
purchases will be 1 year from now
- Appears to be a good time to be letting contracts
and materials purchase orders
- Current estimate is based upon today's prices
• Delaying project 1 year would likely reduce
engineers estimate, but
• Concern about possible inflation impacts with
recovering economy
21
Summary
• Overall LEC development work on Phase 2 is
proceeding well
• The time is nearing to make major Power Island
commitment (~$15 million)
• Cost estimate for constructing LEC project has
increased substantially
• Updated cost/benefit studies by NCPA still
indicate positive economics for project
• EUD recommends continuing Phase 2 work
22
Next Steps
• Power Island price proposal good for a
limited time only (~May 1)
•Approval to issue contract needed from
both NCPA Commission and from
Participants Committee
• NCPA Commission meets on April 23
•Participants meet on April 27
• Most participants are presenting project
updates to their governing bodies
23
Questions/comments?
24