Wednesday, August 21, 2013

Facing a headwind; Schutt describes the challenges for independent power producer in Alaska

Alan Bailey
Petroleum News

The saga leading to the implementation of Cook Inlet Region Inc.’s Fire Island wind farm, offshore Anchorage, was marked by a sometimes acrimonious debate between the Alaska Native Corporation and its potential power utility customers over issues such as the ease or difficulty of integrating fluctuating wind power into the Alaska Railbelt electricity grid. But were these technical bones of contention the symptoms of some deeper issues regarding the place of independent power production in the Railbelt energy scene?

Cook Inlet Region Inc., or CIRI, funded the Fire Island wind farm as a private project, with the intention of selling power to Railbelt power utilities. But when the wind farm went on line in 2012, CIRI only had one wind power customer — Chugach Electric Association — and the farm itself was smaller than the Native corporation had originally planned.


On July 31 Ethan Schutt, CIRI’s senior vice president for land and energy, told the International Association for Energy Economics’ North American conference about some of the hurdles that the Fire Island project had faced. Characterizing the hurdles as interactions with government, Schutt said that Alaska has no formally recognized space for independent power producers.

“If you want to be an independent power producer in Alaska, you’ve got to make your own space, because it doesn’t exist,” Schutt said.

Early on in the Fire Island project, given this lack of commercial space in the power market, CIRI was faced with something of a Hobson’s choice in having to decide whether to go through the tortuous and risky process of trying to be legally recognized as a regulated power utility, or whether to seek a state government exemption from regulation, allowing the wind farm to operate as an independent power producer. In the event, CIRI opted for that latter course, persuading the state Legislature to pass legislation allowing the corporation to sell power, albeit on a relatively small scale, only from a renewable energy source, and only to regulated utilities, Schutt said.

De-facto government

As CIRI’s project moved forward, the corporation came to the realization that all six of the Railbelt electricity utilities, the wind farm’s potential customers, are either government organizations or de-facto government organizations, Schutt said. Two of the utilities are directly owned by municipalities, while the other utilities are vertically integrated customer-owned cooperatives, operating as monopolies within government-granted, certificated geographic regions, he said. Beyond periodic rate cases, in which the Regulatory Commission of Alaska reviews and approves the rates that the utilities charge their customers, the utilities are largely free to act as they see fit within their certificated areas, Schutt said.

At the same time, although the state has set a target of obtaining 50 percent of Alaska electricity from renewable energy source by 2025, there are no formal incentives, regulatory requirements or public support for the independent production of renewable energy, Schutt said. There is a renewable energy grant fund, but there are no market-based mechanisms for facilitating change, he said.

And while most if not all of the commercial-scale power transmission infrastructure in Alaska is either built or substantially funded by the state, the state exerts very little operational control over the infrastructure and over market access to that infrastructure for private enterprise, Schutt said. Compounding this phenomenon and distorting the energy market is extensive state involvement in the funding of power projects such as the project to construct a major hydropower dam at Watana on the Susitna River, he said. State funding of energy projects raises questions over why people would want to buy energy from a privately-funded facility rather than buy relatively cheap, subsidized power, he said.

“That obviously has significant impacts and distortions on the market,” Schutt said. “We felt it directly with our project.”


Then there is the question of the regulation of power rates. Although CIRI obtained an exemption from regulation for the Fire Island project, there is de-facto regulation because the Regulatory Commission of Alaska has to approve utilities’ power purchase agreements, including the power rates within those agreements, Schutt said. And, despite CIRI conducting what it viewed as “arms-length” negotiations with its eventual utility customer, the Native corporation ran into substantial opposition from some utilities during the power purchase agreement approval process, he said.

In the course of trying to bring the Fire Island project to fruition one utility threatened legal action against the wind farm, while another used what CIRI viewed as manipulated numbers to argue against the merits of the project, Schutt said.

“There is actually something of a deep, pervasive suspicion of for-profit companies within the energy space here in Alaska,” Schutt said.

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