Case Background
On November 7, 2007,
Florida Power and Light Company (FPL)
filed a petition for Commission approval of a negotiated contract for the
purchase of firm capacity and energy, as well as "Green Attributes," from
Manatee Green Power, LLC (Manatee). The
agreement was signed October 31, 2007. Under
the contract, Manatee will deliver firm capacity of 5.25 MW beginning January 1, 2009
for a term of 15 years. The facility will
use landfill gas from the Lena Road Landfill in Manatee County, Florida,
for fuel. Planning by Manatee includes
the installation and operation of the facility by December, 2008, in order to
be eligible for federal tax credits.
Negotiations
between FPL and Manatee began in
2006, and were based on the 160 MW combustion turbine (CT) scheduled to be
in-service in 2008, as reflected in the FPL
2006 Ten-Year Site Plan. FPL's 2006 Standard Offer contract used that unit
as the avoided unit and this avoided unit was used throughout negotiations for
this contract.
In addition to
purchase of capacity and energy, the contract provides a specified price for
the purchase by FPL of "Green
Attributes" associated with the generation of electricity from the
facility.
The Commission has jurisdiction over this
matter pursuant to Sections 366.051 and 366.81, Florida Statutes.
Discussion
of Issues
Issue
1:
Should
the Commission approve the requested clause recovery for capacity and energy
payments incurred under the negotiated contract between Florida Power &
Light Company (FPL) and Manatee
Green Power, LLC (Manatee)?
Recommendation:
Yes. When consideration is given to the baseload
characteristics of the capacity and energy to be delivered under the contract,
payments for capacity and energy are not expected to exceed FPL’s avoided costs. The performance requirements under the
contract are uniquely suited to the Manatee project. As part of the approval process, the Commission
may consider the “characteristics of the capacity and energy to be delivered
under the contract” pursuant to Rule 25-17.240(2), F.A.C. (Sickel, Graves)
Staff
Analysis:
When negotiations for this
installation began in 2006, the planning by FPL
included a 160 MW combustion turbine (CT) that would come into service June, 2008. That CT was used as the avoided unit in FPL's 2006 Standard Offer Contract. By the time FPL
submitted a Ten-Year Site Plan for 2007, the 2008 unit had been removed from FPL's planning process. FPL's
2007 Standard Offer contract was based on a combined cycle unit with an
in-service date of 2015. On June 11, 2007, the
Commission approved FPL's 2007
Standard Offer Contract.
On July 2,
2007, the order approving FPL's
Standard Offer contract was protested.
The continuing sessions of negotiation between FPL and Manatee were based upon the 2008 CT because
Manatee was trying to meet an in-service date of December, 2008, in order to be
eligible for federal tax credits. The
contract signed on October
31, 2007, is for 5.25 MW of capacity and energy from a landfill gas
generator in Manatee
County. The in-service date of the renewable
generator is January
1, 2009, and the term of the contract is 15 years.
Rule 25-17.0832(3), Florida Administrative
Code, states that in reviewing a negotiated firm capacity and energy contract for
the purpose of cost recovery, the Commission shall consider factors relating to
the contract that would impact the utility’s general body of retail and
wholesale customers including: a need
for power, the cost-effectiveness of the contract, security provisions for
capacity payments, and performance guarantees associated with the generating
facility. Each of these factors is
evaluated below.
a. Need for Power
From a reliability
perspective, one could argue that the proposed contract would not defer the
need for any additional capacity on FPL’s
system due to the small size of the renewable generator and the mismatch of
in-service dates between the contract and the current “avoided unit.” The size and in-service date of a renewable
generator are based on the business plan of the owner, not the utility. Therefore, it is rare that the size and
timing of a renewable generator match the needs of a utility.
Pursuant to Federal and State
laws, the Commission supports the development of cogeneration.
The Commission has recognized that advancement of cogeneration may
create market imperfections resulting in a utility paying twice for the same
capacity.
This circumstance would develop when the capacity from the cogenerator
duplicates capacity that is otherwise available from a utility's resources. The Commission has also recognized that the
potential subsidy can be mitigated by the utility's opportunity to sell any
surplus capacity on the wholesale market.
Thus, the Commission seeks to “balance market imperfections with the
existing policy of promoting qualifying facilities.”
According to FPL’s
filing in Docket No. 070650-EI
(FPL’s need petition for Turkey
Point Units 6&7), FPL projects
that its summer reserve margin will drop to 19.2% by 2012. FPL
has issued a Request for Proposals for a 2011 combined cycle unit to satisfy
this identified need. As FPL’s system continues to grow, there is a
projected need for additional generation capacity on FPL’s
system during the life of the contract.
The addition of 5.25 MW of firm capacity and energy sold by
Manatee to FPL will not completely
defer or avoid the need for additional capacity in order to meet the current
reserve margin standard of 20%. However,
it has been the Commission’s policy to approve contracts, such as Manatee’s,
that promote the use of renewable resources as a primary fuel. Rule 25-17.001(5)(d), Florida Administrative Code, encourages electric
utilities to:
Aggressively
integrate nontraditional sources of power generation including co-generators
with high thermal efficiency and small power producers using renewable fuels
into the various utility service areas near utility load centers to the extent
cost effective and reliable.
b. Cost-Effectiveness
FPL provided a simplified traditional analysis, which
was modified on December
14, 2007, that compared the negotiated contract payments to the
2006 Standard Offer contract. The energy
payments were estimated to be identical for the negotiated contract and the
“avoided unit” and represent the bulk (88%) of the total payment stream. The energy payments are calculated as the
lesser of system as-available energy or firm energy from the avoided unit in
order to mimic economic dispatch of the renewable generator. Such a pricing methodology results in ratepayers
being held harmless with regard to energy pricing.
The
analysis provided by the utility compares the capacity payments with cost for
similar capacity under the 2006 Standard Offer Contract, using a 2008
combustion turbine as the avoided unit.
Under that analysis, the capacity payments result in an estimated
$64,540 in excess of the standard offer contract payments for similar
capacity. With total payments projected
to amount to $21,954,706, the excess is approximately 0.29% of the net present
value over the life of the project.
The
combustion turbine used as the avoided unit was projected to have a capacity
factor of 10% in the first year of operation because the unit would only run
during the times when demand was at a peak.
In contrast, the Manatee unit is projected to run about 90% of the
time. Thus, the contract between FPL and Manatee is a hybrid of sorts because the
capacity payments to the renewable generator (based on a CT) do not match the
performance requirements of the contract which mimic a baseload unit. Such performance requirements are uniquely
suited to the Manatee project since the landfill gas will not be stored and is
currently being flared to the atmosphere.
If the Manatee project
does not meet the contractual performance requirements, then the capacity
payments are reduced for that month. If
the project does achieve the performance requirements, then the energy from the
Manatee project will displace coal, oil, and natural gas baseload generation on
FPL’s system. Manatee projects that the generator will
exceed a 90% capacity factor.
As part of the approval
process, the Commission may consider the “characteristics of the capacity and
energy to be delivered by the renewable generating facility under the contract”
pursuant to Rule 25-17.240(2), F.A.C. FPL provided a traditional analysis comparing the
net present value of the capacity payments with the calculated costs for
similar capacity, based on the designated avoided unit. In its petition, FPL
says that costs associated with the Manatee project are not expected to exceed
full avoided costs. In response to
staff's questions, FPL
acknowledged that in the simplified analysis the capacity payments appear to
exceed capacity costs associated with the designated avoided unit. FPL
also explained that some expected savings are not taken into account in the
simplified analysis. Since baseload
plants have fixed costs that are typically 300-400% greater than a peaking
unit, the small premium in fixed cost (0.29%) should be easily offset by the
difference in performance requirements along with improved fuel diversity and
security of FPL’s generation mix. In essence, FPL’s
customers are getting a baseload capacity resource, which typically carries a
high fixed cost, for a low fixed price. In
contrast, the risk of fuel price volatility is borne by the owners of the Manatee
project. When these factors are
considered in total, the overall contract is expected to result in total
payments that will be less than avoided cost.
c.
Security for Capacity Payments
Under the
terms of this contract, the capacity payment depends upon the performance of
the Manatee project for each individual month.
There are no advance payments requiring security, since no payment is
made by the utility until energy has been delivered by the seller. A period of 60 days following Commission
approval of the contract is allowed for the seller to either make necessary
arrangements or withdraw without penalty.
After that 60-day period, the seller is obligated and will forfeit
security up to $30/kW for deficient performance. If the agreed capacity is not delivered by
the date as required by the terms of the contract, the contract may be
terminated by either party without future obligations, but the utility immediately
receives 100% of the security deposit.
d.
Performance Guarantees
Under the
terms of this contract, the capacity payment depends upon the performance of
the Manatee project for each individual month.
The calculation of the payment for avoided capacity uses a set rate times
the capacity produced. For the seller to
receive full capacity payments, the Manatee project must have an availability
of 90% for on-peak hours and 80% for all hours.
No capacity payment is due if the Monthly On Peak Capacity Billing
Factor is less than 90% or the Annual Capacity Billing Factor is less than
80%. In case the capacity factor drops
below 70%, the contract may be terminated.
Conclusion
The negotiated contract between FPL
and Manatee will provide a viable source of renewable capacity and energy that provides
fuel diversity and security to FPL's
generation mix. Authorizing clause
recovery for capacity and energy payments will put no additional risk on the
utility or its ratepayers. For these
reasons, staff recommends that FPL
be authorized to include the capacity and energy payments made to Manatee with
the regular filings for clause recovery.
Issue 2:
Should the Commission approve FPL's request for recovery through the fuel clause
for costs associated with payment for "Green Attributes" under terms
of the negotiated contract?
Recommendation:
No. It would not be appropriate for the general
body of ratepayers to be obligated to pay the cost to purchase speculative
"Green Attributes" that may be associated with the Manatee
project. Such an obligation would
require FPL's general body of
ratepayers to pay in excess of avoided cost and therefore be contrary to Order
No. PSC-02-1059-DS-EQ. Staff recommends that FPL
be authorized to go forward with the contract and that the cost associated with
purchase of "Green Attributes" should be booked below the line. The "Green Attributes" purchased
should be the property of FPL, and
any profit or loss resulting from the sale of such attributes should also be
booked below the line. (Sickel, Graves)
Staff
Analysis:
The
Contract provides that Manatee will sell and FPL
would purchase "Green Attributes" associated with the renewable
energy produced by the facility. In the
provisions for the sale of "Green Attributes," the
contract explains:
. . . .FPL
shall purchase and receive from the QS [qualifying seller]. . . any and all
credits, benefits, emissions, reductions, offsets, and allowances, howsoever
entitled, attributable to the generation of electricity from the Facility, and
its displacement of conventional energy generation ("Green
Attributes"). Notwithstanding the
foregoing, such Green Attributes shall not include solely those attributes
owned by Manatee County related to the landfill. FPL
shall have the sole and exclusive right to purchase all electric energy,
Committed Capacity and Green Attributes generated by the Facility.
The
Petition further alleges:
This
supplemental energy-based payment recognizes the value of the renewable
characteristic of energy from the facility.
FPL's agreement to purchase
the Green Attributes of Manatee's electrical production benefits FPL customers by encouraging development of a new
renewable generation facility in Florida that will serve FPL's customers.
Such Green Attributes may also benefit FPL's
customers in the future, for example by being used to satisfy a future Florida or federal
renewable portfolio standard.
Staff requested that FPL provide an explanation of the utility's plans
for booking the payments to be made for the "Green Attributes"
associated with electricity generated under this contract. FPL
explained as follows:
Payments
under the contract are for three products from the generator -- capacity,
energy and renewable attributes. FPL believes that capacity should be recovered
through the capacity clause. Energy
payments should be recovered through the fuel clause. Since renewable attributes are tied to energy
production, FPL believes that the
REC payments should also be recovered through the fuel clause. If the Commission establishes a RPS
[renewable portfolio standard], then the RECs would be recovered in accord with
procedures established at that time.
In review of the documents filed by FPL and Manatee, there is no clear definition of
what will constitute, or be included in, the "Green Attributes" for
which FPL has set a price of $3.25/MWH. Specifically,
a long list of possible "credits, benefits, . . .and
allowances" is to be included. The
explanation includes possible use for the "Green Attributes" at an
uncertain time in the future, on the condition that certain environmental
requirements might be developed under State or Federal regulation. The Company's explanation makes clear that
"Green Attributes" are a product that is separate from capacity and
energy, but it lacks a definition as to what would be included or excluded as a
"Green Attribute." FPL estimates that payments for "Green
Attributes" over the life of the contract will amount to $888,502, net
present value.
The requested fuel clause recovery
of payments for the "Green Attributes" is directly contradictory to
the underlying rationale for Order No. PSC-02-1059-DS-EQ.
In that Order, which
addressed a request for Declaratory Statement, FPL
asked the Commission:
to declare that its proposal to pay in
excess of its avoided costs to a qualifying facility ("QF") for
renewable energy for a Green Energy Program, in which FPL's
customers voluntarily agree to higher rates covering the costs above FPL's avoided cost, does not violate PURPA, section
366.051, Florida Statutes, and state and federal regulations implementing
PURPA.
The Commission granted the Company's
request for a declaratory statement with the following explanation:
It
seems clear to us that the prohibition under PURPA and the rules implementing
PURPA against exceeding the avoided costs applies to circumstances where the
rate paid to QFs in excess of avoided cost is imposed upon the utility
and its ratepayers. FPL's plan as stated in its petition is voluntary
and is not, therefore, inconsistent with PURPA, or FERC's regulations, section
366.051, Florida Statutes, or our rules implementing PURPA. Accordingly, we grant FPL's
petition and declare that its proposal to pay in excess of its avoided costs to
a QF for renewable energy for a Green Energy Program in which FPL's customers voluntarily agree to higher rates
covering the costs above FPL's
avoided cost does not violate PURPA and its implementing rules, or section
366.051, and its implementing rules. [Emphasis in original.]
In the view of staff, the rationale
underlying the Commission's decision granting this requested declaratory
statement is that a regulated utility may, for a purchase from a renewable
facility, incur cost in excess of avoided cost on the condition that the
additional cost is recovered from a pool of customers who voluntarily agree to
pay for such costs. The additional cost,
beyond avoided cost, may not be imposed upon the general body of ratepayers. It would be a violation of PURPA and state
and federal regulations if such additional costs were to be imposed without a
voluntary agreement by each ratepayer involved.
That Declaratory Statement further
states:
The
question of whether circumstances might exist where a request for costs in
excess of avoided cost to be borne by the general body of ratepayers would be
justified, or the question of the amount FPL
or its green electricity customers may pay, is not presented by FPL's petition and is not addressed in this
declaratory statement.
The Commission's policy, clearly
evident in the Declaratory Statement, is to encourage small power production
while providing assurance that a utility is not required to purchase
electricity from a renewable generator when the utility can otherwise produce
or purchase power at a lower cost. The Declaratory
Statement goes on to recognize that FPL's
proposal to pay in excess of avoided cost for a renewable energy program does
not violate State or Federal requirements because the impacted customers will
voluntarily agree to participate in this program.
Since there is no clear definition
for the Green Attributes that FPL
has agreed to purchase, staff cannot provide a comparison between the price of
$3.25/MWH included in the contract
and other products purchased by regulated utilities. FPL
has referred to the voluntary market as a basis for the pricing. While staff applauds the efforts made by FPL to reach an agreement for this purchase of renewable
energy, we cannot recommend approval for the proposed recovery within the fuel
clause of the cost to purchase the "Green Attributes."
Conclusion
Payment for renewable energy credits are speculative at this
time and there is no regulatory requirement for their purchase. There are many varied scenarios which could
possibly develop within the provisions of the FPL
agreement for the purchase of "Green Attributes" from the Manatee
project. It would not be appropriate for
the general body of ratepayers to be obligated to pay the cost to purchase speculative
"Green Attributes" that may be associated with the Manatee project.
However,
the contract represents an extended effort on the part of both FPL and Manatee to reach a practical agreement for
the renewable generation represented by the Manatee project. In the view of staff, FPL
has an opportunity to purchase and own the Green Attributes provided with the
Manatee renewable generation by booking the purchase below the line. Whether or not a requirement for purchase of
carbon-based or other environmental credits would develop for Florida regulated utilities in the future, FPL appears to estimate that the contract will have
positive financial outcome. By
authorizing FPL to go forward with
this contract and book the purchase of Green Attributes below the line, the
Commission allows the utility to directly benefit from participating in the
voluntary market utilizing utility-based expertise.
Therefore,
staff recommends that FPL be
authorized to go forward with the contract and the cost associated with purchase of
"Green Attributes" as a non-regulated operation, booked below the
line. The "Green Attributes"
purchased should be the property of FPL,
and any profit or loss resulting from the sale of such attributes should also
be booked below the line.
Issue 3:
Should
this docket be closed?
Recommendation:
Yes,
this docket should be closed upon issuance of a Consummating Order unless a
person whose substantial interests are affected by the Commission's decision
files a protest within 21 days of the issuance of the proposed
agency action. (Hartman)
Staff Analysis:
If
no timely protest to the proposed agency action is filed within 21 days, this
docket should be closed upon the issuance of the Consummating Order.