4.2. ERMUSR 10-09-2012 Elk River
Municipal Utilities UTILITIES COMMISSION MEETING
TO: FROM:
Elk River Municipal Utilities Commission Troy Adams, P.E. —General Manager
John Dietz—Chair
Daryl Thompson—Vice Chair
Al Nadeau—Trustee
MEETING DATE: AGENDA ITEM NUMBER:
October 9, 2012 4.2
SUBJECT:
Diesel Power Plant Capacity Credit Agreement
BACKGROUND:
Included in our current interconnection agreement with United Power Association (UPA), now
Great River Energy (GRE), is a power transaction agreement to purchase the generating capacity
from ERMU's Diesel Power Plant. This power transaction agreement has been modified since
the original agreement, most recently in 2003. The revisions to the agreement occurred on
October 31, 2003. These revisions established the agreement to be on an "evergreen" basis with
an October 31 termination date and an April 1 termination notice date. The agreement
established the capacity credit at $2.75/kW month. Typically our agreement with GRE results in
capacity credit payments of approximately $350,000 annually. On March 28, ERMU received
notice that GRE wanted to reevaluate the current agreement's fixed capacity credit. Due to
continuing and progressive discussions with GRE, both parties agreed to and executed an
additional extension establishing a new termination date of November 1, 2012.
DISCUSSION:
The November 1 deadline established was determined by the Midwest Independent Transmission
System Operator's (MISO) Module E for Resource Adequacy reporting requirement that GRE
would need to meet to register ERMU's generation. There is a change this year with MISO
where this generation would need to be registered for the "year ahead." This would require
ERMU to commit to GRE by November 1 for the next MISO Planning Year for resource
adequacy that would run through May 2014.
On May 22, 2012, the Environmental Protection Agency (EPA) signed proposed amendments to
the National Emission Standards for Hazardous Air Pollutants (NESHAP) for stationary
Reciprocating Internal Combustion Engines (RICE). The proposed rule changes do not become
effective until EPA issues a final regulation including any final changes. This final ruling may
change some of the emission retrofits ERMU's generation would require to be registered on the
MISO's Module E for resource adequacy.
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This final ruling from the EPA will not be made until after the GRE November 1 deadline and
likely not until after the MISO reporting deadline. This creates a window of exposure where
ERMU would be committing to a contract without knowing all the costs.
The proposed amendment to the current capacity contract with GRE significantly reduces the
capacity payment credits from $2.74/kW-month to $0.20/kW-month. This reduction is a
reflection of the saturated capacity market. The smaller two of ERMU's four engines would also
be removed from this Module E registration and be reclassified and used as emergency with
black start capability. These changes result in an approximate reduction in annual capacity
credits from $352,000 to $22,600. The estimated retrofit costs for the larger two engines to be
RICE compliant is approximately $200,000. The proposed amendment to the current capacity
contract would include a shift to align with the MISO Planning Year resulting in an initial term
of 17 months. After that, the contract would be evergreen renewing year to year. This would
make this initial term of the proposed amendment to the current capacity contract with GRE
worth approximately $32,000 leaving ERMU exposed to approximately $167,000 in retrofit
costs.
There are other municipal utilities in Minnesota with diesel engines similar to ERMU's. For
example, the diesel engines that Missouri River Energy Services (MRES) registers by contract
for their member municipal utilities are very similar to ERMU's engines. Those municipal
utilities are exposed to the same RICE rule and MISO registration considerations that ERMU is
facing trying to maintain a valuable community emergency mitigation asset through selling the
capacity on the MISO market. Because MRES is representing "members," they have provided a
better than market multi-year contract to their members that allows the municipal utilities to have
a guaranteed revenue source to invest into the maintenance and retrofit of their engines. This is a
win-win for MRES and their members. Because of the current ERMU relationship with GRE
and the current capacity agreement, the year-to-year evergreen approach forces GRE into only
committing to a short term "business deal." This way GRE is not exposed to any financial risk.
Unfortunately, this approach does not best serve the customers of ERMU. Further discussions
with GRE have been open to analyzing a longer term contract that would allow ERMU the
revenue stream to maintain and retrofit our engines. However, it is not likely that these options
will be available prior to the existing November 1 deadline.
ACTION REQUESTED:
Staff recommends allowing the current capacity agreement with GRE to expire. Staff further
recommends ERMU explore longer term capacity agreements (starting in the 2014-2015 MISO
Planning Year) with GRE and other power agencies that would allow for sufficient revenue to
retrofit and maintain ERMU's generation as a critical component of our community's emergency
mitigation preparedness.
rill AI
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