Introduction

In December 2001, Nova Scotia Power Incorporated (NSPI) made application to the Nova Scotia Utility and Review Board for an Optional Green Power Rider to be added to their existing Domestic (that is, residential) Services Rates [1]. The proposed Green Power Rider is intended to offer NSPI’s residential customers the opportunity to purchase ‘green power’. (Subsequent references to NSPI’s submission will be referred to as ‘the document’.)

The Green Power Rider is a ‘premium price option’. The proposed premium price is $5.00 for 125 kilowatt-hour per month ‘block’ of electrical energy. This is equivalent to a premium of 4 cents per kilowatt-hour; that is, the cost of a kilowatt-hour is the existing residential rate (at the time of writing, 8.35 cents per kilowatt-hour) plus 4 cents, for a total of 12.35 cents per kilowatt-hour. For example, if someone purchased a single block of ‘green power’ and used 200 kilowatt-hours of electricity, they would be charged 12.35 cents per kilowatt-hour for the first 125 kilowatt-hours and 8.35 cents per kilowatt-hour for the remaining 75 kilowatt-hours.

NSPI’s Green Power Rider is essentially a public relations exercise; as NSPI’s web site explains [2]:

This report examines NSPI’s Green Power Rider submission to the UARB.

What will be the source of NSPI’s ‘green power’?

NSPI’s web site would seem to suggest that ‘green power’ would be produced from the two wind turbines it purchased in 2001 (see next section). However, according to the document, NSPI has the option to purchase ‘green credits’ (equivalent to blocks of ‘green’ electricity) from generators outside the province. In these circumstances, residential customers will still be expected to pay the Green Power premium pricing although the power will not be produced locally.

How many turbines and how much do they cost?

NSPI has purchased two turbines for its Green Power programme. According to the Emera Annual Report for 2001, these turbines are rated at 1.3 megawatts [3]. However, the document refers to these turbines as having a combined rating of 1.2 megawatts.

According to the document, the two turbines were purchased in 2001. The total capital expenditure on these turbines was $2,954,240. However, because these turbines were intended for a renewable energy programme, the Federal government refunded NSPI the 44 percent Capital Cost Allowance (CCA), meaning that the true cost to NSPI was:

It should be noted that this is not the value used by NSPI in the document. In the document, NSPI includes the cost of marketing and promoting the turbines ($48,000) as part of the overall cost of the turbines:

This amount is then subject to the 44 percent CCA refund:

Observations and comments:

• It is unclear whether the marketing and promotion of the turbines should have been included as part of the 44 percent CCA refund.
• The CCA refund is apparently intended for equipment that is installed in the year the refund is applied. The turbines were purchased and the refund applied in 2001 and at the time of writing this submission (July 2002), the turbines have yet to be installed.
• These are the only capital expenditures listed. Although not stated, they should include the cost of land, installation, and grid connection.

How many kilowatt-hours are to be generated by these turbines?

It is important to know the number of kilowatt-hours (kWh) that NSPI expects to generate from its turbines, since this can be used to determine the cost per kilowatt-hour.

The document does not discuss or indicate how many kilowatt-hours the turbines are expected to generate; however, it is possible to estimate this from information in the document:

• NSPI states that residential revenue will be $152,000 per year. NSPI will be charging $5.00 per 125 kWh ‘block’ of electricity:

$152,000 / $5.00 per block = 30,400 blocks

The sale of 30,400 blocks at 125 kWh each suggests that NSPI expects to generate 3.8 million kWh per year:

30,400 blocks x 125 kWh per block = 3.8 million kWh

• The document refers to two 600 kW turbines. Assuming that the turbines operate at 100 percent capacity for the entire year (8760 hours per year), then the maximum theoretical output will be:

8760 hours per year x 600kW x 2 turbines = 10.512 million kWh per year

Depending upon the sites selected, the turbines can be expected to generate upwards of 35 percent of their maximum output:

10.512 million kWh per year x 0.35 = 3.68 million kWh per year

These two methods, based upon the data supplied by in the document, suggest that NSPI expects to produce about 3.7 million kWh each year from these two turbines.

According to a report in the Daily News [4], NSPI expects to generate 3.9 million kWh from these turbines. (This figure is used throughout the remainder of the report.)

Observations and comments:

• NSPI has stated that the Green Power Rider is to cost 4 cents per kilowatt-hour and that the expected revenue is $152,000 per year. If NSPI expects to generate 3.9 million kWh, then at 4 cents per kilowatt-hour, NSPI’s revenue will be:

3.9 million kWh x 4 cents / kWh = $156,000

Or $4,000 per year (about 2.5 percent) more than their submission states.

What is the cost per kilowatt-hour?

The cost to generate a kilowatt-hour of electricity is important to know when determining the overall rate to charge a customer.

A common method of determining the cost per kilowatt-hour from a particular generating source is to use the ‘levelized cost’. The levelized cost consists of two components:

• the capital cost of the project plus the fuel, operating, and maintenance cost over the lifetime of the plant (in the case of a wind turbine, there is no fuel cost), and
• the total number of kilowatt-hours produced by the plant over its life.

The levelized costs for NSPI’s turbines are based upon the data shown in the following table:

To determine the operating and maintenance costs for the lifetime of the project, it is necessary to know the initial annual expenditure ($51,000), the annual cost increase (2%), and the lifetime of the project (20 years). The costs for the lifetime of t he project are calculated as follows:

The levelized cost, based upon this information, is therefore:

Levelized cost over 20 years:

Or about 3.7 cents per kWh.

Observations and comments:

• The cost per kilowatt-hour shown here is the cost of generating the electricity; it has nothing to do with the Green Power Rider of 4 cents per kilowatt-hour that NSPI proposes.
• It is instructive to compare the levelized cost of the wind turbines with that of other electrical generation assets. The following table presents capital, operating and maintenance costs for U.S. Department of Energy ‘best case’ coal fired technolog y [5] (comparable data was not available from NSPI). The projected fuel costs are those supplied by NSPI for the 2002 rate case [6]:

What are the cash flows and Net Present Value of the turbines?

The cash flows are a necessary feature of any business plan, since they allow the proponent to decide whether the project will lose money, break even, or make money.

NSPI determines the annual cash flow as follows:

where:

Cash inflow: revenue from residential customers.

Cash outflow: expenses from the project. These are positive if money is spent and negative if money is saved. NSPI lists four cash outflows:

• Avoided variable generation costs - by operating the two wind turbines, NSPI will avoid generating (notably, purchasing fuel) or purchasing electricity from other sources. This represents a saving to NSPI.
• Avoided capital generation costs - by operating the two wind turbines, NSPI also avoids or postpones the construction of new generating assets. This represents a saving to NSPI.
• Generation operating costs - the annual costs of running the wind turbines. As stated earlier, this starts at $51,000 in 2002 with an annual 2 percent escalator.

Tax: the tax rate is 44 percent of the net cash flow (cash inflow - cash outflow).

The viability of a project can be determined using the ‘Net Present Value’ (NPV), a calculation of the present value of an investment’s future net cash flows minus the initial investment. The value of the future cash flows is discounted to a predetermi ned interest rate. The Net Present Value can be defined as:

If the Net Present Value is positive (that is, the sum of the discounted annual cash flows are greater than the initial investment), the investment should be made (unless a better investment exists), otherwise it should not [7].

NSPI’s initial investment consists of the following, both of which occur in the first year only (2001):

• Marketing and promotion - the Green Power programme budgets $48,000 for marketing and promotion. Although the programme runs for 20 years, marketing and promotion occurs in the first year only.
• Capital expenditures - the costs of establishing the project; in this case NSPI lists only one, the cost of the turbines ($2,954,240).

The document determines the Net Present Value of the turbines using two different cash inflows, both of which are now discussed.

No change in residential revenues

In the first table (reproduced at the end of this report), NSPI assumes that the power generated by the turbines replaces that of existing generating assets, consequently, the cash inflow remains unchanged (i.e., it is zero). What does change is the a voided variable generating costs and avoided capital costs (they become negative, that is, a savings to NSPI, since NSPI is not required to produce electricity from these generating assets). There is, not surprisingly, an additional expense, the operatin g costs of the turbines (starting at $51,000 per year with a 2 percent escalator).

According to data presented in the first table, the Net Present Value of the turbines if there is no change in the residential revenues is about -$838,000. Due to rounding errors, the Net Present Value in the document differs by about $1,000 from the Net Present Value in this report.

The Net Present Value is negative because the sum of the discounted annual cash flows (i.e., the savings made in the avoided variable generation costs and the avoided variable capital costs, plus the turbine operating costs) is less than the initial ex penditures.

There are a number of omissions in the document regarding this table and the way the Net Present Value is obtained, notably:

• The discount rate used for the cash flow after tax. This is estimated to be 6.1 percent.
• There is no indication of how the avoided variable generation costs were estimated. It is unclear whether NSPI has included its projected rising fuel costs in this (and subsequent) tables.
• There is no indication of how the avoided capital generation costs were estimated.
• There is no indication of how the turbine operating costs were estimated.

Application of the Green Power Premium

In the second table (reproduced at the end of this report), NSPI introduces the Green Power Premium of 4 cents per kilowatt-hour. As stated earlier, this means that NSPI is charging the residential rate (currently 8.35 cents per kilowatt-hour) plus th e premium. This table is based upon revenues of $152,000 per year (that is, the sale of 3.8 million kilowatt-hours). As with the previous table, it is assumed that the turbines simply displace existing generation assets.

In the second table, the Net Present Value is positive, suggesting that NSPI should go ahead with the project. In the document, the Net Present Value is slightly lower than those shown in this report ($963 rather than $1031); this difference appears t o be attributable to rounding errors.

As with the first table, there are a number of omissions in the document regarding this table, notably:

• The discount rate used for the cash flow after tax. This is estimated to be 7.05 percent. It is unclear why NSPI appears to use two different discount rates for the two tables. Had the document used 6.1 percent (as in the first table), the Net Pres ent Value would have been over $130,000.
• There is no indication of how the avoided variable generation costs were estimated.
• There is no indication of how the avoided capital generation costs were estimated.
• There is no indication of how the turbine operating costs were estimated.

A third table (reproduced at the end of the report) shows the Net Present Value if the turbines produce 3.9 million kilowatt-hours of electricity (that is, the annual residential revenue is $156,000 rather than $152,000). In this case, the Net Present Value increases to over $24,000 (using the same discount rate found in the second table).

Treating the turbines as ‘new’ power

Another way to consider these turbines is to assume that they are producing ‘new’ power that does not displace any existing generation assets. If this approach is taken, the residential revenues can be considered ‘new’ as well (given the growth in the residential home market, this is a reasonable assumption). In this case, the Net Present Value is positive, over $41,000.

The value of the residential rate is not fixed at 8.35 cents per kilowatt-hour (as it appears to be in the document); instead, the rate increases at one percent a year. By 2021, the rate is 10.09 cents per kilowatt-hour. The Net Present Value is calc ulated using the same discount rate presented in the second table.

Observations and comments:

In addition to the above discussions regarding the tables supplied in the document, the following should be noted:

• The document does not state which existing generation assets will not be used when the wind turbines are running. If these burn fossil fuels (coal, oil, or natural gas), the reduction in carbon dioxide emissions will allow NSPI to sell production cre dits to other utilities. This inflow is not included, but should be.
• The revenue from the sale of green power remains at 4 cents per kilowatt-hour for the lifetime of the programme. There should be an escalator included in this price, since no one can expect the price of electricity to remain unchanged for such a leng th of time. By keeping the price per kilowatt-hour fixed, the value of the Net Present Value is reduced.
• Recently announced Federal Production Incentive for Renewable Energy [8] subsidies on renewable energy may be applicable to these turbines. This is another cash inflow that should be included.

What if green power was included directly in NSPI’s energy mix?

According to the Emera 2001 Annual Report, NSPI had the following electricity sales [3]:

The proposed green power programme, if included as part of NSPI’s generating capacity would amount to:

The additional capacity of these two turbines is negligible.

Conclusions

NSPI is proposing a Green Power Rider for its residential customers that is 4 cents per kilowatt-hour over and above the existing residential rate.

As this report has shown, the Green Power Rider cannot be justified for a number of reasons, notably:

• The Federal tax rebate on the wind turbines means that the levelized costs of the power from the turbines is as good as or better than the levelized costs for NSPI’s existing generation assets.
• As shown in this report, there are a number of ways in which the Net Present Value can be used to determine whether the turbines will be profitable. When treating the turbines as ‘new’ power and increasing the residential rate, the best Net Present V alue is obtained.
• How much of the data supplied in the report is obtained is not made clear. For example, assumptions about fuel prices are not presented.
• Other incentives and credits that could be used as cash inflows are ignored.

The UARB should reject NSPI’s Green Power Rider and require NSPI to include these turbines as part of their existing generation assets. The cost per kilowatt-hour of these turbines compares favourably with NSPI’s existing generating assets.

Bibliography

1. Nova Scotia Utility and Review Board, "In the matter of an Application of Nova Scotia Power Incorporated for Approval of an Optional Green Power Rider to be added to all existing Domestic Service Rates", UARB-319, 12 December 2001.
2. http://www.nspower.ca/GreenPower/. Accessed 12 July 2002.
3. http://www.emera.com/images/annreport2001.pdf. Accessed 12 July 2002.
4. S. Bournais, "Wind turbines find homes", Daily News, 5 July 2002.
5. U.S. Department of Energy, Electricity Generation Costs, 2005 (1997 mills per kilowatt-hour), http://www.eia.doe.gov/oiaf/presentation/sld006.html. Accessed 15 July 2002.
6. NSPI’s Rate Case 2002, from http://www.nspower.ca/ratecase2002/Documents/RateCase2002.pdf. Accessed 12 July 2002.
7. Net Present Value definition from http://www.investorwords.com. Accessed 12 July 2002.
8. Production Incentives for Renewable Energy, http://www.fin.gc.ca/budget01/bp/bpch6e.htm. Accessed 19 July 2002.

Table 1 (continued)

Table 2 - continued.

Table 3: continued.

Table 4: continued.