An Examination of
Nova Scotia Power Incorporated’s
Green Power Rider

Larry Hughes
Department of Electrical and Computer Engineering
Dalhousie University
Halifax, Nova Scotia, Canada, B3J 2X4

19 July 2002
This submission replaces the one of 17 July 2002.

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]:

With Green Power, Nova Scotia Power and Nova Scotians can feel good about making a contribution to a cleaner, greener, environment. It's an important first step in improving our environmental performance.

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:

$2,954,240 - ($2,954,240 x 0.44) = $1,654,374

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:

$2,954,240 + $48,000 = $3,002,986

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

$3,002,986 - ($3,002,986 x 0.44) = $1,681,254

Observations and comments:

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:

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:

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

Capital costs (turbine plus marketing)

$1,681,254

Operating and Maintenance (annual)

$51,000, escalating at 2% per year

Expected output (annual)

3.9 million kWh

Expected lifetime of the turbines

20 years


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:

= Initial annual expenditure x ((1 + cost increase) lifetime - 1) / cost increase

= $51,000 x (1.0220 - 1) / 0.02

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

Total cost = $1,681,254 + $51,000 x (1.0220 - 1) / 0.02

= $1,681,254 + $51,000 x 24.3

= $1,681,254 + $1,239,165

= $2,920,419

Levelized cost over 20 years:

= Total cost / kilowatt-hours produced

= $2,920,419 / (3.9 million kWh per year x 20 year)

= $0.0374 per kWh

Or about 3.7 cents per kWh.

Observations and comments:

Cost

Cost (per kWh)

Capital, operating and maintenance costs
(U.S. dollars converted to Canadian, 1997 dollars)

$0.012 to $0.037

Projected fuel costs (from [6])

$0.031

Levelized cost

$0.043 to $0.068


The levelized cost of 3.7 cents per kilowatt-hour of wind generated electricity is better than the ‘best case’ coal fired technology. Since this technology is not available to NSPI, it is reasonable to assume that NSPI’s levelized cost is in the range gi ven ($0.043 to $0.068 per kWh).

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

The author would like to thank Mr. Luke Miller, a graduate student in the Department of Mechanical Engineering at Dalhousie University, for several conversations regarding this section.

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:

Annual cash flow = cash inflow - cash outflow - tax

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:

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:

Net Present Value = Sum of discounted annual cash flows - initial investment

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):

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:

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:

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:

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]:

Sector

Total (GWh)

Residential

3,756.7

Commercial

2,724.9

Industrial

3,831.6

Other

592.6

Total

10,905.8

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

= 3.9 million kWh (3.8 GWh) / 10,905.8 GWh

= 0.035%

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 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: No change in residential revenue (from Table 1 of document)

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Residential revenue

Total cash inflow

0

0

0

0

0

0

0

0

0

0

Incremental cash

outflows:

Avoided variable

generation costs

(268,014)

(165,680)

(180,614)

(126,426)

(177,498)

(172,520)

(176,130)

(141,436)

(159,562)

Avoided capital

generation costs

0

0

0

(16,530)

(16,872)

(17,214)

(17,556)

(17,936)

(18,278)

Generation

operating costs

51,000

52,020

53,060

54,122

55,204

56,308

57,434

58,583

59,755

Marketing and

promotion

48,000

Total cash outflows

48,000

(217,014)

(113,660)

(127,554)

(88,834)

(139,166)

(133,426)

(136,252)

(100,789)

(118,085)

Net cash flow

(48,000)

217,014

113,660

127,554

88,834

139,166

133,426

136,252

100,789

118,085

Capital expenditures

(2,954,240)

Total net cash flow

(3,002,240)

217,014

113,660

127,554

88,834

139,166

133,426

136,252

100,789

118,085

Tax

1,320,986

(95,486)

(50,010)

(56,124)

(39,087)

(61,233)

(58,707)

(59,951)

(44,347)

(51,958)

Cash flow after tax

(1,681,254)

121,528

63,650

71,430

49,747

77,933

74,718

76,301

56,442

66,128

NPV

(837,104)

Table 1 (continued)

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Residential revenue

Total cash inflow

0

0

0

0

0

0

0

0

0

0

0

Incremental cash

outflows:

Avoided variable

generation costs

(163,628)

(133,418)

(157,320)

(154,888)

(239,514)

(132,772)

(264,784)

(188,594)

(201,020)

(158,042)

(161,196)

Avoided capital

generation costs

(18,658)

(19,038)

(19,418)

(19,798)

(20,216)

(25,422)

(25,954)

(26,448)

(25,232)

(25,764)

(26,258)

Generation

operating costs

60,950

62,169

63,412

64,680

65,974

67,293

68,639

70,012

71,412

72,841

74,297

Marketing and

promotion

Total cash outflows

(121,336)

(90,287)

(113,326)

(110,006)

(193,756)

(90,901)

(222,099)

(145,030)

(154,840)

(110,965)

(113,157)

Net cash flow

121,336

90,287

113,326

110,006

193,756

90,901

222,099

145,030

154,840

110,965

113,157

Capital expenditures

Total net cash flow

121,336

90,287

113,326

110,006

193,756

90,901

222,099

145,030

154,840

110,965

113,157

Tax

(53,388)

(39,726)

(49,863)

(48,402)

(85,253)

(39,996)

(97,723)

(63,813)

(68,129)

(48,825)

(49,789)

Cash flow after tax

67,948

50,561

63,463

61,603

108,503

50,904

124,375

81,217

86,710

62,141

63,368

 

Table 2: Application of the Green Power Premium (from Table 2 of document)

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Residential revenue

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

Total cash inflow

0

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

Incremental cash
outflows:

Avoided variable
generation costs

(268,014)

(165,680)

(180,614)

(126,426)

(177,498)

(172,520)

(176,130)

(141,436)

(159,562)

Avoided capital
generation costs

0

0

0

(16,530)

(16,872)

(17,214)

(17,556)

(17,936)

(18,278)

Generation
operating costs

51,000

52,020

53,060

54,122

55,204

56,308

57,434

58,583

59,755

Marketing
and promotion

48,000

Total cash outflows

48,000

(217,014)

(113,660)

(127,554)

(88,834)

(139,166)

(133,426)

(136,252)

(100,789)

(118,085)

Net cash flow

(48,000)

369,014

265,660

279,554

240,834

291,166

285,426

288,252

252,789

270,085

Capital expenditures

(2,954,240)

Total net cash flow

(3,002,240)

369,014

265,660

279,554

240,834

291,166

285,426

288,252

252,789

270,085

Tax

1,320,986

(162,366)

(116,890)

(123,004)

(105,967)

(128,113)

(125,587)

(126,831)

(111,227)

(118,838)

Cash flow after tax

(1,681,254)

206,648

148,770

156,550

134,867

163,053

159,838

161,421

141,562

151,248

NPV

1,031

 

Table 2 - continued.

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Residential revenue

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

Total cash inflow

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

152,000

Incremental cash outflows:

Avoided variable generation costs

(163,628)

(133,418)

(157,320)

(154,888)

(239,514)

(132,772)

(264,784)

(188,594)

(201,020)

(158,042)

(161,196)

Avoided capital generation costs

(18,658)

(19,038)

(19,418)

(19,798)

(20,216)

(25,422)

(25,954)

(26,448)

(25,232)

(25,764)

(26,258)

Generation operating costs

60,950

62,169

63,412

64,680

65,974

67,293

68,639

70,012

71,412

72,841

74,297

Marketing and promotion

Total cash outflows

(121,336)

(90,287)

(113,326)

(110,006)

(193,756)

(90,901)

(222,099)

(145,030)

(154,840)

(110,965)

(113,157)

Net cash flow

273,336

242,287

265,326

262,006

345,756

242,901

374,099

297,030

306,840

262,965

265,157

Capital expenditures

Total net cash flow

273,336

242,287

265,326

262,006

345,756

242,901

374,099

297,030

306,840

262,965

265,157

Tax

(120,268)

(106,606)

(116,743)

(115,282)

(152,133)

(106,876)

(164,603)

(130,693)

(135,009)

(115,705)

(116,669)

Cash flow after tax

153,068

135,681

148,583

146,723

193,623

136,024

209,495

166,337

171,830

147,261

148,488

 

Table 3: Residential revenues of $156,000 per year

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Residential revenue

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

Total cash inflow

0

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

Incremental cash
outflows:

Avoided variable
generation costs

(268,014)

(165,680)

(180,614)

(126,426)

(177,498)

(172,520)

(176,130)

(141,436)

(159,562)

Avoided capital
generation costs

0

0

0

(16,530)

(16,872)

(17,214)

(17,556)

(17,936)

(18,278)

Generation
operating costs

51,000

52,020

53,060

54,122

55,204

56,308

57,434

58,583

59,755

Marketing and promotion

48,000

Total cash outflows

48,000

(217,014)

(113,660)

(127,554)

(88,834)

(139,166)

(133,426)

(136,252)

(100,789)

(118,085)

Net cash flow

(48,000)

373,014

269,660

283,554

244,834

295,166

289,426

292,252

256,789

274,085

Capital expenditures

(2,954,240)

Total net cash flow

(3,002,240)

373,014

269,660

283,554

244,834

295,166

289,426

292,252

256,789

274,085

Tax

1,320,986

(164,126)

(118,650)

(124,764)

(107,727)

(129,873)

(127,347)

(128,591)

(112,987)

(120,598)

Cash flow after tax

(1,681,254)

208,888

151,010

158,790

137,107

165,293

162,078

163,661

143,802

153,488

NPV

24,669

 

Table 3: continued.

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Residential revenue

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

Total cash inflow

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

156,000

Incremental cash
outflows:

Avoided variable
generation costs

(163,628)

(133,418)

(157,320)

(154,888)

(239,514)

(132,772)

(264,784)

(188,594)

(201,020)

(158,042)

(161,196)

Avoided capital
generation costs

(18,658)

(19,038)

(19,418)

(19,798)

(20,216)

(25,422)

(25,954)

(26,448)

(25,232)

(25,764)

(26,258)

Generation
operating costs

60,950

62,169

63,412

64,680

65,974

67,293

68,639

70,012

71,412

72,841

74,297

Marketing and promotion

Total cash outflows

(121,336)

(90,287)

(113,326)

(110,006)

(193,756)

(90,901)

(222,099)

(145,030)

(154,840)

(110,965)

(113,157)

Net cash flow

277,336

246,287

269,326

266,006

349,756

246,901

378,099

301,030

310,840

266,965

269,157

Capital expenditures

Total net cash flow

277,336

246,287

269,326

266,006

349,756

246,901

378,099

301,030

310,840

266,965

269,157

Tax

(122,028)

(108,366)

(118,503)

(117,042)

(153,893)

(108,636)

(166,363)

(132,453)

(136,769)

(117,465)

(118,429)

Cash flow after tax

155,308

137,921

150,823

148,963

195,863

138,264

211,735

168,577

174,070

149,501

150,728

 

Table 4: Treating the turbines as ‘new’ power

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Residential rate

cents/kWh

8.35

8.43

8.52

8.60

8.69

8.78

8.86

8.95

9.04

Residential revenue

325,650

328,907

332,196

335,518

338,873

342,261

345,684

349,141

352,632

Total cash inflow

0

325,650

328,907

332,196

335,518

338,873

342,261

345,684

349,141

352,632

Incremental cash

outflows:

Avoided variable

generation costs

0

0

0

0

0

0

0

0

0

Avoided capital

generation costs

0

0

0

0

0

0

0

0

0

Generation

operating costs

51,000

52,020

53,060

54,122

55,204

56,308

57,434

58,583

59,755

Marketing and

promotion

48,000

Total cash outflows

48,000

51,000

52,020

53,060

54,122

55,204

56,308

57,434

58,583

59,755

Net cash flow

(48,000)

274,650

276,887

279,135

281,396

283,669

285,953

288,250

290,558

292,878

Capital expenditures

(2,954,240)

Total net cash flow

(3,002,240)

274,650

276,887

279,135

281,396

283,669

285,953

288,250

290,558

292,878

Tax

1,320,986

(120,846)

(121,830)

(122,819)

(123,814)

(124,814)

(125,819)

(126,830)

(127,845)

(128,866)

Cash flow after tax

(1,681,254)

153,804

155,056

156,316

157,582

158,854

160,134

161,420

162,712

164,011

NPV

41,005

 

Table 4: continued.

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Residential rate cents/kWh

9.13

9.22

9.32

9.41

9.50

9.60

9.69

9.79

9.89

9.99

10.09

Residential revenue

356,159

359,720

363,317

366,951

370,620

374,326

378,070

381,850

385,669

389,525

393,421

Total cash inflow

356,159

359,720

363,317

366,951

370,620

374,326

378,070

381,850

385,669

389,525

393,421

Incremental cash

Outflows:

Avoided variable

Generation costs

0

0

0

0

0

0

0

0

0

0

0

Avoided capital

Generation costs

0

0

0

0

0

0

0

0

0

0

0

Generation

Operating costs

60,950

62,169

63,412

64,680

65,974

67,293

68,639

70,012

71,412

72,841

74,297

Marketing and

Promotion

Total cash outflows

60,950

62,169

63,412

64,680

65,974

67,293

68,639

70,012

71,412

72,841

74,297

Net cash flow

295,209

297,551

299,905

302,270

304,646

307,033

309,430

311,838

314,256

316,685

319,123

Capital expenditures

Total net cash flow

295,209

297,551

299,905

302,270

304,646

307,033

309,430

311,838

314,256

316,685

319,123

Tax

(129,892)

(130,923)

(131,958)

(132,999)

(134,044)

(135,094)

(136,149)

(137,209)

(138,273)

(139,341)

(140,414)

Cash flow after tax

165,317

166,629

167,947

169,271

170,602

171,938

173,281

174,629

175,984

177,344

178,709