One of the nation’s largest water-and-sewer agencies is carving out an opportunity to meet its green targets and save millions of dollars in the bargain.

By David Engle

“Free as the wind,” goes the expression. But if the wind happens to drive a generating turbine, the electricity output—after the turbine investment is repaid—“makes the power free, almost,” observes Rob Taylor. He’s energy manager for the Washington Suburban Sanitation Commission (WSSC) in Maryland’s Prince George’s and Montgomery counties, and spends many millions of dollars a year on power for the numerous pumping stations and treatment plants.

Last year, Taylor took part in helping to structure a $150 million investment in wind-generated electrical power to provide about a third of the WSSC’s electrical load for the next 10 years. A bit paradoxically, not only will the wind be “free, almost” (in the above sense), but projections through the far-off time frame of 2018 indicate the deal could save the agency as much as $20 million on energy purchases.

The unusual contract that Taylor and a host of others had a hand in arranging will propel the WSSC near the top of the list of public-sector wind-power users in the nation, just beneath the federal government.

Truly, the wind is free; it’s also clean and comes in a virtually endless supply. So copious is our wind, in fact, that studies have shown wind power alone could provide 100% of the nation’s electricity need; blustery North Dakota by itself could furnish 40%. At present, though, wind accounts for less than 1%.

All of this explains why—in a world seeking to diminish greenhouse gases—wind power is also a hot commodity. It’s now well established as the preferred clean-power resource worldwide. In the United States, wind farms now rank second only to natural-gas power plants in terms of new generator production.

Demand for wholesale wind power is also soaring, as scores of utilities and some state agencies, like the WSSC, face renewable-energy portfolio (REP) standards; these mandate a gradual shift away from fossil fuels. The WSSC itself, for instance (operating a system of more than 5,300 miles of freshwater piping, and 5,200-plus miles of sewer lines), has its own REP mandate of 7.5% renewable by 2018, notes WSSC General Manager Andy Brunhart.

Typically, energy buyers can satisfy REP requirements simply by paying a premium for certain kinds of qualifying generation, defined by Renewable Energy Certificates (RECs). Currently, this comes to several cents per kilowatt-hour.

Now, though, the WSSC is breaking new ground, literally and figuratively, and will be virtually buying the green, clean wind-power—not via RECs, but directly.

Steady Electric Rates
First, some background.

In 1999—shortly after energy deregulation arrived in Maryland—Taylor took the WSSC into a consortium of 16 local government agencies to pool their kilowatt buying and to obtain power at low, fixed rates. For several years of this, he says, the consortium could save about 3%.

“That was OK,” he notes, and so was the assured pricing; everyone still recalls what happened to the state of California, around that time. However, what was missing from this flat-rate deal, he says, “was any incentive to do load shaving that would save some real money” by rewarding the agency for curtailing or shifting usage at peak-rate times.

So, the WSSC broke away from the consortium and signed on with one of the newly emerging, post-deregulation retailers specializing in shopping in the new markets—a firm called Constellation Energy, the unregulated affiliate of Baltimore Gas & Electric Co. Constellation buys power wholesale and sells electricity to about 10,000 commercial and industrial accounts in the 17 deregulated states.

Now, as Taylor recalls, things began to get interesting.

Constellation offered the WSSC an energy performance contract to supply its 22-MWh annual load via unit purchases on municipal and regional grids. With Constellation setting the strategy, the contract guaranteed better savings.

As Taylor (a certified energy manager) recalls, doing these transactions is not unlike playing the stock or commodities markets, doing hourly energy trades. “On the wholesale level,” he says, “we could buy on the PJM [the grid for Pennsylvania, New Jersey, and Maryland] ... with block purchases to stabilize the price fluctuations on a long-term basis. This would allow us the creativity to load-shift”—i.e., to save lots of money by scheduling certain plant operations in the off-peak hours. “It gave us the advantage of market timing, where we could buy blocks for [variable periods]—a year to six months or three months,” he says. “We could take advantage of when the market had ... a ‘low point’ to buy blocks. And we could also be buying on the hourly market.”

Lots of Buying Power
The latter is also the cheapest, he adds, because it enables bargain hunting. But it also carries the most risk if a longish-term contract is signed and the market then drops.

Overall, though, he says, “Risk is mitigated by buying blocks of power 24 hours a day, seven days a week—say, six months or one year or two years down the road.”

Having such flexibility hedges much of the risk of market gyrations that may be incurred in multi-month contracts.

“So,” he concludes, “you don’t pay a premium for the risk. And you can cash in or out of the spot market on an hourly basis, depending on how much energy you are using.”

Having plenty of buyers and sellers in these markets makes the spot-pricing tend to be more competitive; and purchases on the various PJM regional markets each work a bit differently, he notes.

Managing such fine points is the domain of Constellation, which happens to be one of the larger players in the Eastern energy markets. But, says Taylor, there are dozens of others that were similarly spun-off from local gas-and-electric utilities, and he periodically checks with a few to see if he’s still getting good deals from Constellation.

During this period, Taylor also added to his skills in sizing his block purchases advantageously by focusing on the WSSC’s average loads over a given time period. The agency’s major power-gobblers are its seven water and wastewater plants; but the loads are relatively stable, because the plants operate 24 and seven.

By contrast, pumping stations are more “spike-type loads.”

Constellation also assists in optimizing calculations by downloading and charting the WSSC’s hourly energy consumption data. Martha Duggan, the firm’s mid-Atlantic regional vice president, explains: “We look at every hour of energy consumption and the patterns when the consumption happens,” particularly to identify opportunities to load-shift.

This helps a client figure out “how to flatten those demand peaks,” as well as helping Taylor better appreciate various risk trade-offs.

Taylor receives graphs of the load profiles several times yearly, to help refine the accuracy of budgeting and estimating.

In a two- or three-year period of buying power this way, the WSSC obtained a total of 18 major blocks, of sizes ranging from 2 MW to 17 MW, and of lengths varying from a few months to two years. In its current fiscal year, the WSSC’s budget for electricity comes to about $21 million.

Going With the Wind
Shifting to green amidst this “brown” energy industry became Taylor’s next goal, starting in 2005. At that time he asked Duggan to put out some feelers on what a major purchase and deal might require.

Also checking around on his own, he came across a helpful paper from the New York State Energy Research and Development Authority (NYSERDA), titled “Using Wind Power to Hedge Electricity Prices for Commercial and Industrial Customers in New York,” issued May 14, 2003. NYSERDA’s report helpfully itemized the organizational characteristics of an energy customer who might make a good candidate for a direct wind-energy purchase—again, keeping in mind that wind power more typically is bought using RECS, via wholesalers. But NYSERDA—and the wind-energy industry generally—is keen on exploring whether a niche exists for large end users to buy directly.

And, indeed, the WSSC turned out to fit the profile very well, as Taylor recounts. There are about a half dozen key factors. These include:

• Long-term financial stability—This is a quality that “we have, as most water utilities do,” Taylor says.
• A level load profile—This, again, is common to most water utilities.
• Experience with conventional block purchasing—“We had ... a couple of years’ worth going into the wind purchase,” Taylor says.
• Ability to shift loads—As noted earlier, Taylor was having the WSSC do this already. In particular, the agency has the capacity for about 160 million gallons of elevated storage (water towers). “We can fill tanks at night when prices are lower, and we can drain those tanks and run less expensive pumps during the afternoon, when the PJM prices are higher,” he notes.
• Wholesale pass-through—As mentioned above, the WSSC was already doing this with its block purchases on the conventional power market.
• The ability to execute a long-term contract of 10 to 20 years—This, too, was quite doable, Taylor adds, but, “A lot of agencies really have a problem with long-term contracts,” he observes. “That might have been our biggest hurdle here.”

Nevertheless, the WSSC’s existing commodity purchase contract with Constellation allowed it to execute two extensions of five years each; this ultimately enabled the agency to make the big commitment.

Truly the wind is free. It is also clean and comes in a virtually endless supply.

So, in the end, Constellation’s offer looked the best among several, and it would be easiest to consummate.

Under the proposal, Constellation will buy 100% of the wind power output from a new wind farm (maximum output capacity: 30 MW) to be built in Somerset County, PA, by Edison Mission Group (a subsidiary of Edison International). Constellation will then sell 85% of the power output to the WSSC, in two five-year blocks, at PJM’s hourly wholesale price structure of four cents per kilowatt-hour, or $64 per megawatt-hour.

These good rates reflect, as Brunhart notes, the clout of a big ($800 million annual budget) AAA bond-rated buyer.

Altogether, the WSSC expects to obtain about 70,000 MWh of power annually—roughly the electricity needed for 6,000 homes—supplying about one-third of the WSSC’s total load serving its 1.7 million ratepayers.

A Cleaner Airshed
The farm’s proposed location, although not in Maryland proper, puts it in the Appalachian airshed, notes Taylor. Thus, it will contribute to improving local air quality, and it counts toward achieving air-quality standards set under the Clean Air Act. (Interestingly, suburban Washington, DC, is in a currently noncomplying Air Quality Management District.)

The site will also satisfy the WSSC’s participation in the Maryland Department of the Environment’s nitrogen oxide set-aside program.

As for the money part, to reiterate the “almost free” point noted at the outset, once the farm is built, “the price is more or less locked in for 10 years,” says Taylor, “because the price of energy is created by the capital cost” (i.e., it’s all in the initial investment).

“Part of the beauty in this is that we’re required to pay zero dollars up front,” Brunhart adds. “We’re not paying for the development and construction of the wind power at all. We’re just buying power for 10 years at a guaranteed price ... in line with the cheapest [natural-gas-fired plant output].” Again, this adds up to a huge environmental benefit.

All in all, the clean-air benefit derived from this anticipated annual purchase of 70,000 MWh equates to a reduction of 83,700,000 pounds per year in carbon-dioxide pollutants; 583,000 pounds per year in sulfur dioxide; and 188,000 pounds annually in nitrogen oxides.

How Buying Wind Saves Money
The deal is, again, primarily intended to save money.

Though predicting long-range energy prices is “iffy,” to say the least, market factors look auspicious for making this deal a big winner through its expiration date near the end of the next decade.

In all likelihood, wind power will become costlier, Taylor and his advisors at Constellation believe, due to the utilities’ scramble to reach renewable portfolio goals. When the WSSC’s wind-power farm goes “live” in 2008, its four-cents-per-kilowatt-hour price will initially, quite probably, come close to parity with conventional wholesale power rates.

However—based on a recent history of 10% or so in annual utility increases—power rates for both conventional and wind will likely continue rising over the contract’s duration. Meanwhile, the WSSC continues paying its 4-cent rate.

Also, Taylor notes, per-kilowatt-hour price quotations that he sought for 15- and 20-year wind contracts, compared to 10-year terms, came in surprisingly higher at the longer term.

All in all, the only downside is the slim risk that local energy prices might unexpectedly collapse; the WSSC would then be stuck paying for overpriced watts.

But even that unlikely scenario would be quite acceptable—because the wind portion accounts for only one-third of the agency’s total power purchases anyway. Thus, the remaining two-thirds of the agency’s power purchase would be relishing an unheard-of “windfall” of collapsing prices.

Why Just a Third?
This one-third supply decision also reflects one of the complicating equations involved in buying wind: namely, its wide variability and how to translate this into a workable business deal.

Although wind pricing is rock-steady—because it’s immune to fuel-price volatility—the big question mark is output. Sometimes wind is blowing at gale force; at other times it’s the doldrums. The agreement for the WSSC to buy 85% of the power output effectively translates into committing to purchase at least one-third of the farm’s energy all the time, day or night. In this case this means about 8 MW of the allotted 24-MW maximum, on a 24-and-seven averaged basis.

That 8 MW is a modest and consistently usable output.

However, should the farm enjoy fair breezes and manage to rev up to its rated capacity, the WSSC is obligated to buy 85% of this as well. At that upper limit the total would come to, again, 24 MW—still usable, much of the time, but edging close to the practical limit, depending on the hour and season.

If the WSSC committed to buying more wind (again, purchased in a percentage commitment), there might be times when this power would be coming in as excess (e.g., on many windy nights). The WSSC might then end up having to dump the surplus back onto the grid market—which, Taylor notes, is not the agency’s primary business or interest.

Thus, the one-third averaged figure turns out to be a safe level to avoid power-exporting.

Impact on “Brown Blocks”
Next, an obvious corollary question: What do you do if the wind output is low?

Taylor replies that, during such times (likely to occur in the summer), he’s already drawn graphs defining conventional block buys to be made. “We plan to increase the size [and number] of the conventional blocks,” he says. Instead of buying a single block of power, “you’re now buying two—a ‘green’ block and a ‘brown’ one.”

The wind-produced energy arrives at a consistent price, but is quite variable in terms of megawattage.

To compensate, he says, “we’ll probably buy two sizes” of conventional (i.e., “brown”) power “to keep it simple.” One will be sized to provide whatever the wind power doesn’t. Then, if this purchase turns out to be a bit low, “the difference every month will be adjusted by buying more on the spot market,” he says. “Hopefully, this will be during periods where the price is low.”

And again, all the while, the WSSC will do load shifting. If this demand-response strategy leaves the WSSC receiving too much power in a block, the surplus can be readily sold back to the PMJ grid after all.

These modest transactions will occur automatically via Constellation’s marketing service.

Overall, carefully coordinated “green and brown” buying should thus save an estimated $14 million over the contract term.

Next, additional millions in cost avoidance will be realized, calculated from the wind’s value in the RECs that the WSSC will accrue.

Currently, in Maryland these are valued at about 2 cents per kilowatt-hour. Over the coming decade this racks up an estimated $7 million.

Besides this, REC values will also likely rise, Taylor suggests, as utilities scramble to meet REP goals.

Were it not for the WSSC’s recent wind purchase, Taylor figures the agency would easily spend $7 million or more over the years for RECs needed to meet assorted clean-generation targets.

Contractually, the WSSC will own all of the RECs; thus, the agency legally could sell the RECs but never would, he says, “because we want the environmental benefit” under the Maryland Department of Environment’s nitrogen-oxide-reduction plan to achieve air-quality compliance.

Closing the Sale
With the terms and payback projections ironed out in 2006, Brunhart, Taylor, and staff sought the buy-in of the WSSC’s six-member commission and nearby county executives.

Here, a critically important five-step process ensued, as Brunhart recounts.

Step one was to provide all decision makers “a basic education about wind power and engineering,” followed by discussion of energy market economics to substantiate the rosy $20 million cost-avoidance
scenario.

Next came some underscoring of the project’s environmental benefit, reaffirming this as one of the WSSC’s core values.

Brunhart explained the specific REP requirements that the wind purchase would satisfy.

Finally came frank discussion of the risks and trade-offs in the 10-year contract. In such a lengthy time frame, much can happen, including technology breakthroughs that might conceivably provide green power at even less cost.

At any rate, multiple meetings and hearings ensued, and ultimately the contract won a squeaky 3–2 commission vote (with one abstention).

The two “nays” reportedly expressed reservations about the validity of the projected $20 million savings and had concerns over whether the range of bid was adequate; and, too, they simply hesitated at the unusually long (for a public agency) contract duration.

Is Wind Power for You?
The foregoing should have answered this one already: a conditional maybe.

First, a would-be buyer should probably be located within one of the 18 deregulated jurisdictions: Connecticut, New Jersey, Delaware, Illinois, Maine, Oregon, Texas, Arizona, Washington, DC, Maryland, New York, Pennsylvania, Massachusetts, Rhode Island, Michigan, Virginia, New Hampshire, or Ohio.

Next, reviewing the six characteristics identified by NYSERDA and cited above by Taylor would probably be a good gauge. (The full report, “Using Wind Power to Hedge Volatile Electric Priced for Commercial and Industrial Customers in New York,” is available at www.powernaturally.org).

Another very important point is worth considering, though: Even water or sewer agencies that don’t quite match NYSERDA’s “ripe-candidate” profile—but that operate in deregulated states—should probably already be engaging in intelligent buying on wholesale power markets, perhaps using some of the load shifting, block buying, and spot-market bargain hunting Taylor outlined.

Duggan estimates that several thousand of her firm’s commercial and industrial customers spend enough on power to justify doing an in-depth load analysis with an eye on better purchasing strategies.

As for the WSSC’s deal, she suggests, “It is very repeatable. What it also takes, she is a forward-thinking, involved, strategic-minded agency ... [with] a strong energy partner that has knowledge of these markets; and strong financial backing to be able to make those commitments.”

Constellation’s Larry McDonnell adds that, although the WSSC stands out as rather unique, there are other, smaller agencies doing similar green-power makeovers as well.

One example is that of the Scarborough (ME) Sanitation District, which last year embarked on a load-response program allowing the local grid operators to decide to reduce the agency’s power availability during high-demand times. This reduction is coordinated, of course, with load shifting and with powering up an onsite electric generator (which doubles as a backup power supply) for peak shaving.

McDonnell observes: “Large users are becoming much more sophisticated in managing their usage and making it work for their budget.” In some ways, he adds, buying power is not unlike managing a diversified investment portfolio in which a combination of short- and longer-term contracts, hedging strategies, conservation measures, and demand-response schedules are all in play. This is largely coming about, he adds, “because a number of municipalities are now facing a power crunch, in which demand is increasing but new power generation is difficult to site and build because of market, regulatory, and pricing constraints.” Hence, the new power-acquisition approaches are a necessity.

Buying strategies will be varied, too, according to an agency’s willingness to accept risks and to be a flexible bargain hunter.

Meanwhile, in suburban Washington, all parties involved in the WSSC’s wind deal are anxiously awaiting the groundbreaking. As Taylor observes: “January ’08 is obviously the big date.”

La Mesa, CA–based writer David Engle specializes in construction-related topics.

DE - July/August 2007