Waterbury hydro need and economics

A recent order issuing a new hydropower license to Green Mountain Power Corporation's Waterbury Hydroelectric Project sheds insight into the project's operations and economics.

The Waterbury project is located at a dam built in 1938, and licensed for hydropower development since 1954.  After a 16-year relicensing process, the Federal Energy Regulatory Commission issued a new license for the project in February 2016, authorizing 5.52 megawatts of generating capacity.  That relicensing process illustrates how the Commission considers the need for power from the project, as well as project economics, when considering whether to relicense a hydropower project.

By regulation, the Commission's process for reviewing a license application includes an evaluation of the "need of the applicant over the short and long term for the electricity generated by the project or projects to serve its customers."  In the Waterbury project's relicensing case, this consideration of the applicant's "need for power" involved observations about the project's expected output as well as the regional power market.  The order notes historic average generation from the Waterbury Project of 17,562 MWh annually, but observes that under the new license average annual generation will be reduced to 14,767 MWh.

The order then states, "Electricity generated from the Waterbury Project will help supply the power needs in northern Vermont."  It also cites a 10-year forecast by electric reliability organization North American Electric Reliability Corporation (NERC) showing summer peak demand in the region is expected to increase at an average rate of 0.84 percent per year between 2014 and 2023.  Based on this, the order concludes that "the project's power will help meet the regional need for power."

The Commission's process for determining whether to issue a new license for an existing hydroelectric project also includes consideration of public interest factors, such as the economic benefits of project power.  A 1995 decision established the Commission’s approach to evaluating the economics of hydropower projects.  Under that approach, the Commission uses current costs to compare the costs of the project and likely alternative power with no forecasts concerning potential future inflation, escalation, or deflation beyond the license issuance date.  The Commission has described the basic purpose of this economic analysis as to provide a general estimate of the potential power benefits and the costs of a project, and of reasonable alternatives to project power, "to support an informed decision concerning what is in the public interest with respect to a proposed license."

For the Waterbury project, as ultimately licensed with mandatory conditions and staff measures, the Commission concluded that:

• the levelized annual cost of operating the project is $711,735, or $48.20/MWh
• the proposed project would generate an average of 14,767 MWh of energy annually.
• average generation is multiplied by the alternative power cost of $44.12/MWh, for a total value of the project’s power is $651,520, in 2015 dollars.

Therefore, the Commission concluded that in the first year of operation, the project would cost $60,215, or $4.08/MWh, more than the likely alternative cost of power.  As the order notes, "Although staff’s analysis shows that the project as licensed herein would cost more to operate than the estimated cost of alternative power, it is the applicant who must decide whether to accept this license and any financial risk that entails."

The Commission did note that its consideration of public interest factors also considers that "hydroelectric projects offer unique operational benefits to the electric utility system", including ancillary services like stability and rapid response.  The order also notes that while staff did not explicitly account for the effects inflation may have on the future cost of electricity, hydropower generation is relatively insensitive to inflation compared to fossil fueled generators -- illustrating why "project economics is only one of the many public interest factors the Commission considers in determining whether or not, and under what conditions, to issue a license."