Setting fees for use of federal dams

Federally owned dams and other structures can create opportunities for private development of hydropower facilities, in exchange for a fee.  While fees charged to hydropower developers for using federally owned dams will likely remain stable in the near term, a look at the history of government dam use charges illustrates the process and dynamics involved in setting these fees.

Under federal law, many aspects of hydropower projects are regulated by the Federal Energy Regulatory Commission.  Section 10(e)(1) of the Federal Power Act (FPA) authorizes the Commission to collect annual charges from hydropower licensees whose projects make use of government dams or other structures owned by the United States.

Before 1984, the Commission assessed charges for the use of government dams and other United States structures on a case- by-case basis.  Typically, the Commission charged licensees half of the project's shared net benefit.  That net benefit was defined as the difference between the value of the power (taken as the least expensive alternative power) and the cost of project power (computed from the costs of building and operating the project). 

In 1984, the Commission issued Order No. 379, replacing its government dam use charges with graduated flat rates.  In that order, the Commission concluded that this method "best balances the statutory goals of providing a reasonable return to the Federal government, encouraging hydropower development, especially small projects, and minimizing costs to consumers."

Congress enacted the Electric Consumers Protection Act (ECPA) in 1986, which amended those portions of Section 10(e) of the FPA that authorize the Commission to collect government dam use charges.  ECPA adopted the method and rate levels of the Commission's new graduated flat rate structure as both the maximum allowable and the only federal dam use charges assessed by any U.S. agency. The Commission currently levies these maximum values, as it has since adopting them in 1984.

Section 10(e)(4) of the FPA requires the Commission to report to Congress every five years on whether the government dam use charges are appropriate.  The Commission's fifth and most recent report, dated October 17, 2013, concluded that the fees continue to provide reasonable compensation to the government.  The report noted that in the last five years some licenses for both constructed and unconstructed projects at government dams have been surrendered or terminated, but that there had been no indication that the dam-use fees played a role in such outcomes.  In addition, the Commission noted that it had issued 18 new licenses to projects located on government dams in the last five years that will be subject to these fees when they begin to generate power.

With a no-action recommendation by the Commission, Congress may choose not to amend Section 10(e) of the Federal Power Act in the near term.  However, the ECPA requires a periodic reassessment of the level of government dam use charges; the next mandatory report will come in 2018.  Moreover, Congress is interested in promoting new hydropower development, as is evidenced by its enactment of the Hydropower Regulatory Efficiency Act of 2013; Congress could, on its own, modify government dam use charges.  Nevertheless, for the near term, U.S. government dam use charges assessed under the Federal Power Act will likely remain stable.

Wind to power Microsoft's Texas data center

Microsoft has agreed to purchase energy produced by a Texas wind farm to power its data center in San Antonio.  The announcement, posted on the official blog of Microsoft's Sustainability Development Team, describes a 20-year power purchase agreement with RES Americas under which Microsoft will purchase all of the output of the 110 megawatt Keechi Wind project located about 280 miles north.

The power purchase agreement fits with Microsoft's stated commitment to carbon neutrality.  Since 2012, Microsoft has imposed an internal fee on the use of carbon-based forms of energy; Microsoft uses that fee to make investments in alternative or carbon-neutral energy, such as this power purchase agreement.

The Keechi project will be owned and operated by RES Americas, a subsidiary of British company RES Ltd.  RES Americas currently operates over 600 MW of renewable energy projects, and has a renewable energy construction portfolio that exceeds 6,500 MW and 64 projects, as well as 534 miles of transmission lines.  Its Keechi project is expected to cost $200 million, and will feature 55 turbines expected to produce 430,000 megawatt hours of energy per year.  (To put this figure in context, it could power up to 45,000 homes, or cover between 5 and 10 percent of Microsoft's total electricity consumption.)  Construction is expected to begin in 2014, with the project going operational by June 2015.

Microsoft is not alone in promoting its use of renewable or alternative energy to power its data centers.  In 2012 Google entered into an agreement to purchase the output of a wind farm in Oklahoma to power its Pryor data center.  Apple's new data center in Maiden, North Carolina is powered in part by a solar photovoltaic array and a biogas-fed fuel cell.  eBay has proposed siting a 6 megawatt natural gas-fired fuel cell at its Utah data center.  Whether the data center is powered by on-site distributed generation or buys power from a designated off-site renewable resource, the trend is toward promoting cleaner, greener computing through these arrangements.  These choices may help the companies with cost control and power reliability as well as public relations.

Will large consumers of electricity continue to invest in alternative or renewable electric generation?  If so, will they favor arms-length power purchase agreements with developers of remote projects, or will they rely more heavily on on-campus development of distributed generation?  Will this trend spread beyond the big names so far - Microsoft, Apple, Google, and eBay - to the point where smaller or less tech-oriented companies develop or do similar projects and deals?

  Googa 20-year power purchase agreement (PPA) for wind energy in Texas that will be funded in part by proceeds from Microsoft’s carbon fee - See more at: http://blogs.msdn.com/b/microsoft-green/archive/2013/11/04/microsoft-signing-long-term-deal-to-buy-wind-energy-in-texas.aspx#sthash.4l62oNbo.dpuf

a 20-year power purchase agreement (PPA) for wind energy in Texas that will be funded in part by proceeds from Microsoft’s carbon fee - See more at: http://blogs.msdn.com/b/microsoft-green/archive/2013/11/04/microsoft-signing-long-term-deal-to-buy-wind-energy-in-texas.aspx#sthash.4l62oNbo.dpuf

a 20-year power purchase agreement (PPA) for wind energy in Texas that will be funded in part by proceeds from Microsoft’s carbon fee - See more at: http://blogs.msdn.com/b/microsoft-green/archive/2013/11/04/microsoft-signing-long-term-deal-to-buy-wind-energy-in-texas.aspx#sthash.4l62oNbo.dpuf

US holds first offshore wind site lease auction

Yesterday the U.S. Department of the Interior held its first competitive lease sale for renewable energy on the Outer Continental Shelf.  With a total bid of about $3.8 million, Deepwater Wind New England, LLC won the rights to lease two parcels covering 164,750 acres offshore Rhode Island and Massachusetts.  What do the auction results mean?

Consistent with President Obama's climate action plan, the Interior Department is promoting the use of federal lands for the production of renewable electricity.  Yesterday's auction represents the first competitive auction for leases for offshore wind sites in federal waters.  Following significant stakeholder process, the Interior Department identified and refined the parcels off Rhode Island and Massachusetts, and solicited interest in leasing sites.  In June, the Interior Department announced that nine companies were legally, technically, and financially qualified to participate in the auction.

The auction took place in two phases in late July.  First, a panel met to consider non-monetary factors, including whether any bidders held agreements that could make their project a more realistic success.  For example, bidders demonstrating a power purchase agreement or joint development agreement could score bonus points enabling them to compete against higher monetary bids.  Deepwater Wind's joint development agreement with the State of Rhode Island thus gave it an advantage in the second round held on July 31.  This round took a more traditional auction format, with bidders placing a series of increasing bids until only one bidder remained for each parcel.

Three bidders participated in the auction: Deepwater Wind New England, LLC, Sea Breeze Energy, LLC, and US Wind Inc.  After 4 rounds, Deepwater Wind had won the south parcel for $94,153, and only one other company remained in the competition for the north parcel.  By round 11, Deepwater Wind had won the north parcel with a bid of $3,744,135.

With the auction completed, Deepwater Wind has 10 days to execute the lease agreements.  Its first rent under the leases will be due in 45 days.  Lease fees for the sites will be charged at $3 per acre, and if Deepwater Wind develops an operating project, it will also pay an annual fee roughly equal to 2% of its wholesale energy market revenues.

Building on this first auction, the Department of the Interior plans to hold a second auction for sites off Virginia in September.  Eight bidders have been deemed qualified to participate in the Virginia auction.  How many bidders will actually participate in the auction?  How much competitive interest will arise?  For what price will the parcels' lease rights sell?  Will the leases - whether off Rhode Island and Massachusetts, or off Virginia - lead to operating offshore wind projects?  Time will tell how the 2013 offshore wind lease auctions affect U.S. energy development.