Errors lead to bad conclusions.
Discussion of MMWEC Financial Analysis
At the April public meeting held by Mass Municipal Wholesale Electric Company (MMWEC) in Peabody, I asked MMWEC if they had done a net present value anlysis to compare the proposed gas turbine with alternatives. Matthew Ide, MMWEC Treasurer and Executive Director of Energy & Financial Markets, responded. He said that MMWEC had done such a comparison, and that because battery capacity systems were not equally credited compared to a gas turbine, the cost of a battery system was prohibitive. We asked MMWEC, under the Massachusetts Public Records Law (M. G. L. Chapter 66, Section 10) to provide a copy of the following records:
“B) Levelized cost analysis of the 55MW peaker plant compared to the levelized cost analysis using battery storage (or other analysis showing lifetime total costs /income; at the MMWEC public forum in Peabody, Matthew Ide referred to such a study). Please specify the period of time chosen for the term of the analysis.”
We received a document titled “MMWEC Project 2015A—A Long Term Capacity Hedge: Order of Magnitude Comparison of Gas Turbine v Battery Delivering Substitute Capacity Cost.” (Attached). Levelized cost is commonly used in the energy industry. The MMWEC pro forma presentation is helpful in understanding the decision of MMWEC to decide on a gas turbine. I believe their assumptions are not valid and therefore the analysis is invalid.
Evaluating the MMWEC analysis
The analysis assumed a 30-year lifetime of the gas turbine against a 15-year lifetime for the battery system. The projected lifetimes of battery and gas turbine systems do not seem valid.
Battery installations are currently being contracted for a 20-year lifetime.
The gas turbine lifetime is subject to market and regulatory forces. The MMWEC analysis does not take into account ongoing changes in the industry, including a rapid shift from gas turbines to battery systems for capacity power. The regulatory climate is also changing. Under both state and emerging Federal regulations to limit the use of fossil fuel, and with the growth of reliable, inexpensive renewables like offshore wind and solar, a new fossil fuel plant is unlikely to be competitive within a very few years, and will not be called on by ISO-NE because lower-cost supply will be chosen.
When the gas turbine becomes a stranded asset, ratepayers will be hit with the bill. For example, in Peabody the average ratepayer may be billed for $2,833. There are 23,000 residential customers and 3,000 commercial and industrial customers served by the Peabody Municipal Light Plant. The PMLP share of the $85 million cost of project 2015A is about $28 million.
MMWEC claimed that the gas turbine plant would serve as a long-time hedge, protecting against an uncertain and volatile market. However, even MMWEC projects a decade of low market costs for capacity power. Furthermore, if our analysis is correct, project 2015A faces a short working lifetime ending as a stranded asset. The level of risk involved should argue against a decision to choose the gas turbine option. Therefore, the basic lifetime premise of the comparison by MMWEC does not seem valid.
Revenue and net cost
MMWEC presents pro forma numbers for operating expenses, substitute capacity cost, multiple sources of revenue, and computed energy margin, and Net Break-Even, all on a per Kw month basis.
The operating expenses for the battery are shown as higher than for the gas turbine, and the net profit for the gas turbine is almost twice that for the battery system. Has MMWEC used the presumed 30 year lifetime of the gas turbine compared to the assumed 15 year lifetime of the battery system for the net value? Reports by Strategen and industry sources indicate that battery capacity systems are less costly to operate, have multiple streams of income, and over their lifetime are more reliable and less expensive than gas turbine systems.
There are various streams of revenue available to a capacity power plant through providing services to the ISO-NE grid system. The MMWEC document lists Forward Reserve Revenue, Ancillary Services (VAR), and Shortage Event Revenue. The comparison has set Ancillary Services (VAR), and Shortage Event Revenue as the same for the gas generator and battery example. However, this assumption is contrary to fact. Battery systems are known to provide services which a gas generator cannot, and thus battery systems can and do have significantly greater income from those services.
Furthermore, the gas turbine example is credited with Forward Reserve Revenue, while the battery system receives no Forward Reserve Revenue. In the April meeting held by MMWEC in Peabody, Matthew Ide claimed that ISO-NE would not give a battery system the same level of compensation as a gas turbine. This points to a failure by ISO-NE to properly evaluate the reliability of renewable sources as a justification for the MMWEC decision to reject battery storage. However, the Federal Electric Regulatory Commission (FERC), which oversees ISO-NE, has required ISO-NE to credit renewables, including batteries, under FERC Order 841. Standalone battery capacity systems have already won competitive capacity auctions after the market was first opened to batteries by ISO-NE's implementation of FERC Order 841. It is not clear why MMWEC would be unable to win a contract in the ISO-NE forward capacity auction when other operators are succeeding. If ISO-NE refused today to credit battery storage, surely within a very few years they will routinely contract for battery capacity.
Location for the capacity resource
MMWEC asserts that the Waters River site is not large enough to install a battery system of adequate size. However, they could use any of several sites available to them, or they could use a distributed solution, whereby several aggregated sites could provide the needed capacity resource. Distributed solutions are accepted by ISO-NE.
Strategen net cost analysis
According to the Strategen report, A 60MW gas peaker has an annualized net cost of $7.29. A 4-hour battery storage providing 240MWh has an annualized net cost of $5.83. A 385MWh battery providing about 6 hours would have the same net cost as the gas peaker.
“MMWEC indicates that a longer [than a 4-hour] duration resource might be needed. Although this is not required for participation in the Forward Capacity or Forward Reserve Market and is not justified by the historical operations of other peaking units in the NEMA zone in 2019 and 2020, our analysis still indicates that under NREL's most aggressive cost projections a 385 MWh battery would result in the same net cost as the proposed peaker under the $85 million budget.”
“Given the advancements in the state of battery storage, it appears warranted to revisit the viability of this option in lieu of the proposed alternative. MMWEC could conduct an all-source RFP solicitation that clearly defines system needs and would be open to a variety of resources including (but not limited to), energy storage, solar plus storage including aggregated distributed resources, and demand response. This would allow for broad market participation to determine the most cost-effective mix of resources able to fulfill MMWEC's peak capacity and reliability needs, resulting in cost and emissions savings for the Commonwealth of Massachusetts. Our analysis shows that energy storage would result in benefits in cost, global and local emissions, noise levels, and environmental justice issues.”—Strategen pp10-12
I believe that it is in the public interest to halt project 2015A, a 60MW gas turbine generator. A comprehensive review of the public health, environmental, and climate impacts of a fossil fuel plant should be undertaken. Alternative methods for addressing capacity requirements must be considered and fairly evaluated. Mass Municipal Wholesale Electric Company (MMWEC) could develop a distributed battery storage system. MMWEC could invite a new, all sources proposal to find a comprehensive solution. In addition, Federal, state, and foundation sources may be tapped to provide support for demonstration and pilot programs to engage the community together with power plants to create a truly comprehensive energy system.
References and resources
The Editorial Board, Senate Democrats are weighing game-changing climate legislation — they must approve it: A bill steering utilities toward greener energy may be the single most important legislation Congress can approve to slow the advance of climate change. Boston Globe, August 24, 2021
Lazard, Levelized Cost Of Energy, Levelized Cost Of Storage, and Levelized Cost Of Hydrogen (LCOE 14.0), Oct 19, 2020
MMWEC, MMWEC Project 2015A—A Long Term Capacity Hedge: Order of Magnitude Comparison of Gas Turbine v Battery Delivering Substitute Capacity Cost.
Strategen Consulting, Assessment of Potential Energy Storage Alternatives for Project 2015A in Peabody, Massachusetts, Clean Energy Group, Massachusetts Climate Action Network, July, 2021
In finance, the net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications. Wikipedia. https://tinyurl.com/b8zaj25y
“[Levelized Cost of Energy (LCOE)] Measures lifetime costs divided by energy production •Calculates present value of the total cost of building and operating a power plant over an assumed lifetime. Expressed in real or nominal dollars on a megawatt-hour (MWh) or kilowatt-hour (kWh) basis.” US Department of Energy, Indian Office, Levelized Cost of Energy (LCOE) https://tinyurl.com/yt45v43b
Comparing costs for various energy sources
Based on market conditions expected to prevail in the upcoming auction, storage is expected to have a significantly lower net cost than other capacity resources, including simple cycle gas units. Offer Review Trigger Prices (ORTP) values reflect the low end of the competitive range of the offer price that commercial technologies can plausibly submit to the auction. Still, the values offer insights as to how the resources compare to each other in terms of net cost.—Strategen
Offer Review Trigger Prices for the Forward Capacity Auction; Generating Capacity Resources
Offer Review Trigger Price ($/kW-month)
Simple Cycle Combustion Turbine
Combined Cycle Gas Turbine
Energy Storage Device — Lithium Ion Battery
Note on sources
Data on the shares held by each of the 14 participating municipal light plants for power and sunk costs as well as projected costs of the total, provided by MCAN. Information about the customer base and share of sunk costs for average Peabody ratepayer based on statements by PMLP staff and Commissioners. The projected cost to the Peabody ratepayer in event of the project being a stranded asset has been computed according the the ratio of sunk costs to total investment, $9 million to $85 million, a factor of 9.4; now updated to correct an earlier error in computation.