Monday, April 29, 2013

Between a Rock and a Hard Place* – Wood-Fired Electricity in New Hampshire – Part 3

In my post, It Don't Come Easy, we took a look at the revenue side of the wood-fired electricity business in New Hampshire and we determined that later this year the biomass plants could be earning about $100/MWh for the electricity they produce. Half of this amount will come from selling electricity into the wholesale markets in New England and the other half will come from the sale of renewable energy credits, RECs. Their revenue stream is very much dependent on the high prices which presently exist in the REC market, but I expressed some concerns that the flood of RECs coming from the Berlin plant could have a downward impact on REC pricing. As a reader of this blog, Bob Baker, pointed out to me just this past week, there is another dark cloud looming on the horizon. Within New England, the REC market is an interstate one, and in Connecticut the local utilities purchase a lot of out-of-state RECs in order to meet their renewable energy quotas and avoid the fines levied through the alternative compliance payments. It has been reported that in 2010 that 76% (!) of the Class 1 series of Connecticut RECs have come from wood-fired plants in New Hampshire and Maine. 
One of the fundamental principles of economics is that of unintended consequences. This economic principle states that the actions of individuals, organizations and governments often have unintended and unexpected consequences. The REC program in Connecticut is a very good example of the unintended consequences of a well-meant program to support renewable energy in Connecticut that has ended up providing support for older, out-of-state renewable energy operations. Utility regulators in Connecticut are naturally grumpy that they are not helping newer Connecticut renewable energy companies, the price of renewable electricity is high (due to high REC prices) and they are supporting wood-fired plants in New Hampshire and Maine that were already in place before the establishment of the REC program. As a result, they are now looking to modify their renewable energy incentive programs in ways that would, in essence, exclude the older out-of-state wood plants. This would leave the NH wood-fired power plants looking at substantially smaller and less attractive markets for their RECs and as a result REC prices could plummet. 
We have spent quite a bit of time looking at the revenue side of the wood-fired electricity business and it is time we got down to looking at the cost side. An enterprise in the commodity business is termed a price taking business. Price takers, selling an undifferentiated product, such as electricity, accept the prevailing price the market offers. They are not a company like Apple which sells a unique product and who can, for the most part, set the price for that product. Price taking businesses can be very successful, but they require a laser-like focus on costs and, in the case of wood-fired power plants, the costs for producing electricity are considerable. Let's take a closer look. 
Woodchips are presently selling for about $30/ton and, based on Energy Information Agency (EIA) data for biomass plants in NH, it appears to take about 1.7 tons of woodchips to generate one megawatt hour of electricity. This is a lot of wood and is a result of the low energy content of green woodchips, which contain as much as 50% moisture, as well as the low conversion efficiencies of these operations, which I noted in a previous post was only about 23%. 

Using 1.7 tons of woodchips at $30/ton, means that the fuel cost alone is $51 per megawatt hour of produced electricity. The other costs these plants face include labor, operating and maintenance costs other than fuel, depreciation and financing costs. My very rough estimate of their cost structure per MWh of produced electricity is shown in the table below.

I might be high on the depreciation and finance costs but my estimate is that their costs are of the order of $80 to $90 per MWh. If they are earning $100/MWh from a combination of electricity and REC sales, this means that these operations are earning a profit of $10 to $20/MWh at this time. It is important to note that my estimates are based on my research, engineering judgment and business experience and are, at best, rough approximations. The actual financial information for these wood-fired operations is confidential and correctly so. However, if better information is publically available I would be interested in learning about it.
This cost structure does indicate that these plants are not viable based on just selling electricity at $50/MWh. They unquestionably need the RECs to remain in business, and moreover, they need attractive REC pricing. Anything below $30 to $40/MWh for REC pricing could lead to unprofitability and could be hugely damaging.
However, the high dependence of their costs on woodchips is cause for concern. Even a relatively limited increase of $6/ton in woodchip prices at 1.7 tons/MWh leads to a cost increase of $10/MWh which gets close to putting these plants underwater, profit-wise. Therefore, wood plant operators worry a lot about woodchip prices and their escalation. Here they have two major concerns. The first is that woodchip prices are highly dependent on diesel fuel costs. As noted in Songs from the Wood, wood harvesting, chipping and transportation involves a lot of high powered machinery and is therefore fossil-fuel intensive and woodchip prices, in large part, reflect prevailing diesel fuel prices. This is demonstrated in the chart below which shows there is a strong long-term correlation between diesel costs and woodchip prices. As the diesel price, plotted in blue, increases, the woodchip price, plotted in red, follows and rises accordingly. In the long term diesel prices are bound to increase and so we can expect to see woodchip prices increase as well.

The other woodchip price concern the existing wood-fired plants face is the startup of the large Berlin biomass plant later this year. As noted in Knock on Wood, this plant is a behemoth and it will increase woodchip consumption in the State by almost 50%. This increase in demand is bound to put upward pressure on woodchip prices. The price increase will be somewhat moderated by trucking in woodchips from out-of-state sources but I suspect that the pending Berlin plant start-up is cause for concern at the smaller wood-fired operations. The wood-fired power plants are faced with a challenging future and they are likely to find themselves squeezed between falling revenues and rising fuel costs.
So what could they do? Here are some options for consideration:
  1. Lobby aggressively for the expansion of renewable energy programs that favor wood-fired energy and that would support high REC prices or even seek some other form of outright subsidy. Without significant subsidies, through RECs or other means, wood-fired power plants are likely to reach the point of unprofitability.
  2. Figure out a way to use that 67% of waste heat and consider the implementation of district heating programs in the vicinities of the plants. The challenge is that these plants are in rural communities and getting the waste heat to local communities in the form of hot water will require long and very expensive pipe runs. Perhaps projects like low income housing, trailer parks, nursing homes, industrial parks, or heat intensive industries could be considered for development nearby these power plants so that the waste heat could be harvested and used.
  3. Consider the investment in new technology to improve conversion efficiencies but it must be understood that these investments would be in the tens to hundreds of millions of dollars with long, long payback periods. These investments could include installation of unit operations to pre-dry woodchips using the waste heat or even entirely new technologies that involve the gasification of wood to produce a combustible gas that could then be fired in combined cycle gas turbine units. However, according to the EIA, these newer wood-fired technologies would cost of the order of 4 to 8 times that of an equivalent natural gas-fired electricity operation. Energy companies would be hard pressed to make this investment in renewable energy unless they were assured of a higher price for electricity through a favorable power purchase agreement or subsidy.  
Many of these ideas are a stretch but, in the meantime, I am sure legislative developments in Connecticut as well as the low costs of electricity, created by low natural gas prices, are keeping the owners and managers of these wood-fired power plants awake at night. Perhaps expanding renewable energy subsidies to support home grown and produced NH energy is not necessarily a bad idea, however, we do need to think through the unintended consequences of these subsidies beforehand, rather than after the fact like the folks in Connecticut. I am concerned that without substantial subsidies, through RECs or other means, our smaller wood-fired power plants will find themselves being squeezed between lower revenues and higher costs – the proverbial rock and hard place* with nowhere to turn.

Many folks believe that subsidies are the wrong way to go and that renewable energy plants need to compete in an open competitive energy market alongside fossil fuel operations. I do not agree with that approach and I believe we need to support renewable energy through subsidies even if it means paying more for the fossil fuel based energy we presently use. There are even some that say renewable energy subsidies are OK but that wood-fired electricity should not be subsidized because it is a "dirty" form of renewable energy owing to the fossil fuel used in harvesting, transporting and chipping the wood. Again, I don't agree because the reality is that every type of renewable energy is "dirty" in one form or another. When it comes to energy, there is no free lunch. There is an environmental and social impact associated with every form of energy utilization, renewable or not. What we need to do as a society is decide which of those impacts we are willing to live with and to make decisions about subsidies that will provide good options for future generations instead of leaving them with depleted oil wells, piles of poorly stored nuclear waste and exhausted coal mines. We need to think long term and not just about our children. We need to think about our children's great grandchildren. Making good decisions today that will give future generations viable energy options is an enormous responsibility and not one we can push off anymore.
Until next week, remember to turn off the lights when you leave the room.
Mike Mooiman
Franklin Pierce University

(*Rock and a Hard Place is a great rock and roll tune by the Rolling Stones from their Steel Wheels album which came out in 1989 after the rift between Mick Jagger and Keith Richards was repaired. To my mind this was the last decent album the Stones put out, but it pales in comparison to Sticky Fingers, my personal favorite. However debating the best Stones album would be worthy of a blog by itself.)

1 comment:

  1. Thanks for your interesting discussion this week regarding wood fueled energy. In my view the greatest insight was the concern regarding revenue generation and cost structure issues. It is assumed that because you have such a resource at your doorstep (wood) the cost per MWh would be a substantial and distinctive feature, however it is clear this is not necessarily the case.



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