The Waste Management Department in Riverside County, California (RCWMD) is developing up to six landfill gas-to-electricity projects on six different County-owned landfills. Although the usual method of controlling landfill gas emissions is collecting and burning the gas in flares, utilizing the gas instead to generate electricity yields both economic returns and environmental benefits. Due to recent utility industry restructuring and the resulting new renewable energy programs on the state level, LFG-to-electricity power plants in California are more economically feasible now than ever before. This paper describes the process the RCWMD is using to implement the projects and capture revenues. As electric utility restructuring continues to sweep the nation and similar renewables programs are established in other states, the lessons learned from these projects may be transferred to LFG-to-electricity projects throughout the country.
The RCWMD owns, operates, and maintains seven active landfills for County residents. To comply with the strict air emissions regulations in the South Coast Air Quality Management District in Southern California, the RCWMD currently flares the LFG generated at five other closed landfills and in the future will be required to do the same at some of the seven active sites. Although flaring LFG has been the most economical way to comply with the regulations in the past, the new electric utility restructuring laws and associated programs being implemented in California, coupled with federal tax benefits and other incentives, make LFG-fueled power plants more economically viable now than in the past. Therefore, the RCWMD is pursuing the development of LFG-to-electricity plants at the six landfills determined to be most suitable for such projects.
Utility Restructuring in California
In August 1996, the California State Legislature passed Assembly Bill 1890 (AB 1890). The bill restructured the state'
s electric utility industry by introducing competition into the generation and other aspects of electricity provision. Investor-owned utilities, which previously enjoyed a monopoly on electricity provision in their service territories, must now allow other energy service providers to compete for their customers. Other services related to electricity provision, including metering and billing, will also be competitively provided as a result of AB 1890. This restructuring was meant to both lower electricity rates and increase customer choices in the area of electricity use and services.
Prior to restructuring, customers in California received power from a mixture of generation sources. Approximately 11 percent of the power consumed in the state was supplied by renewable energy sources, such as small hydropower, solar, wind, and biomass. However, this renewable energy was mixed with the rest of the generation portfolio in the state, which includes coal and natural gas generation technologies. Barring installing their own generation facilities, such as solar panels, consumers had no choice but to accept the average generation mix for the state. With the onset of the new market structure, however, energy service providers are introducing new energy products, such as renewable power, to attract customers and capture market share. This renewable, or "green" power is usually sold at a premium above the market price for "brown" power. For generators of green power, which is traditionally more expensive to produce, this presents a new market opportunity to develop economically viable renewable energy projects.
While AB 1890 opened up various aspects of the market to competition, the state also made provisions to continue public support for energy efficiency, low-income assistance, public interest research and development, and renewable energy programs through at least March 2002. The California Energy Commission (CEC) was charged with the responsibility to distribute the $540 million of public funds allocated to supporting the continued production and use of electricity from renewable resources in the state. Thirty percent of the $540 million, or approximately $162 million, was distributed to new renewable electricity generation projects through a competitive process. Again, for developers of new renewable energy power plants, this represents a new opportunity to create a viable project.
Renewable Power Sales
In February 1999, the RCWMD issued a Request for Proposals (RFP) to potential power purchasers requesting price proposals for the power to be generated at the six projects. The RCWMD hoped to capitalize on the emerging renewable energy market and command a premium price for the department'
s renewable power. The response, however, was limited to one company, which proposed a price with no premium for its renewable characteristics. In July 1999, the RCWMD received authorization from the County Board of Supervisors to negotiate a power sales agreement with the respondent and other firms on a sole-source basis. That same month, the RCWMD staff conducted face-to-face meetings with two companies to discuss the details of a potential power sales agreement. Both companies are energy service providers authorized to sell power directly to retail customers in California.
There are two options for a power sales arrangement. In one option, the County agrees to purchase power to supply County facilities from one of these companies. In return, the company agrees to purchase renewable power from the RCWMD projects at a premium price that makes the projects viable.
The other option is for the RCWMD to sell the power to one of the companies at a fixed price, a price that fluctuates with the market, or a combination of the two. The RCWMD may also start out with a fixed price contract and renegotiate later for a floating price contract, or vice versa. A renewable power premium may or may not be included.
CEC Renewable Energy Incentives
In June 1998, the CEC conducted a competitive process to award $162 million of state funds to help support the establishment of new renewable energy projects. The RCWMD submitted an application to the CEC to obtain incentive payments for each of their six prospective LFG-to-electricity projects. Two of the RCWMD'
s proposed projects were awarded incentive payments of 1.47 cents per kilowatt-hour (kWh) generated and sold. The other four proposed projects were awarded payments of 1.48 cents/kWh. Each project that receives payments is expected come on-line before 2002 and is allowed to continue receiving payments for five years of generation. The County projects are approved to receive up to $3.98 million in incentive payments from the CEC.
In order to receive the payments, the RCWMD must complete certain milestones, begin operating its renewable power plants, and submit monthly invoices to the CEC documenting the sale of its generated power. One milestone is preparing a Project Award Package (PAP), which includes a detailed description of the project site, required permits, financial information, schedules, and a formal funding award agreement signed by the County and a CEC representative. Other milestones involve obtaining all required project permits and meeting various construction schedules.
Status: In March 1999, the RCWMD submitted the PAPs for the six projects. The CEC approved and adopted them shortly thereafter. In June 1999, the RCWMD completed the second milestone, which was filing all necessary environmental permits.
Section 29 Production Tax Credits
Other potential sources of revenues for the County projects exist. Section 29 of the United States Tax Code provides production tax credits (PTCs) for projects that utilize LFG for an economically beneficial purpose, such as to fuel a power plant. These credits are available to a taxpayer with an ownership interest in LFG production facilities, based on the sale of the gas to an unrelated party for the beneficial purpose. Gas production facilities include the gas field, gas wells, blowers, gas transport infrastructure, and associated assets. Depending on when the gas collection facilities were placed in service, PTCs are available through either 2002 or 2007. If portions of the collection facilities were financed through tax-exempt financing, the value of the available PTCs is reduced in proportion to the fraction that was financed in this manner. Furthermore, under current tax regulations, if the facilities were constructed after June 30, 1998, the project is not eligible to receive any PTCs. In 1998, these tax credits were worth approximately $1.073 per MMBtu; for these projects, equivalent to about 1.5 cents/kWh of generated power.
Because the County is not a taxpayer, it must enter into a transaction with a private investor in order for the eligible power projects to benefit from PTCs. The investor would purchase rights to the LFG and an ownership interest in the gas production facilities, and would then sell the collected gas to the County or its power generating agent and collect PTCs on the sale of the gas. The investor yields a percentage of the value of the PTCs to the County through a series of transactions, including the purchase of the gas production rights and purchase/lease of gas production facilities from the County. Some share of the value of the PTCs may also flow to the County if it operates and maintains the gas production facilities on behalf of the investor. Essentially, the yield to the County is the purchase price for gas production rights and facilities, plus operation and maintenance payments, minus the gas purchase payments made by the County. The funds are normally paid to the landfill owners (the County) over time as the credits are generated.
To explore the market for potential investors for the three projects that qualify for the tax credits, the County issued an RFP in February 1999 and received proposals from two companies in March 1999. Because negotiations are ongoing with the potential investors, specific responses cannot be released at the time of this writing. However, the net present value of the PTCs to the County is expected to be in the range of $1.5 to $2.0 million.
Status: In August 1999, the County conducted in-depth meetings with both proposers regarding their proposals. The County anticipates that it will select a finalist and begin the transactions near the end of 1999.
Renewable Energy Production Incentives
Renewable Energy Production Incentives (REPIs) are another potential source of revenue for the County. The U.S. Department of Energy (DOE) offers these REPIs as a subsidy for renewable energy projects owned by public-sector entities. Public agencies can apply for subsidies worth up to 1.5 cents/kWh (in 1993 dollars and adjusted for inflation) of power generated and sold. The subsidy can be requested for up to 10 years, although there is no guarantee that funding will be available from year to year. Congress must appropriate funds for the program each year, and the level of the subsidy depends on the annual appropriation as well as the amount of generation approved for payments annually.
Insufficient funds could result in some qualified projects receiving either no incentive payment or a prorated one. In the case where the appropriated funds are less than the amount required to make full payments to all qualified applicants, the funding is distributed according to tiers of renewable technologies. Payments are first provided to owners and operators of solar, wind, geothermal, and closed-loop biomass projects. The second tier includes all other qualified facilities, such as LFG-to-electricity projects. Because this revenue is uncertain, the County's feasibility analysis did not include reliance on this source.
Status: In order to begin the process, the County would submit a pre-application to DOE and obtain preliminary approval to receive REPIs for its projects.
Design, Construction, and Operation of the Plants
The last piece of the project economics is the cost of building and operating the actual power plants. In June 1999, the RCWMD released an RFP to select one or more companies to design, acquire construction permits for, construct, operate, and maintain the power facilities. In combination with the revenue sources, the submitted proposals will allow the department to evaluate the final economic viability of these LFG-to-electricity projects.
Status: Proposals are due in early September 1999, and the RCWMD anticipates bringing a final contract to its Board in November 1999.
A combination of strict environmental regulations, federal incentives, state subsidies, and new market forces have made the development of these LFG-to-electricity plants more economically feasible than ever before. By November 1999, the RCWMD plans to have all of the significant technical and economic factors fully defined to allow an implementation decision on each project. With positive results from these current activities, one or more power plants could be operational in less than 12 months.
ŚMichael D. Brown, Robert A. Nelson, Annette C. Guy