State: Watana would need subsidy to be affordable

Posted: Monday, April 18, 2011

A large state subsidy will be needed to make hydroelectric power from a proposed Watana dam project affordable for consumers in Southcentral Alaska, state officials told an Anchorage municipal energy advisory group April 7.

Without significant state financial help, Watana's cost of power would be over 10 cents per kilowatt hour, Bryan Carey, the Alaska Energy Authority's manager for the project told the Mayor's Energy Task Force.

In comparison, Chugach Electric Association's average cost of generating power using natural gas and some hydro is about 6 cents per kilowatt hour, Chugach has said.

"This project will not move forward without significant state participation," Carey said. With a state cash infusion the cost of power from Watana could be reduced to the 6 cents per kilowatt hour, he said.

State legislators have included funding to begin work toward an application for a Federal Energy Regulatory Commission license for Watana, which would be located on the upper Susitna River north of Anchorage. The dam is expected to cost about $5 billion, Carey told the mayor's task force.

The project envisioned now is sharply scaled down from a large two-dam Susitna project planned in the 1980s but abandoned.

If it is built, the new Watana dam would supply the Interior-Southcentral Railbelt power grid with about half of its requirements, but it will take at least 11 years to obtain permits and build the project, Carey said.

In financing Watana AEA executive director Sara Fisher-Goad told the task force the utilities and the state could follow the example of financing for the Bradley Lake hydro project that was done in the 1980s.

With Bradley Lake, a 120-megawatt dam near Homer, on the Kenai Peninsula, the state paid half of the $357 million capital cost and five Railbelt utilities signed on to pay for the other half through bonds, Fisher-Goad said.

Watana would be much larger, with a capacity of 600 megawatts.

Currently, the energy authority can't build and own projects, but legislators in Juneau were expected to approve a bill that would expand the authority of the AEA to do this. The authority now essentially administers state energy programs.

Lawmakers also were expected to approve a $65 million state capital appropriation to pay for initial work needed to an application to the Federal Energy Regulatory Commission for the project.

Carey told the task force that it is important that preliminary work get under way this year for an application for a FERC license. That process will take several years and getting started now in important in meeting a goal to have the dam producing power by 2022, he said.

Anchorage Mayor Dan Sullivan, who sat in on the task force meeting, asked how much work AEA has done on the economic feasibility of the project. Carey said a financial analyst is now working on revising previous estimates.

Previously, capital costs have been estimated at $4.8 billion. However, the use of a "roller compacted concrete," a new construction method, could reduce this cost by about $1 billion, Carey told the task force.

At the same task force meeting an independent consulting economist, Mark Foster, questioned some of the underlying assumptions the energy authority made in recommending a Susitna dam to the governor and the Legislature.

Fundamentally, the project should be considered without an expectation of a state subsidy. Viewed in that light, and using a $4.8 billion construction cost estimate, the cost of the electricity generated works out to be about $13 per million British thermal units (Btus), compared to a long-range price for natural gas of $8 to $9 per million Btus that was used in the utilities' Railbelt Integrated Resource Plan developed with the AEA.

Foster also questioned how realistic the $4.8 billion construction cost estimate will be. For example, costs of dealing with long-term environmental impacts are likely to be more than the assumptions used by AEA in its decision to support a Susitna dam, he said.

Capital costs might be at least 40 percent more, he said in a paper he made available to the task force.

Roller compacted concrete appears to be promising as a way to reduce costs, but whether the technology will work in cold climate needs to be carefully weighed, he said in the paper.

A major concern is that a subsidized Susitna project might discourage new natural gas exploration and development, Foster told the task force. The regional utility market is already small for the companies exploring for gas.

If Susitna were to reduce the market by taking out half of the electric utilities' demand for gas for power generation it could put a damper on exploration, Foster said.

Members of the mayor's task force raised some critical concerns over the Watana plan.

Judy Brady, a former state natural resources commissioner, said she is concerned that the state is moving forward on several major energy projects that could involve substantial public investments without a clear and comprehensive plan.

Mary Ann Pease, another task force member who is a consultant on energy projects, asked about the utilities' existing investments in natural gas-fired power generation and whether this would be "stranded" if the utilities signed on to buy Watana power.

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