AGENDA MEMORANDUM

 

Meeting Date:           March 23, 2009

 

From:                          Paul Kalv, Electric Director

 

Subject:                      Resolution authorizing an agreement with Power Secure for the purchase of interactive generator transfer switches and associated services.

 

 

Staff Recommendation:

Staff recommends approval of the resolution authorizing an agreement with Power Secure for a total amount of $1,652,880.00.  This purchase will provide equipment and services for eight city-owned generators.

 

Analysis:

Executive Summary

Retrofitting eight existing City owned emergency generators to accommodate operation during hours of peak demand each month provides the opportunity to reduce power supply costs by more than $13 million during the next ten years.  With operating costs during the period of $3 million, the net power supply savings would be more than $10 million.  The cost to retrofit the throw-over switches at these eight locations is $1,652,880 with a payback of 25 months.

 

Introduction

In response to high and increasing power supply costs in general and monthly power supply demand costs in particular, staff has evaluated potential actions to reduce our monthly Peak Demand and thereby reduce our monthly power supply expense.  The City has two available options to reduce Peak Demand.  One option is to garner support from electric customers to reduce their power use during time periods each month that demands are high and the other option is to “exercise” (operate) existing City owned emergency generators during those times.

 

We currently exercise our emergency generators each week to ensure their availability when needed in the event of loss of commercial power.  While the periodic operation of emergency generators is important, the operation is an expense and provides no additional benefit.

 

Our long-term objective should remain to educate our customers and gain support to reduce electric use during high demand periods.  At the present time, however, results cannot be assured given the current level of consumer understanding, the utility’s limited ability to communicate the need, and the inability to control consumer equipment use, even if we had the permissions to do so.

 


What we do have within our immediate control is the operation of our existing emergency generators.  Further, given the potential willingness of other large power users with existing emergency generators to join us, this action can be easily expanded to provide greater cost savings to the City and the participating generator operators.

 

Staff observations and recommendations are summarized in this report for your consideration.  Staff has also prepared a spreadsheet model for use in evaluating the effects of projected changes in our power supply rates during the next 10 years.

 

Our need to control Peak Demand and Energy use does not end with this recommendation.  If the electric utility is to be successful in meeting the needs of our customers for safe, reliable and competitively priced electric service, we will need to engage, educate, and inform all customers in the most effective ways and times to reduce electric use and provide the real-time information and tools to trigger those actions.  The business case for these future actions will be updated during the next several months when staff will present the Advanced Metering Infrastructure (Smart Meter) Feasibility Study that the Commission authorized during July 2008.

 

Background

Recent changes to our FMPA power supply rates have resulted in significantly increased power supply expenses that adversely affect both our retail electric rates and the utility operating expenses of City departments.

 

The FMPA wholesale rate structure, on which power supplied to the City is billed, consists of three components.  Those components include a fixed Customer Charge and a rate for Energy, Capacity (Generation), and Transmission (Delivery to Leesburg) that are adjusted each month based on FMPA’s actual expenses.  The Customer charge is $750.00 per month for each of the City’s five (5) delivery points (substations.)   The Energy charge is based on the total Energy (kilo-watt-hours, kWh) delivered to the City by FMPA.  The City also receives a fixed amount of Energy each month based on the output from the St. Lucie and Crystal River 3 nuclear power plants, so the energy provided by FMPA is the energy delivered over and above the energy from our share of the two nuclear plant outputs.

 

The Demand charge is based on the total Energy delivered to Leesburg each month during the one hour in the month of highest energy delivery to the Florida Municipal Power Pool (FMPP.)  This is called the “Coincident Peak” because it is the Energy delivered to Leesburg during the hour that is Coincident with the FMPP Peak.  The FMPP members consist of Orlando Utilities Commission, Lakeland Electric Utility, and the FMPA All Requirements Project (ARP) of which the City of Leesburg is a participant.  Because of our geographic location, the Leesburg peak usage hour (Peak Demand) is almost always the same hour as the FMPP Peak.  The Peak Hour during the summer months is almost always hour ending 4:00pm or hour ending 5:00pm on the hottest day and during the winter months is almost always hour ending 8:00am on the coldest day.

 

The Demand charge has two components.  The greater component is the Capacity charge for the FMPA power plants and the lesser component is the Transmission charge for delivery of the power to Leesburg.  The Capacity charge is in the range of $15.25 per kWd and the Transmission charge is in the range of $2.20 per kWd for a total Demand charge of $17.45 per kWd each month.

 

To illustrate the impact of energy used during the one Peak Hour vs. energy use during the other of the 719 hours in a 30 day month we will compare the costs of 1 kWh.  Ten 100watt light bulbs burning for 1 hour will draw 1 kWh.  The cost to the City of that 1 kWh during the Peak Hour includes the Demand and Energy charge and the 1 kWh used during any hour other than the Peak Hour consists of the Energy charge only.  The difference in cost is dramatic:

 

                                                                                  Demand       Energy        Total Cost

                        1 kWh used during the Peak Hour      $18.27  +  $0.05537  =  $18.32537

                        1 kWh used during any other Hour     $  0.00  +  $0.05537  =  $  0.05537

 

Energy used during the Peak Hour costs 330 times the cost of any other time during the month.  While  we would not suggest that everyone totally stop using electricity during that one Peak Hour, turning off as much as possible results in tremendous savings and those savings are available every month.

 

The Value of Demand Reduction will be Rising

During recent years the Energy, Capacity, and Transmission charges have increased at a more rapid rate than originally projected by FMPA.  New preliminary forecasts recently provided to FMPA by R. W. Beck project an even more rapid rate of increase.  While the forecast is preliminary and subject to change, future FMPA Demand (Capacity and Transmission) and Energy rates recently provided by R. W. Beck are:

 

 

FMPA Projected Costs

Year

Demand ($/kW)

 

Energy ($/kWh)

2009

$17.46

 

$0.04761

2010

$18.27

 

$0.05537

2011

$19.82

 

$0.06161

2012

$21.23

 

$0.06669

2013

$21.54

 

$0.07004

2014

$21.69

 

$0.07466

2015

$22.06

 

$0.07696

2016

$22.76

 

$0.07664

2017

$23.25

 

$0.07880

2018

$24.74

 

$0.07869

2019

$25.26

 

$0.07952

2020

$26.35

 

$0.07742

2021

$27.04

 

$0.08095

2022

$26.85

 

$0.08275

2023

$27.14

 

$0.08675

2024

$27.25

 

$0.09070

2025

$27.15

 

$0.09521

2026

$27.49

 

$0.09762

2027

$28.18

 

$0.10416

 

The value of all energy conservation measures will also be increasing over time and conservation will be addressed in future recommendations, but Energy is not the subject of this recommendation.  The high demand charge provides the City an opportunity to reduce its monthly power costs by reducing the peak demand each month.  Peak Demand reduction can be achieved by reducing the energy being consumed during the peak hour, generally referred to as “demand side management” (DSM), or by adding generating capacity to operate during the peak periods, generally referred to as “demand response” (DR.)  Under the terms of the ARP contract, Leesburg cannot install generators for the purpose of supplying load but we do have the flexibility to exercise our existing emergency generators as we deem most appropriate.

 

Feasibility Study Evaluation

 

The City has existing emergency generators located at the MOC, Canal Street WWT (2), WWT Turnpike, Police, City Hall, and Water Department.  An additional generator is available, though not connected at Public Works for a total of eight.  Staff is also evaluating the feasibility of adding a new generator for the Library as part of a separate analysis.

 

The purpose of this study was to evaluate whether the City should attempt to modify existing emergency generation capacity and exercise those generators during hours that their operation may also provide cost savings.  This study was performed at a high level and on a short schedule because the project would need to be started immediately in order to be operational by the beginning of the 1010 Fiscal Year.

 

The evaluation methodology compared the estimated savings from reduced power costs to the additional costs associated with modifying and operating the existing generators.  Some of the basic assumptions and methodologies used in the evaluation are summarized as follows:

 

 

Financing Considerations

 

The City has received a proposal with two financing options.  One option is for the City to purchase the retrofit equipment. Under this option, the City could contract for annual switchgear maintenance, remote monitoring and dispatch service, or staff could perform those responsibilities at the option of the City.

 

The other option is similar to a lease where the City would make monthly payments based on the installed capacity without an initial cash outlay and the vendor would perform all services on the switchgear.

 

Staff prepared Income and Cash Flow Statements for both options using the assumptions and methodologies above.  Both options provide net savings during the first year.  For the purchase option, the payback is approximately 25 months.  Both options produce the same avoided power supply expenses over the 10-year study period.  On the expense side, both options assume the same fuel expense.  The differences between the two options are found in the other operating expenses and the future cost to acquire the switchgear assets at the end of the 10-year lease.

 


A summary of the consolidated 10-year Income Statement totals for each option is provided in Table A below.

TABLE A

 

Avoided Power Supply Expense

 

Purchase Option

 

Lease Option

 

 

 

 

 

Avoided Demand Purchases

 

$13,092,184

 

$13,092,184

Avoided Energy Purchases

 

$426,643

 

$426,643

POWER SUPPLY SAVINGS

 

$13,518,827

 

$13,518,827

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

   Fuel

 

$1,104,007

 

$1,104,007

   Switch Maintenance

 

$217,603

 

 

   Depreciation

 

$826,440

 

 

   Loan Interest

 

$450,883

 

 

   Remote Monitoring & Dispatch

 

$334,773

 

$3,756,222

   5 Year Extended Warranty

 

$61,200

 

 

   Insurance

 

$189,484

 

   

OPERATING COSTS

 

$3,184,390

 

$4,860,229

 

 

 

 

 

NET OPERATING SAVINGS

 

$10,334,437

 

$8,658,598

 

 

 

 

 

Future Acquisition Cost

 

$0

 

$1,239,660

 

 

 

 

 

NET INCOME - Year 10

 

$10,334,437

 

$7,418,938

 

The detail evaluation for the Purchase Case is provided as Exhibit “A” and the detail evaluation for the Lease Case is provided as Exhibit “B.”

 

A summary of the cumulative 10-year Cash Flow Proforma for each option is provided in Table B below.

TABLE B

 

Cumulative Cash Flow Proforma

 

Purchase Option

 

Lease Option

 

 

 

 

 

Net Income – Depreciation Excluded

 

$11,160,877

 

 

Less Loan Principal

 

$1,652,880

 

 

NET CASH FLOW

 

$9,507,997

 

$8,658,598

 

 

 

 

 

Future Acquisition Cost

 

$0

 

$1,239,660

 

 

 

 

 

CASH FLOW - Year 10

 

$9,507,997

 

$7,418,938

The detail Cash Flow Proforma for each option is provided as Exhibit “C.

 

Results of the Evaluation

 

Based on the evaluation methodology and the assumptions used, modification of the existing emergency generators provides a positive cash flow for the City during the first year and beyond.  The purchase option provides full cost recovery in 25 months.  The purchase option also provides $3 million more net income than is provided by the lease option.

 

The purchase option is also attractive because, while we may want to contract for Remote Monitoring and Dispatch for the first year or so, we would more likely assume this function in our SCADA operation saving an additional $300,000 during the 10 years.

 

Observations and Recommendations

Staff recommends the Commission:

 

The City should consider accepting the proposal from Power Secure to retrofit existing emergency generators.  There are several tangible and intangible benefits of this strategy.  Economically, this option has a payback of just over two years and positive cash flow starting in the first year.  Also, this option requires a relatively small investment of funds compared to the annual power supply expense.  While maximum peak shaving benefits would not be attained by these small units, there is very little risk that the cost of this alternative would exceed the actual benefits realized.

 

This initiative will also send a message to the public that the City is taking positive steps to reduce power costs now and in the future.  City Hall and the Water Plant use the City gas supply, MOC uses propane, and the other generators use diesel fuel.

 

The successful dispatch of emergency generators to reduce the peak requires the use of certain forecasting systems and procedures to ensure the units are operating at the most beneficial times without operating for excessive lengths of time.  The expertise gained with the small diesel units would be applicable to the operation of a larger DSM initiative, in effect reducing the risks associated with a larger investment in the future should an attractive option become available to the City.

 

The high demand charge, with a comparatively low energy rate, provides the City with the most opportunity to lower total power costs through peak shaving generation and DSM.  This scenario also mitigates the greater risk of higher power costs resulting from higher than expected peak demands due to weather or other factors.

 

Future Actions

On balance, the City should embrace the high demand charge because of a potentially large “untapped” capacity for peak demand reduction.  For most of the City’s recent history, there has been no action to reduce demands.  Therefore, many of the successful programs already in place at other utilities could tap “low hanging fruit” benefits if deployed by the City, such as:

 

 

These future action programs were not evaluated as part of this study but should be considered by the City along with other peak shaving proposals that may be evaluated in a manner similar to the one set forth in this recommendation.

 

Funding Source

I recommend the funding of $1,652,880.00 come from the College Drive to Radio Road Hwy 441 Electric Capital Budget.  There is $1,740,000 of bond proceeds available in that project.  A separate  item will placed onto the next agenda to reallocate the 2007 Capital Improvement Bond projects.  The generator project will reimburse the 5% interest we are paying on the bond issue.

 

We will accrue $700,000 from the power supply cost savings during the first year and another $880,000 during the second year, so significant funds will be available for the Hwy 441 project by the fall of 2010.  This is a good use of the money because we are not going to be working on the Hwy 441 project in the near future.

 

 

Options:

1.  Approve the resolution authorizing the agreement with Power Secure for the purchase of the

     equipment and services; or

2.  Such alternative action as the Commission may deem appropriate

 

Fiscal Impact

The direct fiscal impact for this agreement will be upfront costs of $1,652,880.00 for the equipment purchase.  In addition, there will be another $35,000.00 in funding necessary to install the existing generator at the Public Works site; this will also be funded from the Electric Capital Budget 2007 Capital Improvement Bond. The estimated payback on these expenses is approximately 25 months.  The purpose of this project is to provide additional savings to our electric utility and customers by reducing the peak demand by our electric utility as a whole.  A reduction in peak demand will provide a lower power purchase cost. 

 

Submission Date and Time:    3/19/2009 11:43 AM____

 

Department: _Electric Department_______

Prepared by:  _Mike Thornton___________                     

Attachments:         Yes__X__   No ______

Advertised:   ____Not Required __X___                     

Dates:   __________________________                     

Attorney Review :       Yes_X_  No ____

                                                

_________________________________           

Revised 6/10/04

 

Reviewed by: Dept. Head ________

 

Finance  Dept. __________JB______                                     

                              

Deputy C.M. ___________________                                                                         

Submitted by:

City Manager ___________________

 

Account No. _041-1099-531-xxxx__

 

Project No. ___________________

 

WF No. ______________________

 

Budget  ______________________

 

Available _____________________


 

 

 

RESOLUTION NO._______________

 

A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF LEESBURG AUTHORIZING THE MAYOR AND CITY CLERK TO EXECUTE AN AGREEMENT WITH POWER SECURE FOR THE PURCHASE OF INTERACTIVE GENERATOR TRANSFER SWITCHES AND IMPLEMENTATION; AND PROVIDING AN EFFECTIVE DATE.

 

BE IT RESOLVED BY THE CITY COMMISSION OF THE CITY OF LEESBURG, FLORIDA:

 

            THAT the Mayor and City Clerk are hereby authorized to execute an agreement  with POWER SECURE whose address is 1609 Heritage Commerce Court, Wake Forest, North Carolina 27587 for the purchase of generator transfer switches and associated services pursuant to vendor proposal dated March 3, 2009.

 

THAT said generator transfer switches and associated services pursuant to vendor proposal dated March 3, 2009 is part of the City of Leesburg Electric System.

 

             THAT this resolution shall become effective immediately.

 

PASSED AND ADOPTED by the City Commission of the City of Leesburg, Florida, at a regular meeting held the _23rd_ day of _March__ 2009

 

 

 

                                                                            __________________________

                                                                             Mayor

 

ATTEST:

 

 

__________________________

City Clerk