City may buy 40-megawatt plant

Gillette is moving toward buying a natural gas-fired unit that will provide 40-megawatts of power on demand.
The city may buy the 10-year-old natural gas combustion turbine II at Wyodak for $22 million. If it follows through with the plan, it will be the second power plant that the city owns at the Wyodak complex. It also owns 23 percent of WyGen III, which supplies most of the city’s power.
But when the demand for power surges, as it does during peak air conditioning months, the city buys supplemental power from the Municipal Energy Agency of Nebraska. It is a consortium that buys power from different providers and sells it. The city’s contract with MEAN is up for renewal in 2014.
Black Hills Power approached the city with the option of buying the combustion turbine because of its partnership with the city through WyGen III. City officials determined that it was a win-win situation.
“When we save money, they earn money,” explained City Administrator Carter Napier.
It’s basically a built-in incentive for Black Hills to find energy that is cheaper for Gillette than it would be for Gillette to turn on the turbine. When the machine is turned on, the city gets all the savings, but when it’s off, Black Hills gains as well, Napier said.
“They get a little piece of that savings pie that ordinarily they would not,” Napier said. “The model automatically encourages them to make us the benefactors.”
If the city were to stay with MEAN, then in 20 years it could expect to pay about $71 for a megawatt hour. If it buys the turbine, in the worst-case scenario the city would only pay about $64 per megawatt hour.
That means that in the absolute worst-case scenario, the city still would save $43 million after 20 years if it were to buy the turbine. In a more probable scenario, the city could expect to save $83 million over 20 years, Napier said.
The purchase also could allow the city to buy cheaper energy on the market.
“Because we would be an owner of this turbine, we would have the option of purchasing economy energy,” Napier said.
The city now cannot buy economy energy — which is cheaper — because it doesn’t have the ability to produce supplemental energy, explained Mark Lux, vice president and general manager of Black Hills Corp.
Electric energy can’t be stored anywhere economically, Lux said.
So a buyer of economy energy must have the capability to back up that purchase in the event that the line feeding that purchase cuts off. If the buyer doesn’t have that capability, then it would have to buy firm energy, which is more expensive but guarantees that the energy will be there. Having the combustion turbine, which can ignite and go from zero to 40 megawatts in 10 minutes, would give the city this capability, he added.
“This is a turn-key or on-demand system where we really only use it when we need to. We use it when we realize that turning the system on is the best cost alternative to us that the market can’t beat,” Napier said.
“When you’re a part of the market, you’re not at the mercy of the market,” Councilman Robin Kuntz said.
Whatever it costs to run the turbine, that’s what would be Gillette’s cost for energy. If it’s less, then the city will turn off the turbine and buy from the market. Black Hills Power would monitor the market and look for those cheaper rates because it would be in the company’s best interest.
But it’s a benefit to Black Hills, too.
Black Hills Corp. believes that the long-term services that it would provide to the city, as well as the sale of the asset that it would provide to Black Hills shareholders, is a good deal, Lux said.
“We’re spending the money anyway. We’d be spending a lot more of it if we don’t go this route,” Councilman John Opseth said.
Black Hills would be taking care of the maintenance and would be watching the market, Councilman Everett Boss said.
“It’s a win-win for us,” he said.
Diversification from coal-fired generation is a good thing, too, and it’s something that the city already does through its contract with MEAN, Napier said.
“The true diversification that this particular option provides is that we aren’t dependent necessarily upon one resource to provide power locally,” he added.
The power of ownership
It also would put the city in charge of its own destiny.
The problem with the city’s current arrangement with MEAN is that its rates are projected to continue to increase and the city has little input with regard to those increases, Napier said.
“Input is critical,” Napier said. “Our input now is limited.”
The city’s lack of input comes back to the fact that Gillette is one of the few MEAN customers that buys only supplemental power. Those customers that buy base-load and supplemental power have more say in the rate hikes, said Utilities Director Kendall Glover.
“MEAN has done everything they can because they value our relationship. They’re not shoving us out the door,” Glover said.
The company is just trying to make ends meet, he added. It has the right to hike its rates by 15 percent each year until the contract is up in 2014, but it has never done that, Glover said.
Napier doesn’t think that it will do that either.
“MEAN isn’t going to want to kill us for the next two years because there’s a natural incentive for them to want to be able to provide our peaking needs as we grow from now until beyond 2014,” Napier said.
A bond
If the city buys the turbine, the agreement would be tacked onto the city’s existing agreement with Black Hills Power that was formed when it bought a partial ownership in WyGen III. That partnership and bond agreement is through a joint powers board for capital facilities.
The value of the joint powers board is that the $22 million bond that the city would need to buy the turbine wouldn’t count against the city as debt because the holder of that debt would actually be the joint powers board, Napier said.
“Technically, it’s not debt to the city. Practically, however, it is debt to the city because we will service that debt despite whose hands it lies in,” Napier said.
The combustion turbines tend to have a lifespan of 30 to 40 years, potentially more. Because Black Hills rebuilt part of it last year, the turbine should be good for another 15,000 to 20,000 hours — roughly eight to 10 years if it’s used at a 30 percent capacity, Lux said.
Once it does need a tuneup, the city can send it to a factory for the rebuild at a cost of $1.5 million to$3 million.
“Just like an automobile engine, you can rebuild it and just keep running this thing,” Lux said.
If the city were to buy a brand new unit, it would cost about $50 million, Lux said.
“WyGen III is a winning solution for base power. We think that the combustion turbine options available through supplemental power will be similar,” Napier said.

What’s next

Tuesday night, the City Council will consider a letter of intent with Black Hills Corp. for the sale of the turbine. If the plans go forward, the bond likely would be financed over a 15-year period at a 5 percent rate.