Lockport Union-Sun & Journal
December 19, 2006 05:36 pm
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December 19, 2006
MEMORANDUM TO THE TRUSTEES
FROM THE PRESIDENT and CHIEF EXECUTIVE OFFICER
SUBJECT: Conditional Award of Contract and Authorization to Negotiate a Strategic Alliance with NRG Energy, Inc. Regarding Proposed Advanced Clean Coal Power Plant Facility
SUMMARY
The Trustees are requested to authorize a conditional award of a contract and the negotiation of a Strategic Alliance with NRG Energy, Inc. (“NRG”), the highest evaluated bidder in the Authority’s “Request for Proposals for Long-Term Supply of Advanced Clean Coal Power Plant Capacity and Energy and Other Products” issued on September 1, 2006 (“RFP”). NRG submitted a bid to construct an Integrated Coal Gasification Combined Cycle (“IGCC”) plant at the site of its existing Huntley Station in Tonawanda, NY. NRG’s proposal was the most favorable bid submitted, but staff determined that the price of NRG’s proposal was too high to be workably competitive for NYPA, given the current market environment. By establishing the recommended Strategic Alliance with NRG, the parties can together pursue additional support that may be available through tax credits and/or other funding sources. If negotiating this Strategic Alliance is approved by the Trustees, the parties would work together to find an approach that would close the financial gap between the current proposal by NRG and a project that offers a purchase price more commercially acceptable to NYPA. As discussed more fully below, this Strategic Alliance will be subject to certain time and spending limitations.
If the Strategic Alliance is successful, the price to NYPA can be brought to a level more in accord with the Authority’s mission, and upon the satisfaction of the regulatory conditions precedent required for the Authority to enter into a written power purchase agreement with NRG (such as those required by the State Environmental Quality Review Act (“SEQRA”)), the Trustees will be requested to authorize entering into negotiations with NRG for the execution of a long-term supply agreement.
BACKGROUND
In his 2006 “State of the State” address, Governor Pataki outlined a comprehensive plan aimed at reducing the State’s dependence on foreign oil without causing irreparable damage to our natural environment. The plan included, among other things, lending support to an advanced clean coal power plant initiative in the State utilizing our nation’s most abundant fuel without the pollution of traditional coal plants.
The Advanced Clean Coal Power Plant Initiative (“ACCPPI”) was developed by a multi-agency team, lead by the Governor’s Office of Regulatory Reform (“GORR”), and consisting of NYPA, New York State Energy Research and Development Authority (“NYSERDA”), Empire State Development, the Department of Environmental Conservation, the Department of Public Service, and other State Agencies as required. This “Shovel Ready Team” worked together to identify sites suitable for the development of “clean coal” plants and CO2 sequestration, with priority consideration given to existing brownfield properties (generally, abandoned or underused industrial or commercial property considered for redevelopment, often environmentally contaminated).
Then, as a next step, the Authority issued an RFP for the purchase of up to 600 MW of electric generating capacity and associated energy from an advanced clean coal power plant. The RFP defined an advanced clean coal power plant as “a plant which will in the most efficient and cost effective manner (1) produce a substantial reduction in plant emissions from that of a new, standard design sub-critical coal plant; and, (2) be built with provisions for future capability to capture and sequester carbon dioxide emissions.” As required in the RFP, an advanced clean coal power plant will be acting as a host site for NYSERDA research, development and deployment of technologies for capture and sequestration of carbon dioxide. Throughout this process, NYPA clearly set forth the imperative that the power purchase agreement “must work within the competitive environment”.
DISCUSSION
The RFP and the Responses
Issuance of the RFP and evaluation of the bids was done by the Authority’s evaluation team, comprised of Business Services, Energy Services & Technology, Environmental Health and Safety, Law, Power Generation and Transmission groups. They were assisted by outside experts from the Electric Power Research Institute (“EPRI”), NYSERDA, the engineering firm of CH2MHill/ Lockwood Greene, and the economic analysis firm of Quantec, LLC, and Holland & Knight, NYPA’s outside transaction counsel.
Before bids were received, the evaluation team developed a structured selection process. They determined that the focus of their bid reviews would be four main evaluation criteria: the quality of resources committed to the proposed project (Team), evaluated cost of the delivered product (Economics), technical soundness of the project proposal, including capability for carbon dioxide capture and sequestration (Technology/Sequestration), and the likelihood of permitting the project while addressing community concerns (Permitting, Licensing and Community Issues). These four major review criteria were fully defined and each assigned a percentage weight by the evaluation team.
On October 31, 2006 the Authority received responses to the RFP from four bidders, containing five separate bid options. A summary of the bids follows:
• AES Corporation (“AES”) submitted two similar proposals: (1) construction of a 700 MW super-critical pulverized coal (“SCPC”) plant at their existing Somerset facility in Somerset, Niagara County, NY, and (2) construction of a 526 MW SCPC plant by repowering of their existing Jennison facility in Bainbridge, Chenango County, NY. The bids were for supercritical steam conditions at 3690psig/1050°F/. The evaluation team expressed concern that these conditions were not sufficiently advanced to comply with the RFP requirements. In response AES indicated in further discussions that they could advance the steam temperatures to 1100°F, which, in the opinion of the review team, would meet the minimum advanced clean coal power plant requirements.
• Competitive Power Ventures (“CPV”) proposed a 630 MW IGCC facility in Lackawanna, in western New York.
• Empire Synfuel LLC and Project Orange Associates, LLC (“Empire/POA”) submitted a proposal for a coal-based synthetic natural gas (SNG) project, based on the Westinghouse plasma gasification technology, to be located in DeWitt, NY, near Syracuse; capable of producing sufficient quantities of SNG to power a 1,000+ MW power plant. A portion of the output from this facility would be piped to an existing co-generation facility in Syracuse. Empire/POA’s bid included 40 MW of capacity and energy from the co-generation facility and additional quantities of SNG or any combination of these products.
• NRG Energy submitted a proposal for a 680 MW IGCC facility to be located at their existing Huntley Station in Tonawanda, NY.
Selection Process
Competitive Power Ventures was eliminated as a result of the initial screening, as not meeting the minimum requirements of the RFP. Among other things, CPV did not demonstrate site control (i.e., the site on which the project is to be located is owned by a third party and CPV did not show rights in such property), and they did not address the issue of carbon sequestration.
The four remaining proposals (AES Bainbridge, AES Somerset, Empire/POA and NRG) were then evaluated for scoring under the evaluation criteria. Following the initial review of the proposals, the selection team submitted questions, which the bidders responded to at on-site meetings at NYPA. Preliminary evaluations and scores were developed following these meetings. The leading two bidders (AES and NRG) were invited back to provide their “best and final offers” and to make presentations to representatives of Senior Management. After these meetings, the final evaluation meeting was held and the evaluation scores were compiled. The proposal from NRG scored the highest and the evaluation team concluded that NRG’s proposal best meets the objectives of the RFP.
The decision to select NRG Energy, Inc. is supported by their scores on the evaluation criteria described above, and by the subject matter experts (NYPA staff and consultants) who participated in this process. The evaluation matrix used in this scoring process was made available to the Trustees under separate cover.
Of the proposals offered, the NRG proposal incorporates the highest efficiency, lowest emission, minimal water use, and a clear strategy for addressing community concerns. Their proposal includes the option to design the plant to be CO2 capture ready from day one of operation. NRG’s proposal for the CO2 capture and compression equipment is based on proven technologies in existence today. The Huntley site chosen by NRG was one of the sites predefined by the Shovel Ready Team as suitable for CO2 sequestration. The NRG project appears to be the most likely to receive permits in a timely manner, using the IGCC technology favored by interest groups opposed to conventional coal-fired generation.
The NRG proposal to build a 680 MW sequestration ready IGCC facility at their existing Huntley Station in Tonawanda, NY would advance the market penetration of this promising clean coal technology, contribute to the current research on carbon capture and sequestration, and according to NRG, will bring more than $1 billion in investment, over 1,000 temporary construction jobs and about 100 permanent jobs to the local economy. It would also create additional business opportunities for air separation and chemical businesses in the area.
Highest Evaluated Proposal: Does It Work for NYPA?
Having identified NRG’s proposal as the one with the best overall score on the evaluation matrix, there remained the threshold question: is the power from the proposed power plant economic within the current market environment? The conclusion at this time is that it is not. Thus, the Authority’s ability to award a power contract to a Clean Coal facility at this time is not prudently achievable given the gap between the bids and the expected price in the current market environment.
Additional Efforts to Achieve the Goal of the RFP
One goal of the RFP, however, was to assist a new advanced clean coal technology to achieve commercial feasibility. Demonstrating the new technology’s potential, especially for the carbon capture and sequestration capability, would call for additional efforts towards a solution that is workable in the current market environment. Instead of rejecting outright all proposals offered, it is recommended that NYPA work with NRG to exhaust all reasonable opportunities for securing financial assistance to drive down the cost of the NRG project and its output. Such assistance may include additional Federal and State support (including tax credits, tax exempt financing and other support) and grants from non-governmental organizations. If ample funding can be made available to offset the cost of the project, the Authority may see sufficient savings passed on in the purchase price of the product sold to the Authority to make the project economic If such price is acceptable to the Authority (i.e., it is consistent with the Authority’s mission of providing clean, economical energy for the benefit of its customers and the people of the State of New York), the State would reap the benefits of NRG’s innovative IGCC facility that uses an abundant domestic fuel. Forming a Strategic Alliance with NRG is the best way to work toward this goal.
Strategic Alliance with NRG
Upon Trustee approval, the Authority will invite NRG to work with NYPA in a Strategic Alliance to explore approaches, including funding opportunities, in order to bring down the cost of the NRG Huntley IGCC project, for the benefit of NRG and NYPA, as discussed more fully above. If NRG concurs, the parties will negotiate an agreement setting forth the terms of such alliance. The Strategic Alliance shall last no longer than eighteen months from the effective date of such agreement, unless both parties agree to an extension of such period.
Conditional Award of Contract: Conditions Precedent to Recommended Trustee Action
If the Trustees approve negotiations with NRG of the Strategic Alliance, and the results of such Strategic Alliance are successful, subject to compliance with environmental requirements as set forth below, the Trustees will be requested to authorize entering into negotiations with NRG for a long-term supply contract for up to 600 MW from NRG’s proposed IGCC Huntley facility.
Environmental Discussion
Because any output purchased from the proposed NRG facilities will not come from existing assets, any contract ultimately negotiated by Authority staff will, in order for the Authority to be in compliance with its obligations under SEQRA, be executed after NRG’s project has been the subject of the requisite environmental reviews, including the issuance of the appropriate findings and permits. If the other conditions precedent to the award of a contract to NRG as set forth herein are satisfied, then NRG shall be required to provide the Authority with the findings and permits or other authorizations to construct new transmission or generating facilities, which the Authority may use in completing its SEQRA evaluations and process (21 NYCRR § 461.13(b)). The Trustees then will be requested to authorize the completion of the Authority’s finding statement under SEQRA by the Vice President – Environmental, Health and Safety who will review and consider any final Environmental Impact Statement prepared for any of the facilities and, with the concurrence of the Executive Vice President and General Counsel, determine that the Authority’s SEQRA responsibilities have been fulfilled.
FISCAL INFORMATION
At this time, the Authority would not be making a financial commitment to buy the output of the facility so that the fiscal impact will be limited to certain expenditures in support the effort to secure the additional financial support. Such expenditures are to be limited to no more than $500,000 over the eighteen month term of the Strategic Alliance. Payments would be made from the Authority’s Operating Fund.
RECOMMENDATION
The Director of Power Resource Planning and Acquisition and the Vice President-Finance recommend that the Trustees authorize that NRG Energy, Inc., highest evaluated bidder in the Request for Proposals for Long-Term Supply of Advanced Clean Coal Power Plant Capacity and Energy and Other Products” issued on September 1, 2006, be conditionally awarded a power purchase agreement and that the Authority enter into negotiation of the Strategic Alliance described above. Award of such contract would be contingent upon the success of the Strategic Alliance and fulfillment of the other conditions outlined above, including receipt of subsequent approval by the Trustees to enter into negotiations with NRG for such long-term power purchase agreement.
The Senior Vice President – Energy Resource Management, the Executive Vice President and General Counsel, and the Executive Vice President – Chief Financial Officer and I concur in the recommendation.
The attached resolution is recommended for adoption.
Timothy S. Carey
President and Chief Executive Officer
Att.
R E S O L U T I O N
WHEREAS, the Authority issued a Request for Proposals (“RFP”) for the purchase of up to 600 MW of electric generating capacity and associated energy from an advanced clean coal power plant in New York State for the purpose of promoting such technology; and
WHEREAS, after evaluations of the bids, NRG Energy, Inc.’s Huntley proposal was the highest evaluated proposal; and
WHEREAS, the Authority determined that the highest evaluated bids, including NRG’s, were priced at a level not consistent with the Authority’s mission of being competitive in the current market environment, and that the award of a contract to the most qualified bidder at this time must be conditioned on satisfactory resolution of such economic issues; and
WHEREAS, to that end, and in order to further the goals of promoting new technologies capable of reducing the State’s dependence on foreign oil without irreparably damaging the natural environment, the Authority proposes to enter into a Strategic Alliance with NRG to work together to explore approaches, including funding opportunities, that will bring down the cost of NRG’s proposed Huntley IGCC project.
NOW, THEREFORE, BE IT RESOLVED, that NRG Energy, Inc., the highest evaluated bidder in the “Request for Proposals for Long-Term Supply of Advanced Clean Coal Power Plant Capacity and Energy and Other Products” issued on September 1, 2006 be conditionally awarded a power purchase agreement, contingent upon success of the Strategic Alliance and satisfaction of the conditions precedent described in the attached memorandum of the President and Chief Executive Officer, including receipt of subsequent approval by the Trustees to enter into negotiations with NRG for such long-term power purchase agreement; and be it further
RESOLVED, that the Senior Vice President – Energy Resource Management, and the Director – Power Resource Planning and Acquisition are hereby authorized on behalf of the Authority to negotiate a Strategic Alliance with NRG Energy, Inc. as described in the attached memorandum of the President and Chief Executive Officer, including, but not limited to an agreement or memorandum of understanding having such terms and conditions as are consistent with the attached memorandum of the President and Chief Executive Officer, and as are deemed necessary or advisable by the Executive Vice President and General Counsel; and be it further
RESOLVED, that the term of such agreement shall not exceed eighteen months, subject to extension as described in the attached memorandum of the President and Chief Executive Officer; and be it further
RESOLVED, that the Trustees authorize the expenditure of up to $500,000 in support of the efforts of the Strategic Alliance as described in the attached memorandum of the President and Chief Executive Officer, which funds shall be paid from the Authority’s Operating Fund; and be it further
RESOLVED, that the Chairman, the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer and the Executive Vice President and General Counsel and each of them hereby is, authorized on behalf of the Authority to do any and all things and take any and all actions necessary or advisable to effectuate the foregoing resolution.
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