Wednesday, January 8, 2014

Clean Line RICL Chief Strategist at the ICC

After the ICC cross examination testimonies, we’ve learned more about the RICL Income Generation Model.  I still think it doesn’t cash flow and is a bunch of ca-ca.

One interesting discovery from the ICC cross examination testimonies was when Clean Line’s money man explained how RICL intends to charge energy generators for their services.  It has been commonly inferred RICL would charge a flat fee per megawatt hour.  There are several “Clean” Line sources across the internet indicating projects like RICL would charge a fee based on usage, somewhere around $25-$30 per megawatt hour.

It’s fairly easy to do the math here and realize RICL simply does not cash flow here.  Take the price of energy in the PJM region, subtract $30 and this is the price the generators in western Iowa would receive (plus potential income from the Production Tax Credit subsidy). 

So how does RICL get around this inconvenient truth that the demand charge model, where there is a per-unit charge, doesn’t cash flow? 

Create a new model with more variables and ambiguity so it’s less obvious their plan is a bunch of ca-ca. 

Instead of charging a demand charge, like $30/megawatt hour, RICL plans to charge an Iowa energy generators a flat fee for services. 

Suppose EDP Renewables wants to build a 500 megawatt wind farm in Spencer County Iowa for east coast states.  EDP will have to secure a 20 year Power Purchasing Agreement from an eastern source.  Then EDP will have to negotiate a fixed price with RICL for 500 MW’s

Now the trouble is no one knows how much the wind is going to blow from day to day.  If wind farms are at best 80% efficient, the best that 500 MW wind farm can do is 400 MW.  SO EDP buys 400MW of annual service from RICL.

And what about those days the wind doesn’t blow?  Well, the annual rate is paid regardless whether the wind blows or not.  So if annually the wind blows at 38% efficiency, or 190 MW, EDP has to negotiate a price with RICL for peak capacity (about 400 MW) when annual capacity is closer to 190 MW. 

In this scenario, EDP would have to guesstimate a discount for the inefficiency of wind energy but also bid according to the maximum potential output.

Basically, the wind generator assumes all the risk and forecast or guestimate how much they can afford to pay.

Confusing?  Heck yeah.  Bottom line, this proposed income model is likely design to make things more confusing so RICL opponents cannot claim this project does not cash flow. 

RICL won’t say how much they believe they can charge or profit from this scheme.  While RICL has approval from FERC to negotiate rates for a Merchant Transmission Line, “Clean” Line claims they cannot negotiate with energy generators until they have secured an easement from landowners. 

I still think RICL is not a profitable model and it still will not cash flow.  The economy has changed and energy demand is falling since this company was conceived more than five years ago.  “Clean” Line still has a PRECONSTRUCTIONAL option to sell RICL to National Grid, meaning, RICL will likely be sold once the easement is obtained from the landowners. 

More likely, the true RICL business model is obtain a Right of Way, and sell it for a profit.

Below is an excerpt from the Dave Berry cross examination by the Illinois Landowner Alliance attorney.  I almost blurted out laughter when the attorney asked Berry “Do you understand how demand charges work in the utility -- utility industry?”  Berry had a screw up in the answer above trying to explain a capacity charge (answer in red) and the ILA lawyer caught him.

The ILA lawyer almost had a tone that said “Lad, do you know how the energy industry works?”  While, sitting next to a “Clean” Line “executive” during the testimony, I wonder if she could read my body language at this point or if I stayed cool.  Either way, I thought this interaction between the ILA attorney and Dave Berry was interesting. 

If it sounds confusing and convoluted, don’t think it’s over your head.  That’s how a shady business plan is designed.

ILA Attorney Question. So there wouldn't be any up front payments to Rock Island at the time those contracts are signed.
Dave Berry Answer. We don't foresee that.

ILA Attorney Question.  Okay. Generally how will revenues under those kinds of contracts be structured?
Dave Berry Answer. As a fixed capacity charge.

ILA Attorney Question. Okay. Would that be a monthly charge?
Dave Berry Answer. It's possible; it would be based on a period of time certainly.

ILA Attorney Question. Okay. So in the utility parlance, would you call that a demand charge? Is that fair?
Dave Berry Answer. I would not, actually.

ILA Attorney Question. No? Okay. How would it be different than a demand charge?
Dave Berry Answer. A capacity charge isn't based on the amount of capacity reserved. A demand charge is typically based on actual utilization or actual demand.

ILA Attorney Question. Do you understand how demand charges work in the utility -- utility industry?
A. I believe I do.

ILA Attorney Question. Okay. I won't belabor that point.  Okay, so back to signing these contracts with customers. When would you, again, based on the timeframe that you've described here, when would you expect to first receive revenues from any of your anchor tenants? For the Rock Island project.
Dave Berry Answer. Be as the project is completed, which, based on our current schedule, would be towards the end of 2017.

ILA Attorney Question. Okay. Mr. Berry, so you're telling us that Rock Island, you expect Rock Island to be able to obtain financing for the project's construction without any generation having been located at or near the western terminance in the resource area, and Rock Island's project lenders will be counting on, when they commit to you and allow you to close on the financing for this project, they will be counting on prospective generators in the resource area, getting all their necessary approvals, their own project of corporate financing for their wind projects or their generation project, and getting those projects constructed in commercial operation?
Dave Berry Answer. No, I would not characterize it that way.

ILA Attorney Question. How would you characterize it?
Dave Berry Answer. Our lenders/investors will look to the revenue contracts into which we enter, however, it's not standard under those contracts that the transmission shipper take the development risk associated with the project of the -- excuse me, I think I stated that wrong.  It's not typical under such contracts that the transmission shipper would try to push onto the transmission provider the risks of the transmission shipper completing his project.

ILA Attorney Question. Okay. So the shippers that you mentioned will have an obligation, once they've signed these capacity contracts, they'll have an obligation to pay you once you have the transmission line in service and ready to be utilized, regardless of whether they have actually developed their generation facilities?
Dave Berry Answer. The nature of a capacity charge, as I described earlier, is that you pay for the capacity if it's available, regardless of your use.

ILA Attorney Question. Okay. That's, that's a, would you agree that's a major risk for those generators to shoulder?
Dave Berry Answer. That is the business of a power plant developer to manage the risk of their own generation development.

ILA Attorney Question. Okay. And is that a yes then?
Dave Berry Answer. I wouldn't describe it as a major risk, I would describe it as the risk of their business.

ILA Attorney Question. But it is, that's the way it would work, is that correct? How I described? That risk would be on the generators?
Dave Berry Answer. By that risk, could I ask you to clarify what you mean by that risk?

ILA Attorney Question. The risk that, associated with those generators who sign capacity contracts with you actually doing all the things necessary in order to get their generation facilities built and in service and connected to your western terminance.
Dave Berry Answer. Yes, they would take that risk.

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