Project Management Institute

A powerful combination

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Renewable energy projects are no longer a novelty—around the world, governments, utilities and private energy concerns are pouring money into the sector.

Global investment in renewable energy reached an all-time high of US$257 billion in 2011, according a June 2012 United Nations report, with China and the United States accounting for nearly 40 percent of that. Germany, Italy, India and Spain were also among the leaders.

Just one year later, that growth had slowed, and Bloomberg New Energy Finance reported in October that 2012's final tally will show a decline—the first in eight years.

Despite all the cash—and ink—they receive, renewable energy sources still represent only a small fraction of global power generation. Renewables accounted for just 2.1 percent of the world's overall output, according to the BP Statistical Review of World Energy 2012. Coal leads the way at 30 percent, with natural gas, oil, hydroelectric and nuclear power producing the rest.

Renewables will play an increasingly larger role in energy portfolios going forward, but it will be decades before they represent a significant chunk of global energy production. That means governments and energy companies must find a balance between long-term renewable goals and the immediate reality that traditional sources still keep the lights on in much of the world.

“There's a huge push for renewables across geographies and governments,” says Andrew Soare, analyst for alternative fuels at Lux Research in New York, New York, USA. “But the biggest constraint is cost. Solar, wind, and biofuel projects are significantly more expensive than traditional generation, and consumers are not willing to pay more.”

At current rates of introduction, the price of electricity from renewable sources won't be cheaper than that from traditional sources until around 2030, according to analyst group Clean Technica.

Though costs are dropping and more renewable energy facilities are coming online, often the only way energy companies and governments can ensure stable, consistent and cost-effective access to electricity is to include traditional power sources in their energy portfolios.

“All energy sources have a role to play,” says Benjamin Sporton, deputy CEO of the World Coal Association in London, England. “Good energy security requires a good energy mix.”

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A BALANCED APPROACH

To an outsider, going the renewable route when launching a new energy production project may seem obvious. But energy company executives face complex internal and external pressures when choosing any new energy source, says John Hines, vice president of energy supply for Northwestern Energy, with offices in the U.S. states of Montana, South Dakota and Nebraska. Northwestern provides energy to more than 650,000 customers in those states.

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The company is rebuilding its project portfolio to reduce its dependence on power purchase agreements with third-party energy providers. As it makes these investments, the portfolio team must look at a combination of issues around costs, risks and rate stability.

“We don't start the process of acquiring additional generation by saying we want gas, or coal, or wind,” Mr. Hines says. “We begin by looking at the various characteristics of resource generation and efficiency programs that best meet the needs of our portfolio.”

For example, Montana has a state regulation requiring 10 percent of the company's power generation comes from renewables—15 percent starting in 2015—while also being cost-effective for customers. Rather than settling on a type of renewable energy, the company put out a broad competitive request for proposals. The resulting bids showed that a wind-power solution would be much cheaper than solar and biomass options.

Through a competitive solicitation, the company selected a third party to build a wind farm, which went online last November. “We didn't go into this saying, ‘We need a wind farm,’” Mr. Hines says. “We looked at all the options bid into the process and selected the one that best met the needs of the portfolio.”

The wind farm helps Northwestern meet the statutory renewable generation requirement, but because wind generation is intermittent, it doesn't address overall load demands or peaking requirements. So the company also looks at traditional energy sources, such as natural gas and coal, to balance its portfolio.

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As part of its cost-benefit analysis, the generation review team attempts to quantify the impact of potential government regulations. For example, a law requiring stricter greenhouse-gas emission controls could necessitate retrofitting existing plants—or paying fees to be in compliance, depending on the plant.

By modeling the financial impact of different regulations, Northwestern has a better sense of the risks associated with different generation resources and their effects on the portfolio with each project. “A coal plant might have twice the carbon emissions of a gas plant,” he says—a risk that must be evaluated and balanced with other generation characteristics and costs.

OLD KING COAL

While the future may be filled with wind farms and solar panels, traditional sources of power—most notably fossil fuels and nuclear energy—are still driving much of the world

Coal, which tends to evoke images of the billowing smokestacks of the Industrial Revolution, has a dirty reputation. According to the Union of Concerned Scientists, burning coal is a major cause of smog, acid rain and air toxins, and a leading contributor to global climate change.

Despite its negative image, coal remains one of the least expensive and most accessible sources of fossil fuel. Most countries rely on it to some extent for energy production. Coal consumption grew by 5.4 percent in 2011, the only fossil fuel to record above-average growth and the fastest-growing form of energy outside renewables, according to the BP report.

Many developed nations, including Japan and the United States, have taken steps to cut their dependence on coal. But emerging markets such as China and India are increasing both production and consumption as the most economical and immediately available choice to meet soaring demand. Global subsidies for oil, gas and coal amounted to US$409 billion in 2010—compared with US$66 billion for renewable energy that year.

Also powering its appeal are innovations in clean coal technology, which are making today's facilities cleaner than those built 30 years ago, Mr. Sporton says.

Given the short- and medium-term inevitability of coal use, industry and stakeholder groups should invest more time and money into research and development projects to lower emissions from coal use, says Greg Sullivan, deputy CEO for the Australian Coal Association (ACA) in Canberra, Australia.

The latest generation of clean coal technology plants offers filters, scrubbers and emission controls that can virtually eliminate nitrogen oxide and sulfur oxide emissions, and significantly reduce carbon dioxide emissions.

These technologies have been incorporated in retrofit projects and new plant construction in many countries, says Mr. Sporton. As emerging markets ramp up their own energy production, clean-coal measures could minimize the impact of new energy production on the environment.

But as with all energy investment decisions, to what extent—if at all—clean-coal technology is implemented on these projects depends on the financial resources available.

“Clean-coal plants cost more to build than traditional coal plants,” Mr. Sporton says. “Without financial assistance, emerging markets will likely build the cheapest plants they can.”

With that in mind, the World Bank has increased its investments in clean coal projects, including a US$3.75 billion loan to South African utility company Eskom to fund construction of the massive 4,800 megawatt Medupi clean coal plant. Governments and environmental groups in the United States and Europe opposed the loan because of coal's contribution to climate change, but the World Bank argued that South Africa's immediate power needs trumped those objections.

Still, the country promised to use another US$1.25 billion from the World Bank to reduce emissions at existing plants, and committed to begin cutting its carbon output in 2025.

Such opposition is a constant issue for the coal industry, Mr. Sullivan admits. He argues that project leaders in the field should focus on better educating public stakeholders to gain support for projects to upgrade existing plants and develop more low-emission coal and carbon-capture technologies.

The ACA is working with industry, scientific and academic organizations to improve energy literacy among community groups, the general public and public leaders in Australia about the role fossil fuels plays in energy generation, and how low-emission coal and carbon capture could minimize its environmental impact.

“We plan to roll it out over the next three to five years, but it must be a holistic effort,” Mr. Sullivan says.

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An industry association talking about coal's benefits isn't enough, he argues. Government and community groups must also support the message for it to be embraced. That begins with acknowledging that in the short term, renewables must be balanced with traditional fuel sources.

“Countries need a suite of energy options so you have long-term stability at an affordable price,” he says.

THE NUCLEAR OPTION

Nuclear energy, like coal, has long struggled with a negative reputation, and the March 2011 disaster at Japan's Fukushima nuclear power plant only made matters worse.

That meltdown, which contaminated surrounding areas with radiation, caused many developed nations to scrap planned nuclear power plant projects, mothball existing plants and rethink their nuclear energy goals for the future.

In the wake of Fukushima, worldwide nuclear output fell by 4.3 percent, with sharp declines in Japan (44.3 percent) and Germany (23.2 percent), according to BP's report.

Yet as with coal, short-term energy demands in emerging markets are giving the nuclear sector a boost. Mahmoud Ghavi, PhD, professor of nuclear engineering and director of the Center for Nuclear Studies at Southern Polytechnic State University in Marietta, Georgia, USA, predicts that the increasing demand for reliable, clean and affordable energy will force countries to embrace nuclear as part of their overall energy policy.

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“Fukushima's biggest legacy to the nuclear industry appears to be a renewed focus on safety.”

Source: Benchmarking the Global Nuclear Industry 2012, Ernst and Young

“You can't rely on wind, solar and hydro for baseline energy,” he says. “At the same time, countries want to avoid the pollution issues that come with fossil fuels.”

China leads the world in new nuclear projects even after the Fukushima crisis forced the country to stop work and conduct safety checks. India has three nuclear power projects underway, and in the 2012 fiscal year, its nuclear power output grew 23 percent over the previous year, according to the government-owned Nuclear Power Corporation of India Limited. The United States, Vietnam, Saudi Arabia and the United Kingdom have all launched their own nuclear plant projects.

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Post-Fukushima, addressing public and government stakeholder fears of similar disasters in their own backyards is a primary concern. All 13 countries surveyed in Ernst and Young's Benchmarking the Global Nuclear Industry 2012 report have launched projects to reinforce their regulatory frameworks, create new rules, and update standards and codes around nuclear safety since the disaster. “Fukushima's biggest legacy to the nuclear industry appears to be a renewed focus on safety,” the report declares.

Third-generation nuclear power plants are much safer than previous models, Dr. Ghavi says. The new plants have many more passive safety systems—which greatly reduce the risk of human error—including passive cooling features that protect the nuclear core even if the power goes out.

When it comes to public support, nuclear has one clear advantage over coal: cleanliness. Dr. Ghavi notes that nuclear power generated in the United States in 2011 would have generated 613 million metric tons of CO2 had it come from fossil fuels—nearly the amount produced by all the passenger cars in the country. Likewise, the U.K.'s Department of Energy and Climate Change attributed that nation's 8 percent drop in CO2 emissions in 2011 to the increase in nuclear power production.

Dr. Ghavi says that while safety and the environment remain high-profile issues when it comes to energy production, governments and utilities must keep one thing in mind when creating a balanced portfolio.

“When people go home, he says, “they expect the power to work.” PM

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Xcel Energy isn't afraid to diversify in order to provide electricity to its more than 3.4 million customers across eight U.S. states.

Xcel was one of the first energy companies to demonstrate the real-world benefits of smart grids through a Boulder, Colorado, Smart Grid City project, and the American Wind Energy Association has also named the Xcel the top wind-power provider for the past eight years.

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Xcel's portfolio includes more than 17,000 megawatts (MWs) of electricity generated by coal, natural gas, nuclear, hydro, wind, oil and refuse, along with a small amount of solar. More than a third of its overall energy production comes from coal, and another third comes from natural gas.

“No single energy source could ever meet all of our needs,” says Frank Prager, vice president of environmental policy and services for Xcel Energy in Denver, Colorado, USA.

Xcel entered into a power-purchase agreement with the Limon Wind Energy Center, which went online last December near Limon, Colorado, adding 200 MWs of power to the energy portfolio.

The Limon project will bring Colorado's total wind energy generation to 2,170 MWs, which is impressive, but it's still just a small fraction of Xcel's energy output in the state.

“Balance is the key word,” Mr. Prager says. “If we went all-in for one type of resource, our customers would suffer.”

In fact, while system-wide Xcel has about 4,000 MWs of wind generation, it only counts on about 10 percent of that total to meet demand due to the intermittent nature of the resource. If more wind is generated, the company uses that energy first, and ramps down other forms of generation, such as coal or natural gas.

“It's why diversity in our portfolio is so important,” Mr. Prager says. “It protects us from swings in fuel costs, weather, environmental regulations and the fact that customer demand is growing.”

When Xcel considers a new project, the leadership team looks at several competing factors, including demand, reliability of the resource, cost to build and operate the facility, and impending environmental regulations. The goal is to stay ahead of demand and regulations, provided that can be done while maintaining reliable, clean and competitively price electricity, Mr. Prager says.

In late 2010, for example, Xcel launched a US$1 billion program to retire 593 MWs of coal-fired plants and replace them with a new 569 MW natural gas plant. The program also involved retrofitting another coal plant to burn natural gas, and installing modern emissions controls on existing coal plants.

Scheduled for completion in 2014, the program is expected to significantly reduce emissions, including:

  • Nitrogen oxide by 86 percent
  • Sulfur dioxide by 82 percent
  • Mercury by 82 percent
  • Carbon dioxide by 28 percent

The program is enabling Xcel to reduce the risks associated with coal-burning emissions, while lowering costs through the use of natural gas.

“An aging coal plant is an opportunity to make use of natural-gas fired generation to meet customers’ needs cost effectively,” Mr. Prager says. “It gives us more flexible energy sources, it reduces our costs and our emissions, and it creates great balance in our generation mix.”

Though that mix is still heavy on coal and natural gas, the company is actively seeking cost-effective wind projects to meet Colorado's aggressive 30 percent renewable-energy goal by 2020.

“Our portfolio of generation today shows we are a well-balanced company,” Mr. Prager says, “and we will continue to look for new renewable resource generating projects that will help us maintain and improve that balance in the future.”

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“Balance is the key word. If we went all-in for one type of resource, our customers would suffer.”

—Frank Prager, Xcel Energy, Denver, Colorado, USA

 

CASE STUDY

Sitting more than 3,000 miles (4,828 kilometers) from the nearest continental landmass, Hawaii, USA, faces a constant and costly struggle to meet energy demands. The archipelago state depends on imported oil from the Middle East and Asia for nearly 90 percent of its energy needs.

“We are totally dependent on a commodity from a very volatile part of the world where many people do not like our country and supplies could be disrupted at any time by natural disasters, war and even pirates,” says Colton Ching, vice president for system operation and planning at the Honolulu-based Hawaiian Electric Company. Hawaiian Electric and its subsidiaries serve 95 percent of the state's 1.2 million residents.

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Mr. Ching points to the March 2011 Fukushima nuclear meltdown in Japan, as an example. After that disaster, Japan shut down all of its nuclear plants and increased oil imports to make up the difference. That drove the global price of oil up and directly impacted the price of electricity in Hawaii.

“Being so dependent on a single commodity threatens our security, our economy and our way of life,” he says. “And as an island state facing the impacts of global climate change, including rising sea levels and weather changes, it threatens our environment and the world environment as well.”

Like many power companies, Hawaiian Electric is working to simultaneously diversify its portfolio and improve the efficiency of its existing plants.

Hawaiian Electric's current goal is to transition to 40 percent consumption of renewable energy by 2030 and reduce oil use by 30 percent. “These goals were put into state law and are among the most aggressive clean energy goals in the nation,” Mr. Ching says.

The state is on schedule to meet its first clean energy milestone of 15 percent renewable energy production by 2015, and it's moving forward with an aggressive renewable energy portfolio that includes more than 1,000 megawatts (MWs) of renewable energy projects currently in service, under construction, awaiting approval or being negotiated.

These include a new 69 MW wind project on the island of Oahu that is currently under construction, and more than 78 MWs of solar capacity generated by individual customer-owned photovoltaic projects.

The state is also looking at ways to import liquefied natural gas (LNG), which is cheaper than the low-sulfur fuel oil it currently imports, Mr. Ching says. “Even if we exceed our renewable energy goals, as we hope to do, we will need some imported resources for the foreseeable future,” he notes. “If we commit the resources to develop an infrastructure for importing LNG, the very propitious side effect will be to burn a much cleaner fossil fuel than oil or coal.”

That's no easy task in such an isolated community, but Hawaiian Electric believes a balanced portfolio of clean energy solutions will ease the state's dependence on foreign oil. As Hawaiian Electric considers its options, cost remains a major concern. But Mr. Ching notes that good project management is helping to make the projects more cost-feasible.

He points to the Oahu wind project, which was completed in 2011, qualifying for federal financial assistance and allowing Hawaiian Electric to buy the power at a lower rate.

Overcoming numerous technical, permitting, procurement and construction challenges, the team accelerated construction of two interconnection substations to get them done in 11 months—rather than the anticipated two years—in order to meet the financial assistance deadline. At times, that meant borrowing equipment from other, long-term projects, rather than undertake the costly and time-consuming process of bringing it in from the mainland.

“Highly competent, energetic and flexible project management is essential to getting Hawaiian Electric's part done on time so our customers will benefit from lower electric prices,” Mr. Ching says.

Utility companies should look at what Hawaii has accomplished when they face their own renewable energy obstacles, Mr. Ching adds. “It is often said, ‘If it can be done in Hawaii, it can be done anywhere.’”

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“Highly competent, energetic and flexible project management is essential to getting Hawaiian Electric's part done on time so our customers will benefit from lower electric prices.”

—Colton Ching, Hawaiian Electric Company, Honolulu, Hawaii, USA

 

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM NETWORK FEBRUARY 2013 WWW.PMI.ORG

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