PlanetNL49: NL Hydro Must Capitalize on Green Hydrogen Power Storage But Will Government Allow It?
As explained in PlanetNL48, this province has a big leg up on virtually all other places around the world seeking to develop green hydrogen production; many have fewer resource strengths than we have and are making big plans to participate in what may be a very profitable new industry. One resource strength local operators will seek to use for additional competitive advantage is a local utility with substantial hydro power reservoirs. Many proposals – elsewhere – won’t even connect to a utility grid, but local proposals will likely all want to tie into NL Hydro. This will give them access to Hydro’s surplus energy and to take advantage of Hydro’s capabilities through a concept called “energy exchange”.
The implications for NL Hydro, the Province as its controlling shareholder, and regulated ratepayers, are significant. High demand for anything usually means profit, so there is great potential for new NL Hydro revenue streams. However, this province is a place where politician ally with corporate friends, contrary to the public interest.
This post drills into the potential revenue and the risk of government failing to seize the opportunity on behalf of the public.
How Energy Exchange Is Expected to Work
Off-grid green hydrogen operators will rely solely on their own renewable generation assets. Most will use wind turbines; a few may have a wind and solar mix. Neither technology generates full power continuously: good sites tend to yield around an average of 40% of their rated power. Because generation will rarely be at maximum potential, most operators propose to build excess generation capacity relative to the capacity rating of their hydrogen plant with 2:1 a fairly popular ratio. On low-to-medium wind days, those extra wind turbines help produce extra hydrogen. The extra hydrogen revenue will pay off the incremental scaling up of the wind farm. Low and sometimes zero wind days will still occur, so the electrolyzer utilization might be in the ballpark of 70%. Even if their energy producing machinery is idle a fair amount of the time, off-grid operators are excited to build and they expect to make very healthy profits.
In contrast to off-grid, grid-connected facilities have an opportunity to push for much nearer to 100% electrolyzer utilization. By using their plant on low or no wind days, they receive a lot more revenue than an off-grid plant at no higher cost, except for utility fees. Most of the energy used will have been provided to the utility by them on days when the wind is strong enough and power generation exceeds electrolyzer capacity.
On another day when wind is too low to run the plant at full capacity, they will ask the utility to provide them any power shortfall. This practice works best with utilities that are predominantly hydro based, and substantial reservoirs. When an operator provides power to the utility, the utility will decrease its own generation and allow the excess wind power from the green hydrogen operator to be used by its regular customers. That causes water to accumulate in the reservoirs which can be released later when the green hydrogen operator requests utility power.
Within the constraints of the utility’s available transmission and generation limits on any given day, a grid-connected operator will find itself producing lots of hydrogen on low wind days that off-grid suppliers cannot. If the cost of electricity service is really low, the operator’s average unit cost of production will decline considerably, delivering a substantial boost to profitability.
No Useful Precedent Leaves Room for Concern
There should be a solid opportunity for NL Hydro to benefit from the resale of energy supplied to interconnected green hydrogen operators. If not, why do it at all considering the extra stress and strain on generation and transmission assets wouldn’t be worth the risk. The heavy swings in load required to provide this service will be no small feat for a utility that has only just recovered from a performance that caused the DarkNL outage in 2014, and more recently an LIL transmission line delayed for years, the sources of the problems not limited to GE, which is routinely scapegoated for their software problems.
Taking on the role of energy facilitator for green hydrogen producers is a very big deal and it deserves solid cash flows. Yet, Hydro does not seem to have any clear policy or rate structure for the provision of “energy exchange” that we can find or understand.
Prior to steady energy delivery to Emera over the Maritime Link, Nalcor Energy Marketing did engage in something similar though it was micro-sized by comparison. They referred to it as “ponding”, in which Emera sent surplus energy (presumably wind) to Hydro that was later recalled to them. The commercial details were very secretive, likely negotiated, and remain unknown. Nevertheless, the temporary and low volume nature of the deal does not make it a useful precedent.
The absence of a clear pricing structure is a worrisome red flag that could find Hydro performing poorly in negotiations and overcommitting resources, in the process underpricing power and energy relative to its true value to green hydrogen operators.
Economics Suggests Fair Pricing Solutions
Marginal price and cost theory provides a critical cornerstone to understanding the value of the energy exchange scenario. When wind is low, the interconnected plant operator is faced with two main alternatives: don’t purchase power and let the plant sit idle, or purchase power because the additional electricity cost is less than the value of the product it will create.
Various references indicate that up to 55 kWh of energy is used to make one kilogram of hydrogen. Today’s NL Hydro industrial rate for electricity, in the ballpark of 6 c/kWh CDN, would yield a marginal production cost of less than $3 USD per kg. If the market price for hydrogen is higher, the operator will make clear profit whenever it can acquire utility energy to run the plant during low wind days. With current hydrogen prices many times that level and a very high probability that demand will be keeping it high for decades to come, utility energy is a great extra profit-making advantage that off-grid operators will envy.
The addition of additional excess wind turbine capacity is a third alternative. While utilities in Canada have contracted wind power in the range of 3-5 c/kWh, such low prices depended on full use of all available energy. Excess wind turbine capacity that goes unused on higher wind days, only beneficially used at partial capacity on low wind days, results in a far higher energy cost. While adding some capacity may make sense to raise electrolyzer output, adding turbines represents very high internal generation costs, and increases capital risk. Hydro must understand the operator’s economic dilemma. Operators hope to avoid risky investment and a high marginal cost of energy, preferring to transfer risk to the utility and achieve a lower marginal price than if they added more turbines. Hydro has an opportunity to price its services to maximize its own opportunity.
A Fixed Price Model Established
Hydro benchmarks can deliver a simple fixed price model for a suggested minimum price of energy exchange. The first is the price paid on energy supplied to Hydro.
Today, Hydro can acquire Churchill Falls power at 0.2 c/kWh. This is the least cost source of power that can be imported to the Island if offsetting Island production and raising the reservoirs were a necessity. Clearly, Hydro has no incentive to pay more than that as the days of using expensive Holyrood oil-fired power to augment energy supply shortages (it has happened) are hopefully soon a thing of the past.
Another important detail is that once paid for, the energy is Hydro’s: it is owned, not borrowed. Those who sell power to Hydro would have the first right of purchase, however. For Hydro sales, an unregulated class of new customers is proposed, as the most useful model that will raise profits. (The regulated model minimizes the utility’s profit to a specific percentage and is not the best choice). The selling price, however, should copy the regulated industrial rate of roughly 5 c/kWh for energy and $10/kWh per month for demand. How much revenue is possible is anyone’s guess at this point and highly dependent on estimating the maximum amount of energy Hydro could receive and return. Hydro has yet to release any such study, if they have one. 1000-2000 GWh seems like an appropriate range with average monthly demand of 500MW. That would yield $110-150M of new revenue. It would be a welcome new source of rate mitigation, too, to offset a small portion of the future rate increases to be inflicted by the Muskrat Falls project.
There is another model practiced widely in other jurisdictions that could create more wealth during periods of high hydrogen prices, which may occur often.
Scarcity and the Opportunity of an Auction Model
The first proposal out of the gate, World Energy GH2 proposes a 1500 MW electrolyzer plant capacity; other proposals are starting to emerge too. The roughly 2000 MW NL Hydro system is going to struggle to consistently meet the total demand of green hydrogen clients on slow wind days.
Consider for example, what if there is eventually 5000 MW of electrolyzer capacity on the Island? On a windless winter day, when Hydro might be experiencing native winter loads of 1300 MW, it may only have 300 MW or so that it can reasonably offer the market while abiding by critical reserve criteria to ensure reliability to regulated customers. During the summer, the peak level supportable might rarely exceed 700 MW: despite much lower loads, we must not forget that Hydro frequently has generators offline for planned maintenance outages during those summer months. Very complex studies need to be done on this subject, but this simple napkin sketch analysis suggests that Hydro may have only about an average of 500 MW spare capacity compared to demand that may be many times higher. Hydro should, therefore, consider an auction model for energy supply to the green hydrogen market group. The fixed price model, described above, should establish the minimum charges but competitive auctions should result in much higher returns. At today’s hydrogen price, bidders could be willing to pay 30 c/KWh as they would still turn a profit. Maybe today’s price is an exceptional bubble but extended periods of 10-15 c/kWh is probable.
The auction method would work two ways. During times of surplus wind generation, green hydrogen operators would bid into Hydro with the utility choosing to take the lowest price. High bidders would take the power out when called for. It’s a fair system, one where Hydro will earn the difference in the spread. Hydro could also choose to “pool” in energy obtained from off-island sources including Muskrat Falls, Churchill Falls, and perhaps even via imports on the Maritime Link. Those options will increase premium-priced energy sales to the hydrogen marketplace. The staff of Nalcor Energy Marketing who went several years of incurring losses on export operations would suddenly become the busy darlings of Hydro’s operations. They would have their hands full, but if they are allowed to take advantage of every available opportunity, say 3 TWh of energy plus demand revenue, new revenue of several hundred million dollars is likely; if hydrogen is really high priced, it may be close to $1 billion.
Hydro’s Business Development staff may also be able to provide a solid business case to expand Hydro’s generation capacity by 150 MW through the completion of the long foreseen, but never installed, Unit #8 at Bay D’Espoir; the new revenues might even justify additional capacity expansion projects at Bay D’Espoir and Cat Arm. Those options should certainly be considered long before any thoughts of building another ridiculously expensive transmission line from Labrador gets spoken of.
Care must be taken however, not to oversupply the market as that would drive electricity prices down: the element of excess demand must be preserved to maximize returns. A fresh attempt at reducing the problematically high winter loads of regulated customers by promoting adoption of high-efficiency heating systems should also be taken. Reducing low-profit regulated load so that more energy can be sold for high profit to the green hydrogen sector would more than justify offering the incentives that would push a large number of homeowners and businesses to act for their own benefit.
The Risk of A Giveaway
What has been described above represents the type of talking points the public ought to have heard from Government and Hydro’s top officials by now. Their silence should cause concern. The worst-case scenario is not implausible. Hydro may eventually say they will do energy exchange for some nominal small fee like 1 c/kWh or even a fraction of that. They may say it will also be first-come, first-serve, and if later entrants can’t get power, well that’s just too bad, and no auctions will be possible. They’ll say they have no choice, that an existing policy few can understand obliges them to do so. That’s all code-speak that really says that Government wants it done this way and won’t provide the legislative authority Hydro would need to do something new and innovative.
Ultimate responsibility for the outcome rests with the Government and the Premier. Their words and actions should have explained how they will make the most of this opportunity and leave no stone unturned to maximize utility revenue, rents and royalties, tax revenue, and whatever benefits can be had for the people of the province.
So far, Premier Furey appears to have recused himself to silence. His Ministers, those who have spoken already, have yet to make any substantive comment that indicates they understand the scale of the opportunity. Meanwhile the World Energy proponents seem to be driving the bus and gaining nearly all the inside advantages they are seeking as Furey and his team practice the art of willful blindness.
It’s hard not to think that the fix is in, ratepayers and taxpayers will be denied their rightful benefits, and possibly put them at risk, to enable certain Liberal friends to profit handsomely.