Landfill gas (LFG) produced by the decomposition of the garbage buried at the closed Sunnyvale Landfill is collected and delivered to the Power Generation Facility (PGF) at the Sunnyvale Water Pollution Control Plant (WPCP). The PGF burns the landfill gas in two large engines to generate electricity that is used to power the majority, but not all, of WPCP operations. The PGF has a total generating capacity of 1600 kilowatts (kW). This is larger than the WPCP demand for electricity, which varies from 900 to 1300 kW.

If the engines were to operate at full capacity, the City would benefit in the following ways:

• Decreased expense for purchases of electricity from Pacific Gas & Electric (PG&E)
• Revenue from sales of excess electricity generated and exported
• Revenue from New Renewable Resources incentive payments from the California Energy Commission
• Revenue from federal government Renewable Energy Production Incentives
• Improved efficiency of operation of both the PGF engines and the landfill gas extraction system

Installation of the systems needed for export is being funded by Capital Project 821110 (Power Generation Facility). At this time the City Council is being asked to approve an agreement with PG&E for installation of the hardware needed to export power to the electricity "grid."

A separate agreement with the California Automated Power Exchange (APX) for sale of the exported PGF power has been prepared. This agreement will be executed by the City Manager should the Council approve the PG&E agreement that is the subject of this RTC.

The contracts with PG&E and APX have been reviewed and recommended by a contract attorney specializing in energy sales agreements. Staff is recommending that the City Council authorize the City Manager to execute the attached agreement with PG&E.

Landfill gas (LFG) produced by the decomposition of the garbage buried at the closed Sunnyvale Landfill is collected and destroyed as required by the Bay Area Air Quality Management District and the Federal Government. Until recently, the destruction was accomplished by burning the gas in a large flare located at the Water Pollution Control Plant (WPCP). In 1997 the City installed a PGF at the WPCP which burns the landfill gas in two large engines to generate electricity.

It is expected that the landfill and the WPCP digesters can provide sufficient fuel to power the WPCP through at least the year 2005. The City will be able to use varying combinations of landfill gas, digester gas and natural gas to sustain PGF operations for a longer period of time.

The electricity needed to operate the Sunnyvale WPCP has historically been purchased from PG&E. However, since November 1997, the WPCP has been supplied primarily by electricity generated by the PGF. Because the WPCP power use is not constant, 100-150 kilowatts of power are purchased from PG&E to buffer rapid fluctuations in WPCP power use. While this arrangement has greatly reduced WPCP purchases of electricity, even more PG&E power purchases could be avoided if the engines were consistently run at their full power. This would enable the entire WPCP power demand to be satisfied by City-generated power aside from periods of engine downtime for maintenance and repair. Running the PGF engines at a constant rate also has major benefits to the landfill gas extraction system, which functions most effectively when gas is withdrawn at a constant rate.

The PGF has a total generating capacity of 1,600 kW. The PGF is not currently running at full capacity because the WPCP power demand ranges from 900 to 1300 kW, leaving 700 to 300 kW available for export. (300 kW for one hour is 300 kWh.) The estimated annual average available for export is approximately 3.5 million kWh, and the current average market price for power is approximately $.03/kWh. Though WPCP demand varies daily and seasonally, it is anticipated that the annual power available will remain relatively constant over the next five years.

PGF electricity in excess of WPCP demand can, in theory, be sold directly under a contract to one of several green power wholesalers. However, small, steady outputs of electricity like the PGF’s are of little interest to wholesalers. The market places a premium on power that can be quickly brought on line to meet peak demand at say, mid-afternoon on a hot summer day. The excess power that could be generated by the PGF and made available for export can best be viewed as a waste byproduct derived from the PGF’s primary mission, which is to provide power for WPCP operations. Staff inquiries to power wholesalers found little interest in direct purchases of the small quantity of excess electricity generated by the PGF. In any case, direct sales to a power wholesaler could require the City to make commitments for power delivery and take on consequent risks that would be disproportionate to the amount of revenue that the City could realize.

The Automated Power Exchange (APX), located in Santa Clara, is an alternative to the larger, more well-known Power Exchange (PX) through which prices are set for the bulk of the electricity used in California. The APX provides a marketplace in which a market-clearing price for power is set on an hourly basis. By contracting with the APX, the City sells its power at "spot" prices determined by the hourly demand for electricity. No future commitments for power delivery are required, and administrative requirements are minimized. Power exports to the grid are automatically measured and are reported by a modem to the Independent System Operator (ISO). The ISO is a quasi-governmental non-profit corporation established to balance power demand and supply. The PGF output information provided to the ISO will tell the APX how much power was exported by the City and when the export occurred. This information will allow the APX to determine the value of the City’s power.

Under the APX contract the unit value of the City’s power will be established on an hourly basis, based on power supply and demand. The entity purchasing the power will pay the APX, which in turn will pass the money along to the City by wire transfer.

To encourage the productive use of alternative energy sources such as landfill gas, the federal and state governments provide various financial incentives to projects such as the City’s PGF. The revenue streams available to the City are:

• New Renewables Incentives
• Renewable Energy Production Incentives

• SUN LFG Payments

The California electricity deregulation legislation defines "renewable" power to include electricity generated from solar, wind, geothermal, waste-tire, biomass, municipal solid waste, digester gas, and small hydropower sources. To ease the impact of deregulation on these types of projects, the deregulation legislation established a "New Renewable Resources Account" of $162 million funded by ratepayers and administered by the California Energy Commission (CEC). The $162 million from this account will be distributed by the CEC to new renewable electricity generation projects that are:

• Located in California
• Using a technology or fuel source that is renewable
• Placed in operation on or after September 26, 1996

The City’s PGF, powered by landfill gas, qualifies as an eligible project. Power sold to qualifying outside buyers is eligible for the subsidy. The City submitted a winning bid for a portion of these funds at a rate of 1.12¢ per kilowatt-hour (kWh and is eligible to earn up to $210,000 in "New Renewables" subsidies for power sold over a five-year period. As discussed in RTC 98-183, staff used conservative assumptions of the number of kWh to be sold when preparing the bid. This allowed the bid to be a low-risk process that avoided stiff state penalties designed to discourage bidders from overestimating electricity sales. On June 8, 1999 the City Council approved the Funding Award Agreement with the CEC (RTC 99-244). The City is thus able to begin claiming the New Renewables subsidy as soon as power sales begin.

The federal government provides a Renewable Energy Production Incentive (REPI) for use of landfill gas to produce electricity. Instead of an auction, renewable energy producers such as the City file annual statements of the amount of renewable energy they produced and sold in the past year. Total REPI funds appropriated by the U.S. Congress for that year are distributed to producers of renewable energy in proportion to each producer’s share of the total qualifying production. This report assumes that the City will receive REPI funds at the rate of $.01/kWh. The amount of future City revenues from REPI will depend on:

• The amount of REPI funds appropriated by the federal government
• The quantity of power sold by the City
• The total quantity of qualifying power sold nationwide by other renewable energy producers, with whom the City will share the appropriated REPI funds on a pro-rata basis

In December, 1997, the City entered into four related agreements by which it sold its landfill gas collection system and gas rights to a private investor, SUN LFG (a subsidiary of Palmer Capital Management of Cohassett, Massachusetts) (RTC 97-512). Under the SUN LFG agreements, the City pays SUN LFG for landfill gas produced by the gas collection system while receiving revenues for:

• Sale of the landfill gas collection system
• Conversion of LFG to electricity at the PGF
• Operation and Maintenance of the LFG collection system

The net financial effect on the City is a revenue stream that increases by 40¢/million Btu (British thermal unit, a measure of energy content) if the gas is used for generating electricity rather than being flared. As a private entity, SUN LFG is able to take advantage of federal tax credits arising from the use of the landfill gas to generate electricity. These tax credits, contained in Section 29 of the Internal Revenue Service (IRS) Code are designed to reward the beneficial use of various types of alternative energy sources, including landfill gas. Unless the U.S. Congress takes action to extend these tax credits, it is unlikely that this revenue stream will continue beyond 2002, the present date at which the Section 29 tax credits sunset. If exporting electricity would increase "beneficial use" of the landfill gas, revenues to the City from the SUN LFG agreements would increase.

Production of landfill gas is limited by the amount of garbage available to be decomposed, the rate at which the bacteria are able to generate gas, and a number of other factors. At a closed facility such as the Sunnyvale Landfill, a declining rate of gas production is expected over time, since no new "food" is being provided to the gas-generating bacteria. At this time, it is unclear whether or not the landfill can provide more gas to the PGF than it presently does. For purposes of the recommendation in this Report to Council, staff has used a conservative assumption that all available landfill gas is already being extracted. This would result in no increase in revenues from Sun LFG.

Because it is made from a renewable resource, power produced by the PGF is considered "green power" in the deregulated electricity marketplace. Green power has a somewhat higher wholesale value than so-called "brown power" generated from fossil fuels or nuclear sources. The extra value placed on the City’s green power will take the form of "Green Tickets," for which the City will receive revenue.

The benefits to the City of power export are both financial and operational.

Although WPCP power purchase costs have dropped substantially since the PGF began supplying electricity, the WPCP still spends about $245,000 per year to purchase power from PG&E. Running the PGF at full load will enable it to supply all of the WPCP’s power needs under normal operating conditions. Electricity costing about $60,000 per year will still need to be purchased from PG&E on a standby basis during times when the PGF engines are off-line for maintenance or repair. Running the PGF at full load will thus reduce WPCP electricity costs by $185,000 per year compared to current conditions.

The market value of the excess PGF electricity cannot be precisely predicted since its worth is determined by future supply and demand factors outside the control of the City. Staff estimates that, at current WPCP power use rates and assuming 94% uptime for the PGF, that an annual total of 3,488,400 kWh will be available for sale. Based on a 12-month average of past electricity value pricing, staff has used an average value of 2.97¢ per kWh to estimate that annual APX electricity sales revenues would be $103,600.

According to the journal "California Energy Markets," Green Tickets traded between January 1 and April 15, 2000 had an average value of $0.00422 per kWh. At the projected rate of sale, the City would realize Green Tickets revenue of approximately $14,700.

For the first five years of power exports, the City will earn 1.12¢ per kWh from the CEC’s New Renewables incentive payments. At the projected rate of sale, this revenue will total $39,100 per year.

Revenues from REPI cannot be precisely predicted because two key variables (the annual appropriation amount and the total qualifying electricity production) are unknown. Based on history, staff feels that an assumption of $.01/kWh is reasonable. At this rate, exporting the excess PGF electricity would return to the City approximately $34,900 per year in REPI funds.

The recommendation to export power is based on a conservative assumption that there will be no increase in revenues from Sun LFG’s payments to the City. However, should it be found that landfill gas production can be increased and used to generate electricity, the City would see an increase in revenue at the rate of 40 cents per million Btu’s. In any case, this revenue stream is likely to stop after the IRS credits expire in 2002.

The total of the power export revenues and savings estimated above is $377,300 per year for the first full year of operation. With one-time installation expenses estimated to total approximately $200,000, the installation costs will be recovered well before the end of the first year of power exports.

The operational benefits of power export are as significant as the financial benefits. Operating the PGF engines at full capacity improves the operating efficiency of both the PGF and the landfill gas extraction system. The engines run most efficiently when at full power, resulting in less engine maintenance and repair and lower air emissions. The landfill gas extraction system depends on biological activity that is sensitive to fluctuations in gas withdrawal rates. Both short and long-term gas production benefits when gas is withdrawn at a constant rate, and fewer gas field adjustments are necessary when flow is constant. Finally, a general community benefit is derived from making available for use electricity generated from landfill gas that would have otherwise been destroyed by flaring.

To accomplish export, the City is in the process of installing cables and telecommunication equipment and making other technical modifications to the PGF to safely transfer and meter exported power. The one-time construction and engineering cost of these installations is estimated to total approximately $200,000, which includes the $184,798 in one-time PG&E costs authorized by the proposed agreement. Funding for this work is provided by Capital Project #821110, "Power Generation Facility." The proposed agreement with PG&E will obligate the City to ongoing Cost of Ownership payments of $1312.89 per month. Electricity export will also require minor ongoing expenses for telecommunications and equipment maintenance.

Staff recommends that the City Council authorize the City Manager to execute the attached agreement with PG&E to enable the sale of excess electricity.

Solid Waste Sub-Element

• Policy 3.2H.2 - "Extract available resources from the refuse buried at the landfill."
• Policy 3.2H.5 - "Generate revenues from post-closure uses of the landfill."

Fiscal Sub-Element

• Action Statement 7.1D.1r - "Seek all possible Federal and State reimbursement for mandated projects and/or programs."

Funds for the installation of the power export equipment are provided in the budget for Project #821110. After the start up costs are recovered (which is anticipated to occur in less than one year), power exports will reduce future customer revenue requirements in the Solid Waste and Sewer funds.

Notice has been provided through the publication and posting of the City Council agenda. In addition, all Reports to Council are available in the Library and on the City Internet home page.

Staff recommends Alternative 1.

Prepared by:

Mark A. Bowers
Solid Waste Program Manager

Reviewed by:

Marvin A. Rose
Director,
Department of Public Works

Reviewed by:

Mary J. Bradley
Director,
Department of Finance

Approved by:

Robert S. LaSala
City Manager