Island Times asks GridMarket CEO for some insights on microgrid project, here’s what he has to say

Island Times asks GridMarket CEO for some insights on microgrid project, here’s what he has to say

  02 Nov 2018

Island Times: For now, I have one thing in mind which I would like to have a clarification with. In my previous interview with one of the senators, it was shared that one of the Senate’s concerns is whether the Palauan people are going to pay a power bill that is fair. PPUC Board Member Brian Melairei had already clearly explained to the media that Palau is in fact going to save money with the arrangement with Engie. But I think it is worth noting that Melairei’s premise is anchored on the comparison of the price of buying fossil fuel versus renewable energy cost. Indeed, as Melairei explained, given that Palau is only going to buy .19 cents per kilowatt hour from Engie in the first five years of the operation of the project, and comparing it to the current set up where Palau is buying 20.6 cents per kilowatt hour from diesel companies and with fossil fuel price projected to increase in the coming years, Palau can save money without a doubt. But I think what the people want to know is whether there is the same project somewhere – one that uses renewable energy – where Palau can make a comparison with especially in terms of the cost to be paid? And if there is, is the agreed power cost with Engie better, fairer than that same project somewhere? I think if you can provide some insights on this, that would be a really great information to share to the people and make them understand.

GridMarket CEO Nick Davis: 

We are hoping to continue to support this being the most transparent and democratic process ever delivered for a deal of this kind, and I think the project lives up to those standards given the initial down-selection process and negotiation from dozens of solution provider hopefuls, down to the extensive negotiations Engie has entered into across every level of government thus far. 

Palau is on the front lines of global warming and rising sea levels; this much we all can agree on. The scale and magnitude of the global climate crisis requires immediate action, in many ways unprecedented, as all nations must work to transform their economies and energy sector to have low-to-no carbon footprint.  In the face of this daunting challenge, President Remengesau and OEK have bravely and decisively made a firm commitment, enacting legislation that moves Palau’s energy sector to 45% renewable generation by 2025. With GridMarket’s help and the support of the PPUC and PEA, a plan was determined and a roadmap defined to meet those aggressive goals. Palau and GridMarket then prepared to enter into a PPA directly—respectful of the existing and compliant regulatory approval process—which GridMarket would then have the right and intent to transfer to the best-fit IPP.  In parallel, GridMarket canvassed the market to find the most capable, experienced and cost effective partners to implement the plan. Through an exhaustive process evaluating dozens of possible partners, Engie was determined to be the clear winner, with its global reach, project expertise, and access to a unique pool of philanthropic capital—allowing them to commit to the lowest PPA possible—delivering ~50% of Palau’s demand with battery storage enabled solar energy, meeting Palau’s committed goal five years early.

Though already unanimously passed by the House of Delegates, endorsed by the Council of Chiefs, and approved by the PPUC and PEA, there has been some delay from the senate to vote upon the final ratification. Though the landmark clean energy project stands to catapult Palau to the forefront of leadership on climate and clean energy—while locking in stable and affordable energy rates for the duration of the term—there is a time sensitivity to a portion of the project’s funding sources which require an expedient Senate review and ratification.  We applaud OEK’s commitment to due diligence in support of the people of Palau, but urge the senate to take immediate action to ratify this contract, which has gone through an incredibly exhaustive, inclusive and democratic negotiation process, culminating in execution by the PPUC and unanimous ratification by the House of Delegates last week.

The unique factors that shape Palau’s capacity and opportunity to integrate renewable energy into the grid—and the resulting impact these factors have on the proposed project—have been made clear to the Leadership.  While it is impossible to compare projects from one part of the world to another on a completely equal basis without a detailed discussion of the aforementioned unique conditions that drive each project’s costs and benefits, even a cursory survey of similar projects’ energy rate indicates that what is proposed for Palau at $0.19/kWh is a great deal.  PPUC even had the option to start at $0.17/kWh with very mild inflation even under the U.S. CPI, however they (I believe) wisely chose to deliver a flatter, secure rate structure for years to come. Remember that a gallon of gas in the U.S. was $0.95 cents 30 years ago. Now it is $3.60. Palau will be completely protected from this reality under this structure, and can focus on delivering the next 50% renewable energy. Compared to the rate which Engie and PPUC negotiated and have agreed to, here are a few examples of somewhat similar clean energy projects:

Samoa: $0.33 USD/kWh, with additional feed-in tariff government subsidy

Tuvalu: Projected at $0.40 USD/kWh cost

Molokai: $0.18 USD/kWh with additional escalation and 40% minimum subsidy from US Government

African Island Engie Project (they can verbally provide name): $0.24 USD

Grenada: $0.21 USD/kWh – $0.44 USD/kWh range, minimal to no battery storage

US Virgin Islands: Average PPA is $0.18 USD/kWh with additional escalation, subsidized 30-40% by US Government

JICA’s Projected Costs for Palau to go 45% Renewable – $0.44 USD/kWh

The current structure offered by Engie in Palau has no government subsidy. Even diesel is subsidized in Palau. If the ROP government subsidized or co-invested in the project (as with some of the projects mentioned above), naturally the tariff could go down even further. But that would simply be another way of charging the people, through taxation. This particular deal avoids those disingenuous financial structures, and simply delivers exactly what it says: a completely un-subsidized rate, and only for what Palau needs and uses.

It is important to remind elected officials and the public that currently the PPUC relies exclusively on diesel to produce electricity for the nation, having paid an exorbitant $0.246 per kWh on average over the past decade.  These costs are directly reflected in the rates which citizens and businesses must pay. Fossil fuel prices are incredibly volatile; without progress towards reducing diesel dependence, Palau will remain locked in a cycle of high-cost and high-volatility energy, which stunts opportunities for growth.  By working collaboratively with PPUC and PEA, Engie was able to determine that not just cost, but volatility, was a major concern, and have structured a contract with minimal price inflation. The contract’s terminal rate will hardly increase over 30-years from its starting point; over just the next ten years, crude oil price forecasts show the cost per barrel could increase 100% or more.  Simply by de-linking Palau’s energy costs from such wild volatility, this renewable project will have a stabilizing effect on the Palauan economy, where diesel procurement costs was recently up to 1/5th of Palau’s GDP.

While most countries that are securing clean energy projects are focused only on addressing the needs of their densest areas (read: most profitable for the private sector), this plan is leveraging economies of scale to provide clean, accessible, reliable, and inexpensive energy for outlying islands as well, which are currently subsidized through higher costs to the primary grid. As the product of a comprehensive review of Palau’s current energy infrastructure, the current plan will leverage battery storage in a cutting edge way to both increase the total penetration of solar energy the grid can support by 6-7 fold, while taking the first critical step towards resilient grid hardening.  Some have suggested that Palau can afford to wait indefinitely until renewable energy technology costs drastically drop, or some philanthropic entity or government donor arrives and promises the project for nothing. But, as the most recent IPCC report illustrates in chilling clarity, natural disasters and storms are swiftly increasing in strength and frequency—making it imperative that Palau strengthen the resilience of its infrastructure now—as the solar and battery storage project promises to do.

In order to provide the PPUC with this attractive, predictable long-term energy rate while requiring no subsidy or capital from the Government of Palau, Engie has done considerable work to shore up an internal philanthropic funding source, bridging the funding gap to make this showcase project pencil for investors.  As no government capital is required for the project, in its place, a Sovereign Guarantee has been requested to secure the PPUC’s commitment to purchasing the solar energy throughout the project’s contract term and commitment to not nationalize the project to put the already slow-to-pay investment at risk. The Sovereign Guarantee isn’t designed to burden Palau—but rather is designed to reduce Palau’s need to invest directly in the project— absolving them from requiring issuance of government bonds and unduly burdening taxpayers. Typical investment / government subsidies for projects of this scale are in the range of 30-50%, roughly $26-$38MM USD, a substantial investment requirement that the proposed structure eliminates completely. Furthermore, the contract preserves the right for future external incentives and carbon credits be applied to the project financials, securing the potential for additional benefits to be passed through to Palauan rate-payers. So, at worst, this project saves Palau money and improves the efficiency of the grid for decades. At best, the costs go down even further. With the application of battery storage to support even the existing diesel infrastructure (and thus realizing a 15-25% efficiency benefit to the existing power sources), this deal is tough to impossible to beat in real value to the grid and the people of Palau.

President Remengesau has made preserving the environment, climate, and energy affordability priorities of his administration, and through the tireless efforts of his administration, the PPUC, the PEA, the Council of Chiefs and Leadership Council, the House of Delegates, GridMarket, and Engie, Palau now sits on the cusp of completely revolutionizing its energy sector to face the challenges of the 21st Century head-on.  The Government, Senate, PPUC, PEA, and leaders of Palau have done an admirable job protecting the the interests of the people. Now, financial benefits to the citizens and the preservation of the environment should be held above politics. We ask that the Senate move to quickly ratify this landmark PPA while Engie is still able to deliver the commuted price and leading technology. Further delay would be a devastating result for Palau and would cede Palau’s leadership on this important issue to other, more decisive island nations.

The absolute truth is that this PPA was designed and negotiated for Palau’s specific needs, which are complex: A flat rate structure; distributed, resilient, storm-hardened infrastructure; serving outlying islands; increasing efficiency of the remaining diesel generation; digitizing the grid; achieving 45% by leveraging batteries, so the grid is not overloaded and put at risk. Engie is here doing this project as a showcase. They do not see a return for a decade and a half, and indeed showed these figures to leadership in a collaborative and transparent manner a few weeks ago. They have been open and fair partners, working to craft a favorable deal structure while achieving the bare minimum requirements to write a $75 million + check to modernize Palau’s grid.

In sum: is it cheaper/more affordable? Yes. Will the air be cleaner? Yes. Has it been evaluated and negotiated by every organization with an interest in Palau? Yes. Will Palau somehow get a half priced deal in 5-10 years for a storage-enabled solar project? No, unless the government wants to pay for half, or just go purely solar, which will harm the grid. Remember, this is on par with Molokai’s rate, and the US government paid nearly 40-50% in subsidies. Also remember that for Palau’s unique grid, JICA predicted $0.44 cents/kWh in cost for this project. In fact, Engie can deliver a very low price pure solar deal, much lower than the $0.15 cents initially requested by OEK…but there will be no batteries, the grid will be volatile and at risk with an intermittent resource, cost savings would be minimal because only a few percent maximum more solar could come onto the grid without batteries, and the initiative would fail. It would additionally prevent other private sector companies from investing, as they could not install additional solar without the battery and grid modernization infrastructure. The government would end up having to pay for batteries to be integrated into the system themselves, as they are doing on other islands who went down the “solar only” path. If these projects were easy and cheap, everyone could do them and the costs would be negligible. That said, the biggest IPP in the world is standing at the door with a great deal that has been extensively negotiated across the entire government of Palau, and in a compliant, open, and transparent manner. As we conjecture about the future, every day of delay is another dollar for diesel, and a dollar less for the people of Palau. 

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