Hydro Review

From the Boardroom: Marc Gerken, American Municipal Power

American Municipal Power is paving the way in new hydroelectric development in the U.S., with four projects under construction that will add more than 300 MW of capacity. Read on to learn why the company believes hydropower is the way to go.

By Elizabeth Ingram

American Municipal Power provides wholesale power for municipal electric systems. AMP has 129 members - 128 member municipal electric communities in Ohio, Pennsylvania, Michigan, Virginia, Kentucky and West Virginia, as well as the Delaware Municipal Electric Corporation - that combined serve about 625,000 customers.

Some of the power provided to its members is owned and operated by AMP. In fact, AMP owns 766.5 MW of capacity and operates 223 MW of member-owned generation through joint ventures. In addition, the company is pursuing more than 300 MW of additional capacity by developing new hydroelectric facilities.

Marc Gerken
Marc Gerken

The company is enthusiastic about hydropower. AMP developed and manages the 42-MW Belleville Hydroelectric Plant, a run-of-river facility on the Ohio River in West Virginia, on behalf of 42 member communities. And AMP has four projects under construction at existing Ohio River. These are: 88-MW Cannelton, 76-MW Smithland and 105-MW Meldahl (in partnership with member community Hamilton, Ohio) in Kentucky and 44-MW Willow Island in West Virginia. In addition, AMP is pursuing a Federal Energy Regulatory Commission operating license for a 48-MW project at the Robert C. Byrd Dam on the Ohio River (in partnership with member community Wadsworth, Ohio). Combined, these projects will add more than 350 MW of renewable capacity to the region.

Hydro Review sat down with Marc Gerken, president and chief executive officer of AMP, to discuss the company's significant new hydro development work and why they consider hydro the right path, despite the long development timeline inherent with this generating technology. Following is a transcript of that discussion.

Q: AMP's business strategy is to develop more generation assets and provide a diverse resource portfolio. Why is this an important focus?

Gerken: AMP was very asset poor before 2006, relying on organized markets to provide the electricity our customers needed. At that time, we were 50/50 in the PJM and MISO markets, while today most of our members are in PJM. We didn't like where the markets were headed in terms of the unpredictability and the inability to control wholesale costs. Our members didn't like the volatility that we were seeing in the market. We wanted to generate electricity using our own resources so that our members could have more control of their destinies in terms of wholesale power costs.

We didn't set a percentage of our portfolio to be generated using facilities we owned, but we looked at our existing portfolio as well as what was available in terms of new development. We were convinced we needed a diverse portfolio, with more of a focus on sustainable renewables such as hydropower.

Construction is well under way at the 88-MW Cannelton project on the Ohio River in Kentucky. This facility is expected to begin operating in spring 2014.

We had commissioned our first hydro plant, Belleville, in April 1999. In addition, AMP member the city of Hamilton, Ohio, operates the 70-MW Greenup hydro project on the Ohio River in Kentucky and Ohio. Another member, the city of New Martinsville, Va., also had a hydro plant at Hannibal Dam on the Ohio River. Through these connections, AMP had a lot of experience on the hydro side.

Belleville has been a good project. Even though we had construction issues - mostly related to contract disputes - we got the project finished within the contingency budget, with higher than expected production. We have 13 years of operating this plant under our belt.

In addition, we moved forward with development of a 703-MW natural gas combined cycle plant in Ohio. The AMP Fremont Energy Center was commissioned in January 2012 and represents about 17% of our customers' needs.

Q: AMP has four hydro projects under construction and one operating. What are the benefits of hydro that made you choose it over other generating technologies?

Gerken: Hydropower really is a 100% renewable resource we can forecast a day ahead. The resource gives us about a 55% to 60% load factor. It really almost looks like a baseload resource from that perspective. The longer term benefit for our members is that these projects will last 80 to 100 years, and once the debt service runs out in 30 to 35 years, you are looking at $35/MWh energy and capacity going forward.

We looked at developing hydro plants both with and without some sort of carbon regime. I believe there will be a carbon regime in the future, but I don't know what it will look like. Sooner or later we are going to look at these hydro projects as being extremely beneficial in terms of carbon regulation and the fact that hydropower in this construct is 100% renewable, with no fuel or waste stream. Hydro is also dispatchable, as we know each day how much generation will be available the following day.

When you look at the cost for hydro development, it's similar to building a nuclear plant. The biggest difference is we don't have the fuel to buy and don't have a waste stream to deal with. Are hydro plants above the market right now in terms of development costs? Absolutely. But I believe we're going to be a lot better off 10 years from now with regard to the ability to forecast in terms of duration and predictability of these projects compared with wind and solar facilities.

The 44-MW Willow Island facility is another hydropower project being developed on the Ohio River by AMP.
The 44-MW Willow Island facility is another hydropower project being developed on the Ohio River by AMP.

When work on these four hydro projects are complete, we will have 16% hydro on average in AMP member portfolios.

Q: Let's talk more about cost. With your four hydro projects expected to cost about $1.7 billion to build, how does this compare with the cost to develop other energy sources?

Gerken: When compared with a new coal plant, the cost to develop hydro is a lot higher. We made the decision in 2006 to move forward with these hydro projects, but at the time we had a volatile market reaching $80/MWh and climbing. Now we have a compressed market. If we were looking at these projects on the short term, we would never have built them.

In addition, with low gas prices right now, a combined cycle plant is an attractive option.

If all these hydro projects are lumped together, we are going to be on higher end of where we wanted to be in terms of cost because of delays in permitting, etc. Our cost of energy is going to be above $90/MWh. But we don't look at one project to be a winner or loser in a snapshot of time. We look at our resource portfolio overall and tell members the cost going forward. In 10 years, gas prices, coal costs and environmental regulations will change. Renewable development also will change if we have no investment tax credit or production tax credit. Hydro is just one resource, and AMP members have a lot of resource slices available to them.

Q: AMP awarded a single equipment contract to Voith Hydro for the Cannelton, Smithland and Willow Island projects. Please explain the reasons for awarding a single contract.

Gerken: Our conclusion was that we had eight turbines to order, and the city of Hamilton needed another three. We were very concerned that all the hydro development work in Brazil was going to be moving forward, and bidding in about a year from where AMP was looking might have changed the dynamics of pricing.

We had three qualified vendors, and we wanted to see what it looked like bidding eight units together at once. We didn't worry about the Meldahl facility because it was trailing the other three. We ended up getting pricing and schedules we felt comfortable with. We did have some fears with regard to putting all our eggs in one manufacturing basket, and there have been a few hurdles, such as schedule timing. But, thus far, we have been able to work through them.

The original order was for eight turbines, then we extended the contract for the other three units for the Meldahl plant. The Willow Island powerhouse contains two units, and Smithland and Cannelton have three each.

When I was involved in development of the Belleville project as a board member, I learned that if you take three business cards and put them together, that is the tolerance between the structure the turbine sits in and the blades. There is no tolerance for risk with regard to mounting the turbine. This work is expensive and requires skilled people. Voith Hydro has done a good job for us. At points during the past four years I've said, "Would we have been better off with multiple suppliers?" I don't know the answer to that question. But at the end of day, we will have 11 turbines that basically all look the same and are manufactured very similar, as well as spare parts, at economies of scale we thought were important.

The 105-MW Meldahl hydro project, also on the Ohio River, is being developed in partnership with AMP member community Hamilton, Ohio.
The 105-MW Meldahl hydro project, also on the Ohio River, is being developed in partnership with AMP member community Hamilton, Ohio.

Q: AMP broke ground on the Cannelton project in August 2009. Is development of this facility progressing according to schedule?

Gerken: We have seen some schedule slippage, but we are working with the powerhouse contractor, Walsh Construction Group, and Voith Hydro, the turbine-generator contractor, to recover. We have had a lot of lessons learned on this project to apply on the other projects.

This project was more expensive from the bid perspective than the others. When we bid the projects out based on unit price, Cannelton came in significantly higher than our original estimates. We negotiated with three bidders. Some of the impacts on the first project were a result of contractors still having capacity tied up in New Orleans for work related to Hurricane Katrina.

The Cannelton hydro project is scheduled to begin operating in 2014.

By contrast, Meldahl was significantly lower than our original estimates. Two companies that were very competitive on this project were interested in working on the Smithland and Willow Island projects, so we were able to take unit prices and negotiate the last two powerhouse contracts without going out to formal bids. We saw significant reductions in unit prices a year after we received bids for Cannelton. We think this is because companies got a little more sophisticated on bidding, had a better understanding of what the projects involved, and were a little hungrier for work.

Q: You have said it seems hydropower has been largely ignored in recent discussions of alternative energy. What is your theory with regard to why hydro isn't more "mainstream" in the renewable energy arena?

Gerken: I think it's deemed an old technology. I think wind has done a great job of marketing itself and getting subsidies, such as ITCs and PTCs. Solar hasn't been as successful as wind, but from a marketing and lobbying perspective the industry has done a decent job and is gaining. People tend to think those are our emerging technologies and are a lot cleaner than hydro. If you have to run a utility, those are pieces of the puzzle you need, but they're not going to keep the lights on, and you need a lot of other resources to keep the grid supported.

I really believe we try hard to promote hydropower and market it. It's getting more momentum. In the past four years, I believe the National Hydropower Association and its members have done a lot better job of working on Capitol Hill. We're more focused on project relicensing efforts instead of development because there is not much new development work going on. NHA has redeployed its resources, and both sides of the administration have a better understanding of hydropower.

However, there has to be more guidance and authority coming from all sides, even from us, that helps move this along. Hydro is a tremendous resource, it's long term, most of the megawatts that are going to be built do not involve big impoundment areas. It has little environmental impact. These projects are very capital intensive but last a long time if you manage them right. Once you retire the debt service, the only cost might be small upgrades, but 3.5 cent to 4 cent power is much more attractive when you look at where power is going to be in 35 years.

Although there is a lot less risk in developing a solar facility, they only produce 18% of the energy you need. Wind in Ohio is about 35% capacity factor, but you don't know if you're getting it from one hour to another. It is easier to support something that can be built quickly, but the jury is out on how long a wind turbine or solar panel is going to last, not past 25 years.

Q: You have championed legislation to promote the development of new hydropower capacity in the U.S, such as the Hydropower Improvement Act. Do you feel the U.S. "attitude" with regard to new hydro has changed over the past three years?

Gerken: It's a complicated industry. Now we have a recession, we're looking at job creation, and carbon legislation in the near term is silent. In 2007, I would have told you we were headed toward a carbon regime. With the recession, politics took over, and we're nowhere. If those things would have happened, there would be more hydro development today. I think there will be anyway. The recession slowed a lot of things down. To grow jobs and the economy and reinvent the electric industry in the U.S., we need to spend money on value renewables, the ones giving you the most megawatt-hours when you need them at a decent price. I think that whole equation gets lost because of tax credits.

I think, long term, hydro will gain more momentum. If you look at it from a utility perspective, hydropower brings values wind and solar can't. In addition, there are synergies with hydro that wind could use right away. Partnerships have to happen, and government has to help deploy some of that.

I tell people, "Here's how you solve the energy and economy problem." The federal government buys energy every day and pays a bill. Why not mandate that individual facilities buy power from solar, wind, hydro and nuclear plants? The government wouldn't have to appropriate a nickel. Somebody's got to step up and say, "This is our energy policy and we're going to take energy at a certain percentage from each of these resources."

A recent NHA study indicates Americans view hydropower as a clean, reliable and renewable resource and support hydro-specific initiatives for tax credits, federal reinvestment in facility upgrades and federal investment in research and development (www.hydro.org/why-hydro/poll).

Q: With these four hydro projects, your member resources will include 16% hydro in 2015, compared with 6% in 2011. Do you see this share growing even more beyond 2015?

Gerken: AMP has a preliminary license for the two-unit R.C. Byrd plant. We are working through permitting and licensing. Markets today don't look very attractive. Part of my job is to have vision and strategy to get things moving forward. We don't expect to start construction in 2017. Existing member load is growing, and new members look at us from a growth perspective and to serve them on power supply.

I don't believe in hanging on to a license if we're not going to finish the project. We have made recommendations and they have been accepted, but we have slowed down on pursuing any other license right now. When the R.C. Byrd groundbreaking happens, I don't believe that will be the last hydro plant we develop or become owners of.

With the team we've got, as well as the team outside with MWH (providing engineering design services for the Cannelton, Smithland and Willow Island projects) and others, we know how to get these things built. We understand the return on investment and have the expertise, we just have to find offtake through the AMP membership to make that happen.


Elizabeth Ingram is senior editor of Hydro Review.

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