Community Owned Independent Power Production: Challenges and Opportunities

Economic downturn is becoming a reality for many communities in North America, particularly those in rural areas. Changing economic trends and the recent global economic crisis, combined with concern over climate change, have impacted the community level. Recent job losses, long standing unemployment where low skilled workers cannot easily transfer to new jobs and out-migration continue to have social and economic impacts, altering community demographics and creating a need for new development opportunities.

Energy is a social and economic necessity, particularly in North America where consumption is the highest per capita. The combination of growing energy demands, increasing energy prices and concern over the impacts of carbon emissions associated with fossil fuel energy generation have increased pressure to develop renewable energy. However, with the exception of large hydro dams, renewable technologies are intermittent power producers, generally most efficient when developed at a small or medium scale for supplemental power supply. These smaller facilities are generally seen by large utilities as inefficient in terms of cost and reliability when compared to traditional large scale, base load generation facilities.

While major utilities continue to focus on large scale generation, the market for small scale generation has been opened to Independent Power Producers (IPPs), independently owned power generation facilities which sell the energy to utilities. IPPs can be private, public or involve some level of collaboration. However, when it comes to some forms of renewable energy development, such as small hydro, most IPPs are private. These private IPPs often develop sites close to the rural communities most in need of development opportunities. Such communities, happy to accept private promises of employment, property taxes and purchases of local supplies, often give no consideration to other roles the community could play in energy generation.

This article examines why there is so little community involvement in the independent production of energy, using community small hydro as an example. The focus will be on what challenges communities face in the IPP market and on what opportunities are available to communities that choose to invest in community owned power production. Part II of this article, to be published in the January/February issue, will offer some strategies for overcoming barriers and identify benefits that communities can realize from renewable energy projects.

Independent Power Producers

Centralized energy systems have long been the accepted practice in North America, with large utilities controlling energy grids and supplying energy from a small number of large generation stations using traditional fuel sources (for example, coal, nuclear and large hydro). Distributed generation is an alternate approach, built on the decentralization of energy generation, characterised by a large number of generation stations of various sizes and fuel sources.

There are many arguments in favor of distributed generation. Centralized generation requires the installation and maintenance of considerable transmission infrastructure which, in addition to being expensive to install and maintain, results in a 7 to 10 percent loss of energy due to transmission over long distances. Increasing the number of generation stations and distributing them over a larger geographic area decreases transmission distances, reducing energy loss and lowering pressure on the energy grid. Distributed generation can increase energy supply security by spreading the load between multiple energy sources, decreasing the likelihood of brownouts or blackouts as a result of the failure of a single energy source. Distributed generation requires some deregulation of the energy sector, allowing energy generation by those other than the major utilities; that is, IPPs.

Examples of how renewable energy incentive programs have generated interest among private IPPs are widespread. In the Canadian province of British Columbia there have been over 400 applications for small hydro developments, the majority of which are from private IPPs or joint ventures between private IPPs and First Nations. Many of these proposals have been in rural areas where communities are in need of support and new development. The Regional District of Mount Waddington on Vancouver Island has had many requests from private IPPs, all promising that projects will stimulate “local development.” In reality the impact for these six projects will be limited: a total of 22 permanent jobs, the use of 50 percent local labor and attempts to purchase local supplies. “Local development” in this sense does not include profit sharing or investment in the community. This situation is typical for private IPPs, limited local benefits when compared to investments from community-owned or joint venture IPPs.

Small hydro, like many renewable technologies, is associated with the incentive programs implemented as part of the recent push for the development of “green” energy due to concerns over the role emissions from energy generation play in climate change. There are many examples of such programs, from standard offer contracts to feed-in tariffs to tax incentives. These programs make developing small hydro economically feasible by offering a fixed rate for power, helping to offset high capital costs. Interest in private IPP and joint venture development of small hydro is widespread and continues to grow. However, this type of ownership typically creates few local benefits when compared to community. What this represents is lost opportunity for the revitalization and development of these communities.

Small Hydro

Hydro power is both a proven renewable energy technology and the world’s largest source of economically viable renewable energy. Hydro has the benefit of being versatile in terms of the range of scales and conditions the technology can be built to suit, ranging from traditional large dam projects to small hydro projects.

For purposes of this article small hydro is defined as a facility producing 20 MW or less. Small hydro is considered both a renewable and a green source of energy, as these projects typically have smaller environmental footprints than conventional large-scale dams and can more easily be designed to blend into the landscape, making these projects less obtrusive and more aesthetically acceptable. In addition, small hydro is considered to be the main prospect for future hydro development in areas where large dam potential has been exhausted or where large hydro development is deemed unacceptable due to potential social and environmental impacts.

Small hydro was chosen for investigation as it is considered to be the best example of a renewable energy technology which can help foster community development. Primarily, small hydro, in comparison to other renewable energy technologies, is a more consistent and predictable source of power. Small hydro technology also allows operators to easily vary the power output through water flow control. While upfront capital costs are high, when averaged over a 50- to 75-year lifespan small hydro has the lowest overall cost compared to other renewable technologies. These factors combine to make small hydro a relatively stable source of revenue, which, if community owned, can be reinvested in local development.

To study community involvementin independent power production, data were drawn from four community small hydro cases studies, two in Canada and two in the United States. In-depth semi-structured interviews were held with 51 stakeholders associated with developing and operating small hydro in the case study communities. Interviewees included city/municipal employees, hydro board members, utility employees, engineers, consultants, biologists, non-governmental organization members, local politicians and prominent citizens. Interviews focused on the drivers behind the establishment and refurbishment of local small hydro systems; the planning, design, and permitting process; community benefits; and links between the small hydro and community development.

Case Study Communities

The town of Almonte, Ontario is part of the larger amalgamated community of Mississippi Mills, with a population of 4,650. The Mississippi River is the source of the local small energy generation station. The history of Almonte is tied to the river, both for textile industries and for hydroelectric power generation beginning in 1901. The current generation capacity of the local small hydro is 2.4 MW, with an upgrade to 5 MW in progress. Privatization of Ontario’s energy sector resulted in the formation of the Mississippi River Power Corp., a private company 100 percent owned by the town.

Bracebridge is in the district of Muskoka in central Ontario. The official population is 15,600 with an additional 9,300 seasonal residents. The north branch of the Muskoka River runs through Bracebridge from its headwaters in Algonquin Park and is where three of the small hydro facilities owned by the town are located. In the late 1800s Bracebridge established its first small hydro plant, later expanding to multiple facilities totaling 4.2 MW. In 2000, with the privatization of energy in Ontario, Bracebridge Generation became a part of Lakeland Holding Ltd., a private company whose shares are owned by several municipalities, including Bracebridge as the majority shareholder.

Boulder, Colo., is home to approximately 100,000 people. Boulder is well known as a community with a strong conservation and natural preservation ethic. Within recent years this ethic has led to a commitment to improve sustainability and reduce greenhouse gas emissions. This has included the development of Boulder’s small hydro facilities beginning in the late 1970s. There are eight small hydro facilities, seven in-line and one in-stream, producing a total of just over 20 MW. The in-line facilities are built into the municipal water system, with turbines installed on raw and treated water lines. The in-stream hydro facility is on Boulder Creek, west of the city.

Swanton Village in northern Vermont has a population of 2,500. The Highgate small hydro facility is on the Missisquoi River, upriver from Swanton. Hydroelectric generation began in 1894 when the Village purchased the Highgate dam from private developers and began producing energy for Swanton and Highgate. Various upgrades to the facility have been made, most recently in 1994 when power production was increased to 9.5 MW.

Barriers to Development

Data from the case studies allowed the identification of three common categories of barriers to small hydro development: attitudes, finance and bureaucracy. In addition, various additional factors were identified which negatively impacted the development process, heightening barriers and making the process more difficult. These additional factors are shown in the central area of Figure 1.

Interviewees indicated that the attitudes of three main stakeholder groups (utilities, government and the public) affected the community small hydro development process. Each of these was further influenced by issues associated with communication, knowledge, technology and uncertainty. The attitude of major utilities toward community IPPs was frequently identified as an initial barrier. Respondents explicitly stated that the utilities were hostile toward the development of community IPPs, stalling development and increasing costs for developers as a result of the utility preference for a centrally controlled energy grid. Interviewees also discussed the challenges of working with utilities when it came to connecting their project to the grid. It was felt that utilities saw the connection of small projects to the grid as an expensive inconvenience.

At the province/state level, government was generally supportive of distributed generation, renewable energy and community involvement. However, interviewees did not see this support translating into action at local government offices where delays, paper shuffling, communication problems and other complications were all cited as common issues. There was conflict in the interview data as to whether this was simply a result of attitudes at the local level of government or whether there were additional factors such as government offices being overwhelmed with work or a lack of direction from higher levels.

Public concern over the development of small hydro was the most commonly cited attitude barrier. Project planners indicated that public opposition often arose from a combination of misperception and misinformation on the part of the public, while members of the public reported that some project planners appeared to ignore the potential impacts of these developments on the local environment. On the part of the public there was often an element of NIMBYism (Not In My Backyard). Change, especially the combination of aesthetic change to the landscape and change to the natural environment, was seen as the driving force for NIMBY feelings. These conflicts demonstrate how important the role of communication was among stakeholders. In some cases such attitude barriers may have been lessened or eliminated had better methods of communication been used to include all stakeholders from the outset.

Financial issues were the second major barrier, including capital costs, bonding and credit and budgetary concerns. (All of these are also affected by communications and the other factors illustrated at the center of Figure 1.) Small hydro developments are capital intensive. Research and design, construction, technology and legal advice were all upfront costs that presented a challenge for project planners to secure the necessary capital and for consultants to work within the community’s budget.

Bonding can mean two things: the ability of the community to obtain a secure loan for development and the assurance that should a contractor be unable to fulfill their contract for the development of the small hydro, the investors (that is, the community) would be protected by a third party. Bonding was highlighted by Swanton respondents, who said waiting for the ability for the community to obtain a secured loan resulted in considerable delays. In turn, this resulted in increased cost, debt and uncertainty. The issue also was raised by Almonte interviewees who said that some contractors are not bondable and that it had proved a difficult and expensive process to identify those who were.

Protecting the community’s credit also related to financial planning. Almonte interviewees reported that the utility board and the community had deemed it inadvisable to use the community’s credit for a small hydro development. Accordingly, the small hydro project was established as a private company owned by the community. This allowed the Board to secure credit as a separate entity and limited the community’s financial liability.

Accurate budgeting was cited as a fourth financial concern. While an initial budget was set by project planners, escalating costs brought on by delays and increasing costs added to the original budget. This resulted in impacts such as increased energy costs passed on to consumers, downscaling of project design elements (for example, removing additional features such as educational aids within the facility) and concerns over whether or not the project would actually be built.

The “bureaucratic” barrier was agreed upon by interviewees as the most difficult to overcome. This included understanding the development process, difficulties in obtaining permits and difficulties gaining approvals. “Bureaucracy” can be closely linked with other barriers, such as the frustration associated with issues related to attitude and communication between various stakeholder groups. Bureaucratic barriers often resulted in delays and escalating project costs, impacting the project budget. Issues surrounding the timing of development, project planning and project management were all closely integrated with the complexity of the bureaucratic processes required for project completion (for example, environmental impact assessments and meeting interconnection standards).

Project delays resulting from a combination of lengthy and complex bureaucratic processes and continued requests for unexpected additional studies and environmental considerations all resulted in escalating costs and changes to the initial budget. Interviewees recognized the necessity of having an official permitting and approvals process to ensure proper site selection and consideration of the environment. However, the complexity and length of the bureaucratic process and the fact that this complexity necessitated hiring a consultant was seen as unacceptable. A site with no major environmental issues took years to complete and the process was the same regardless of whether it was 100 kW or 100 MW. Upgrades for the most part were subject to similar regulations as new projects and getting regulatory exemptions often proved just as time consuming. An apparent lack of cooperation between government agencies and within single agencies added to the confusion and frustration.

Part II will address strategies for overcoming many of these barriers. Key community benefits stemming from community involvement in electric power generation will also be addressed.

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