Redbud Looks for Contracts to Take Advantage of Plant’s Capacity
By Zachary Warmbrodt, The Daily Oklahoman
Jul. 20–It’s not easy being an independent power producer in Oklahoma.
Redbud Energy LP’s 1,200 megawatt natural gas-fired plant in Luther, which began generating commercial power in 2004, operates at about 35 percent of its full capacity.
The state’s utilities have almost completely avoided buying energy from the plant on a long-term contractual basis. And congested transmission lines, owned by a utility, hamper the plant’s ability to send more power out of state.
Today, the plant’s proponents fight the construction of a new coal-fired plant by Oklahoma Gas and Electric Co. and Public Service Corp. of Oklahoma. Redbud wants the utilities to take advantage of generation that is cleaner than coal and available now.
OG&E spokesman Brian Alford said power from a constantly running, or baseload, natural gas plant would be expensive for customers because of fluctuating gas prices.
“Those costs are a direct passthrough to customers,” he said. “When gas prices spike, customer bills spike because of the costs associated with the fuel.”
The Redbud plant is a product of deregulation that never came.
Intergen, a subsidiary of Royal Dutch/Shell Group and Bechtel Group, started building the $750 million plant in 2001, when state legislatures, including Oklahoma’s, seemed poised to unleash market-based reforms. Also, natural gas was cheaper.
After California’s deregulated market produced high prices and blackouts, the movement halted in Oklahoma.
Without an open market, Intergen struggled to find long-term contracts. Utilities used Redbud power on a short-term, or peaking, basis. Intergen sold the plant and others in 2005, allowing Kelson Energy Inc. to buy the Luther plant for less than the construction cost.
“There are so many independents that either went bankrupt or sold their plants because they couldn’t cover costs because the market didn’t turn out the way they expected it to,” said Redbud President Rob Janssen. “Intergen I guess wasn’t interested in going into bankruptcy and couldn’t finance again.”
A boost came in 2006, when the Oklahoma Corporation Commission approved rules requiring utilities to seek bids for electricity generation, Janssen said. Since then, the Luther plant has won contracts to supply power to OG&E and PSO during the summer months. In June, it entered into a one-year deal with the Grand River Dam Authority, Janssen said.
Business has increased since the rule’s creation, Janssen said.
“Anything requiring open competition and transparent competition is good for us because that’s the environment that we excel in,” he said.
Aside from these agreements, the plant continues to serve Oklahoma utilities on a weekly, hourly or daily basis. Without long-term deals, the plant must be cycled on and off as demand requires.
Many gas plants operate this way because of the relatively high costs of fuel compared to coal or nuclear plants, but Redbud wants more. Cycling the plant wears down equipment, creating more cost.
“Something that’s very important to us is that we eventually capture the actual capacity value of the plant, that we get paid for our fixed costs as opposed to just variable costs plus some sort of adder,” he said.
In October 2005, PSO issued a request for proposals for up to 500 megawatts of baseload capacity. Redbud applied, and PSO turned it down, citing insufficient credit, said Redbud counsel Cheryl Vaught. She represents Redbud as it fights the proposal that PSO chose — a partnership with OG&E to build a new coal-fired plant in Red Rock.
“Essentially the utility’s saying, ‘You were not eliminated based on pricing you proposed, not based on the merits of your proposal, but based on a threshold financial criteria,’” she said.
She said Redbud’s bid included long-term power sales and an ownership component. Vaught declined to comment more on the bid.
Stuart Solomon, PSO’s president and chief operating officer, said all parties had the opportunity to comment on the requirements before bidding. He said Redbud did not meet the credit requirement or any alternative credit requirement.
“Credit is a very important consideration for our customers,” he said. “We don’t want our customers or our company to be exposed to undue credit risk.”
Sending power out of the state supplements the plant’s Oklahoma business, but Redbud, like other generators and utilities, face congested transmission lines.
The plant is attached to OG&E’s transmission lines. During times of high demand, the utility’s power could take priority over Redbud’s.
“There’s only so much capacity within that transmission grid,” Vaught said. “The bottom line is all transmission’s not treated equally.”
Independent companies have emerged to meet a new demand for transmission lines that are beholden to no single utility.
There are two types of upgrades: reliability, which are those needed to keep the lights on, and economic, which would allow generators to ship power to new, more distant customers.
“The constraints that we tend to see are much farther away,” Janssen said. “It’s difficult to move power too far.”
Oklahoma’s competitive bidding rule has opened doors for the plant in Luther.
PSO has released a request for year-round power from 2009 to 2012. Redbud will bid, Janssen said.
“That will be one of our first opportunities to buy long-term power in the electric industry,” he said.
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