Alaskanomics

Power Cost Equalization

By Tim Bradner

There’s an urban myth that energy costs in rural villages are heavily subsidized. The facts indicate that it’s more complicated.

Power Cost Equalization, or PCE, is a state program that does help reduce some, but not all, rural residential electricity costs. But there are limits to what’s included in the state’s support, and they have been substantially reduced over the years.

What is also important is that commercial enterprises in rural communities, from small grocery stores to fish processing plants, are not eligible for PCE support and pay the full rate charged by a local electric utility.

PCE was originally set up to pay the difference between average power costs in large communities like Anchorage and Fairbanks, and small villages like Napakiak, in the Yukon-Kuskowkim Delta. It doesn’t really do that, however.

Meera Kohler, president and CEO of Alaska Village Electric Cooperative, explained this in a presentation in Juneau last March to the House Special Committee on Energy. Currently, only 29 percent of all electricity sold in small rural communities is eligible for PCE. Commercial enterprises do not get PCE support and neither do state and federal facilities including schools. This means there are 6,000 electricity customers in rural communities who pay full rate, Kohler said.

For residential consumers only the first 500 kilowatt hours a month gets the support. Any use of power over that, and 700 kilowatt hours a month is considered normal, pays the full rate. Any consumer delinquent in his or her utility bill gets the PCE subsidy cut, too.

Some community buildings do get limited PCE support as do water and sewer plants, washeterias and local streetlights, but only up to a limit of 70 kilowatt hours per resident per month.

PCE has been steadily reduced since it began in 1986. The percentage of total power generation costs supported by PCE in 1986 was 32 percent. By 2017 it had been reduced to 16 percent of generation costs even though the population in eligible communities had increased from 62,042 in 1986 to 83,850 in 2017. Total sales of power more than doubled during that period, but the costs covered by PCE dropped by half.

This is good news, of course and it is explained by the increasing efficiencies of village diesel generation plants, thanks to improved technology and investment by rural utilities like AVEC as well as support from the state through Alaska Energy Authority programs.

The development of renewable energy like wind and hydro in small communities in recent years has also helped. Another program of the state energy authority helps fund small renewable energy projects through the Renewable Energy Fund, or REF, but local communities contribute a match to the state grants.

PCE is aimed at helping defray the cost of diesel generation which still supplies most of the electricity in rural communities – it doesn’t subsidize the renewable energy production.

While the program has indeed helped narrow the difference between electricity costs in large and small, diesel-dependent rural communities, there is still a gap even with the support.

In 2017 the average cost of power sold by Chugach Electric Association in Anchorage was about 20 cents a kilowatt hour, or kwH, Kohler told the legislative committee. In Napakiak, in the Yukon-Kuskokwim Delta, the average cost was about twice that, and the same with small villages in the mid-Kuskokwim River region, she said.

However, in some communities that have the benefit of wind or hydro, or both, enjoyed rates below Anchorage. For example in Kotzebue, where wind supplements diesel, the rate was 19.3 cents per kwH in 2017; in Kodiak, where wind and hydro now almost completely displace diesel, the 2017 rate was 15.3 cents per kwH. Juneau, Alaska’s capital city, depends on hydro for most of its power, and enjoys Alaska’s lowest cost of power, about 12 cents per kwH; in 2017.

Power cost equalization as it now exists was created in the mid-1980s when fuel oil prices were high and very high in rural communities because of transportation costs. At the time the state was also enjoying huge revenues from North Slope oil production, which had started in 1977.

The Legislature worked to use the state’s new oil wealth in efforts to reduce energy costs across Alaska. Several hundred million dollars were spent, in cash, to build hydro plants in Southeast Alaska and in Kodiak and near Valdez in Southcentral. To serve the state’s large population centers in Anchorage, the Mat-Su and Fairbanks, an ambitious plan to build a large hydro project on the Susitna River north of Anchorage was developed but then dropped due to high costs (the idea was resurrected in recent years but then again abandoned).

Rural Alaska was extremely difficult, however, with dozens of small communities spread over a hug land area. Legislators and state officials worked hard at it concluded there was no “silver bullet.” The only workable idea was a partial-support program that was modeled on a temporary, early version of PCE implemented in 1980, which was also the first year Alaska received substantial oil revenues.

Even PCE was no magic solution for rural energy problems. The Legislature came back several years later with the Renewable Energy Fund to help support small renewable energy projects where local conditions are suitable, and this has helped.

Today the projects helped by the REF are displacing millions of gallons of diesel that would otherwise have had to be purchased. However, the state has had to throttle back its support for the REF because of lower oil revenues.

But what has been accomplished is helping and there are continuing, and encouraging, technological advances for rural energy supported not only by the state energy authority but also the University of Alaska’s Center for Energy and Power.

Innovations in using surplus power from wind projects to heat community buildings are well along in practical application and researchers, and rural utilities themselves, are exploring ways of using solar, even at northern latitudes, as well as local geothermal resources where they exist.

What PCE does today is help buy time for rural Alaska as these new ideas are developed into workable energy solutions.

 

Tim Bradner is copublisher of the Alaska Economic Report and Alaska Legislative Digest

Alaska LNG Update- Summer 2015

By Tim Bradner

Alaska community and business leaders are closely watching developments on the big Alaska LNG Project this summer. North Slope producing companies and the state of Alaska, which are in a partnership on the project, are engaged in preliminary engineering and environmental work, and key decisions are pending late this year and in early 2016.

Alaska LNG really encompasses three mega-projects rolled into one: a large natural gas conditioning plant on the North Slope, an 800-mile, 42-inch pipeline from the slope to Nikiski, on the Kenai Peninsula south of Anchorage, and a large liquefied natural gas, or LNG, plant at Nikiski. An earlier cost estimate is $45 billion to $65 billion, but that is being updated as part of the engineering studies now underway. The revised cost estimate, which could be available late this year, is obviously very important to the future of the project.

A fourth project now under construction will also be part of Alaska LNG if it proceeds. This is the $4 billion Point Thomson gas and condensate production project currently under construction about 60 miles east of Prudhoe Bay, on the slope. The Prudhoe Bay oil field holds about 24 trillion cubic feet (tcf) of gas and would be the “anchor” gas supplier for Alaska LNG but Point Thomson’s reserves of about 8 tcf will also be needed to support the pipeline and LNG project. Construction at Point Thomson will be finished in early 2016 and will initially produce 10,000 barrels per day of liquid condensates through a new 12-inch liquids pipeline that has been built from Point Thomson. If the big gas project proceeds, Point Thomson’s facilities will be converted to conventional gas production.

The preliminary engineering now underway, called Pre-Front End Engineering and Design, or “pre-FEED”, will set the stage for a decision by the partners to begin final engineering, Front End Engineer and Design or “FEED”, is expected sometime in 2016, although under the partners’ agreement the decision can be stretched into early 2017. Gov. Bill Walker hopes the decision can be made as soon as possible, possibly mid-2016, after completion of pre-FEED. The FEED decision is very important because it will be expensive, with cost estimates ranging from $1.5 billion to $2 billion, and requiring the first substantial investment by the partners. The state’s share of the FEED costs has been estimated at about $500 million. The pre-FEED costs are less, in total about $500 million, with the state’s share of about $100 million. This has already been funded.

The FEED decision is also important because it will be a major indicator that the project’s economics are favorable and that the decision planned in 2018 to actually build it, the Final Investment Decision, is likely. We’re told that very few large projects that reach the FEED stage do not wind up being built.

However, there are important decisions involving the state of Alaska’s partnership role that must be decided later this year. The state is a party to several project operating agreements that are needed among the partners, and the Legislature will have to approve some of these. Most important, the producing companies and the state have to reach agreement on fiscal (tax and royalty) terms on gas production and a way to lock in these terms for a period of years, most likely the terms of LNG sales contracts with buyers (the buyers will insist on stable fiscal terms). There are legal issues involved in this and Governor Walker has said that an amendment to the state constitution is likely to be necessary. The earliest this can occur is the November 2016 state general election. The deal on fiscal terms is necessary for the project and legislative approval is needed, but if a constitutional amendment is required a positive vote of the public will also be required.

Separately, the state will have to decide on whether to change its current partnership with TransCanada Corp., a pipeline company. Under the current arrangement TransCanada would finance and build, and own, the state’s 25 percent share of the pipeline and North Slope gas conditioning plant. The state would separately finance and own 25 percent of the LNG plant through the state-owned Alaska Gas Development Corp. Even this is a big financial undertaking for the state because the LNG plant represents about half of the total capital cost of Alaska LNG. Gov. Walker and the state gas team are considering keeping the current arrangement with TransCanada, ending it and having the state own (and have to finance) all of the 25 percent share of Alaska LNG, or exercising an option to buy into TransCanada’s share of the pipeline and gas plant. This decision will have to be made by the end of the year.

Negotiations are currently underway among the partners on all of these issues and the status is confidential. It is known, however, that the governor has asked for certain changes, such as an increase in pipe diameter to 48 inches; a Cook Inlet crossing on an alternate eastern route to one the project is now focused on, and a change in the way the project would market LNG and the state’s share of that. How the industry partners are responding to these requests is unknown at this time.

While there are still many unknowns, it is known that Alaska LNG is very important to future state finances and the continuation of oil production on the North Slope. After it is operating–2025 is the expected startup–the project would result in several billion dollars a year in new revenue to the state from sales of the state’s share of the LNG. As for continued oil production, the availability of a gas pipeline will encourage exploration on the slope for gas and, inevitably, new oil discoveries will also be made.

 

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce

Cost of Living in Alaska

Throughout Alaska’s history, the cost of goods has been much higher than the rest of the country.  As noted in the July issue of Alaska Economic Trends, during the Klondike Gold Rush a pound of canned butter was $5, or $142 in today’s dollars. While the price of butter has improved, the cost of living, especially in rural Alaska, remains a significant challenge for many. Alaska Economist Neal Fried explains that there are two ways to measure the cost of living. One is to examine the differences between places at a single point in time, and the other is to look at price changes in a single place over time.

Anchorage is the only city in Alaska with its own Consumer Price Index (CPI), and therefore is the only true measure of cost over time. This can be tricky because cost in Anchorage often does not reflect cost in other communities, but the measurement of price change is usually close to that seen in other communities. In relation to price changes, 2014 was a good year. It was the second-smallest increase in the past ten years. Price changes can only be used to compare prices in the same place over time. You cannot compare a Consumer Price Index between cities. Anchorage is the smallest city, of 27, to have its own CPI, and is used as the de facto measure of inflation in Alaska.

It should come as no surprise that Anchorage residents spend the bulk of their monthly budget on housing. Anchorage residents typically spend over 40 percent of their budget on housing and in 2014 the average cost increased by 2.7 percent. Housing price does include the cost of energy and is therefore more volatile. The Anchorage cost is likely much different from communities outside of Southcentral Alaska because many Anchorage residents use natural gas to heat their homes. The price of natural gas is far more complex than the price of heating oil and gasoline, which is used outside of the Southcentral region.

Housing prices in Alaska vary widely depending on the region. Anchorage has the highest average cost for a home at $360,965, while the statewide average is $306,042. Rent for a two-bedroom apartment is the highest in Kodiak, where the average is $1,420 a month. Anchorage is second with $1,331 per month.

Health care does not comprise a large part of the index, but has seen significant increases in the past decade. The cost of health care in Anchorage increased by 3.2 percent in 2014, the largest increase in all categories in the index. Alaska has the highest health insurance premiums in the nation. This is because of higher hospital costs, much higher physician reimbursements, and the higher cost of doing business in Alaska.

Alaska cities are expensive, but not the most expensive in the nation. 11 cities topped Alaska’s most expensive city, Kodiak, in 2014. According to the Council for Community and Economic Research (C2ER), Manhattan and Honolulu are the most expensive cities to live in. Alaska ranked fourth in states with the highest cost of living, behind Hawaii, Connecticut and New York. A few examples of how Alaskan cities compare to others in the nation are:

• National average for a pound of banana $.59, Anchorage $.88, Kodiak $1.26
• National average for a pound of coffee $4.49, Anchorage $5.87, Kodiak $6.09
• National average for a doctor’s visit $105.03, Anchorage $169.40, Fairbanks $173.50
• Cheapest Quarter Pounder Pittsfield, MA $1.99, Anchorage $4.65, Most Expensive Hilo, HI $5.02

The cost of living is a large factor for many when choosing where to live. Anecdotally, Alaska is very expensive, but we can see that it is not the most expensive location in the nation. While Pittsfield, MA may have cheap Quarter Pounders, you can bet that they do not have to share their drive thru with moose and bears as you can in Anchorage.

For more information on the cost of living in Alaska and other cost measures, visit: http://labor.alaska.gov/trends/

Anchorage is the 23rd Most Expensive City in the US

Last week, the Anchorage Economic Development Council (AEDC) released its first Cost of Living Report for Anchorage.  The report is based on the findings from the national Cost of Living Index (COLI) survey, which was developed by the Council for Community and Economic Research. Each participant's index is a percentage of the average for all prices. The index does not measure that change of prices over time, but rather the relative cost of living compared to the national average. The survey measures prices of goods and services in 306 cities throughout all 50 states. There are six categories for the survey: housing, health care, miscellaneous goods and services, grocery, transportation and utilities. In 2013, Anchorage ranked as the 23^rd most expensive city in the US. The cost of living in Anchorage was 126.2 percent of the national average.

2013 was the 2^nd lowest reading on the past five years for Anchorage. There was a 3.4 point decrease from 2012 in the overall composite, and four of the six indices decreased in 2013. The two that rose shouldn’t be a big surprise to anyone, housing and healthcare. Anchorage ranks fourth in the nation for the cost of healthcare. The only three cities in the nation with higher costs are Fairbanks, Juneau and Kodiak.  Illustrating, Alaska has the highest healthcare costs in the US. The cost for housing in Anchorage kept rising as well. Anchorage ranks 20^th in the nation in relation to the cost of housing. We are ahead of Chicago, Portland, Seattle and Philadelphia in housing costs. As we have noted in previous posts, it is alarming that Anchorage has a higher cost of housing than large, densely populated areas. The average sales price for a home in Anchorage in 2013 was nearly $347,000, up 2.9 percent from 2012 and 7.8 higher than 2011.

The four other factors decreased between 2012 and 2013, and the only index that was below the national average was utilities. The average cost of utilities sat just below the national average at 99. Even though Anchorage’s cost for natural gas was 126.4 percent of the national average, electrical was only 77 percent of the average. Grocery saw a large decrease, going from 129.1 to 113 between 2012 and 2013. In a recent Anchorage Daily News Article, AEDC CEO Bill Popp, noted that he felt the decrease was due competition in the grocery business. Several new Wal-Mart superstores, Sam’s Club and the remodel and expansion of existing groceries have resulted in more local competition and reduced the cost of groceries for Anchorage residents.

Popp feels that it is possible to lower Anchorage’s cost of living by encouraging new businesses to come to Alaska and aggressively growing existing businesses. This will lead to more competition and will lower prices for many goods and services. He is also careful to note that it will take the efforts of not only policy makers, but the entire community. If the city decides to make the cost of living a priority, solutions to the rising costs can be found and implemented for Anchorage.

To read the full report, visit http://aedcweb.com/phocadownload/2013%20coli%20report%20final.pdf

Alaska’s Construction Spending to be up 18 percent in 2014

The Associated General Contractors (AGC) of Alaska together with supporter, Northrim Bank released the 2014 Alaska Construction Spending Forecast. The report highlights the upcoming year for both private and publicly funded projects in construction throughout Alaska. Construction spending is expected to be $9.2 billion, up 18 percent from 2013.

The oil and gas sector is expected to account for nearly half of the total with $4.3 billion. This is over $1 billion higher than the total for oil and gas last year. Private spending, excluding oil and gas will be about $2 billion, which is slightly higher than the 2013, which was $1.9 billion. Public spending will also increase from 2013. It is expected to be $2.9 billion, up from $2.7 billion last year.

There are four major factors for the robust projection for 2014. The largest reason is due expanded investment plans by the oil and gas industry. Other factors include a larger Department of Defense budget, a reallocation of unspent funds federal highway funds, and strong spending by the state government.

The oil and gas industry is expected to see a 33 percent increase over 2013. It is suspected that this is due to the climate of optimism with the passage of the new oil tax structure for 2014. Not only will new construction be a factor in the coming year, aging infrastructure will be will addressed on both the North Slope and in Cook Inlet.

Mining is expected to see a drop in 2014 due to the fact that the price of gold is dropping. More than half of the expected spending in the mining industry will be on maintenance, continued exploration, and new facilities at the operating mines in Alaska. The six large mines currently in operation are Red Dog, Fort Knox, Pogo, Kensington, and Greens Creek all mineral mines and Usibelli, is the state’s only coal mine. There are also smaller projects that will have construction activity throughout the state.

Utilities are expected to see a jump in 2014 with two new large plants being built for MEA (Matanuska Electric Association) and ML&P (Anchorage’s Municipal Light and Power). There will also be hydroelectric projects and renewable resource projects, like wind and biomass. There will also be an increase in telecommunications in 2014. Spending will be a mix of new firms (Verizon) coming into the market and GCI and Alaska Communications expanding and upgrading current facilities. Utility spending is a combination of private and public spending.

On the public side of the forecast, much of the increase for public spending will be seen by defense spending. There will be a huge increase in military spending for facilities on bases and formerly used defense sites. Fort Wainwright has seven new projects including a new warm-storage hangar, which will cost $36 million. Fort Greeley will also see a large increase in projects, including a $1 billion expansion to the missile defense system, which will last over the next seven years.

Other areas of public spending will see slight decreases that are offset by the increase in defense spending. Overall, there will be a modest 6 percent increase in public spending, in comparison to the 24 percent increase in private spending.

The construction trade is Alaska’s third largest industry, paying the second highest wages. Accounting for 20 percent of Alaska’s total economy, the construction industry reflects the pulse of the economy. These numbers do not include construction workers that are in other industries, such as oil and gas, mining, and utilities. It also doesn’t account for self-employed construction workers. In 2011, it was estimated that there were 9,000 self-employed construction workers in Alaska.

The economy has continued to grow in Alaska. This means more jobs and a growth in the population. This growth has been a catalyst for the residential and commercial construction sector. The oil and gas sector is an obvious driver for this growth, but the other areas discussed above are also helping add to the positive forecast for 2014.

The 2014 Construction Spending Forecast was compiled and written by Scott Goldsmith, Mary Killorin and Linda Leask of the University of Alaska’s Institute of Social and Economic Research (ISER). Visit Alaskanomics’ Resource Section for the full report.

Energy Challenges and Interior Alaska

In terms of energy, the challenges facing Interior Alaska are numerous. Many companies and individuals are working to identify these complex issues and try to determine feasible solutions for Fairbanks and beyond. The solutions to these problems won’t come easy, but they are necessary for Alaska’s 2^nd largest city. Fairbanks sees extreme cold during the winter and that cold comes with an extreme price tag for homeowners. Monthly expenses for heating can be upwards of $1200 during the coldest months of the year. Electric bills are also higher in the winter because power generation is mostly oil-fired.

One group that is working to find a solution to the problem is the Alaska Industrial Development and Export Authority (AIDEA). This summer, AIDEA’s board of directors approved $7 million for the purchase of long lead-time equipment for a North Slope natural gas liquefaction plant to serve and LNG trucking operation to Fairbanks. The state legislature approved state financing of $275 million for this project during the 2013 legislative session. Governor Parnell would like to see the “Interior Energy Project” ready by the end of 2015. AIDEA has received proposals from three organizations looking to work on the LNG plan; Golden Valley Electric Association (GVEA) and two private firms, Fairbanks Natural Gas LLC and Spectrum LNG. Each organization could potentially partner with AIDEA to assist in brining affordable heating solutions to interior Alaska.

A plant in full operation would allow about 50 trucks of LNG to be brought to Fairbanks on a daily basis. Some have expressed concern regarding the increased traffic along the Dalton Highway. However, it is estimated that because of the seasonal nature of energy demand, the plant would operate at 60% or less for part of the year. The summer months would have much less traffic than the high demand winter months.

AIDEA states that the assumed 9 billion cubic feet per year of gas converted to LNG will be used for space heating and not for power generation by Golden Valley Electric or by Flint Hills Resources. Given that GVEA has submitted a proposal to work with AIDEA, it is likely  that they will also become a customer of the project. The plant at Prudhoe Bay can be expanded to accommodate the additional demand for LNG. 

AIDEA conducted a feasibility study of trucking LNG to Fairbanks to help ease the cost of heating. The study shows that the use of LNG could reduce the average homeowner’s heating cost by half of what they are currently paying for heating oil. This would result in an average annual savings of $2,500-$3,000 per household.

Another factor that is driving this project is the need for cleaner fuel in Fairbanks. The use of wood heat is high in Fairbanks due to the high prices of heating oil, but the smoke from wood burning stoves creates a lot of air pollution. The ability to use LNG would help reduce the air pollution in Fairbanks by reducing residents’ dependence on wood heat and burning heating oil.

There is concern about relying on trucking LNG to Fairbanks because the Dalton Highway is often difficult to traverse in the winter months. The Alaska Energy Authority has explored many emergency supply options for this problem. This includes having storage capacity in Fairbanks to hold a 10 to 14 day supply of LNG in case of road closures, as well as making an arrangement with ConocoPhillips to supply LNG from its plant on the Kenai Peninsula.

Many believe that LNG is the way to address the challenges facing the interior, specifically Fairbanks. The state legislature, AIDEA, Fairbanks utilities, and private industry believe that they can help with the cost of energy, provide a cleaner fuel option, and provide a reliable heating source for Fairbanks. The solutions aren’t easy, but groups are willing to work to find a solution that is viable for Interior Alaska to address the issues brought on by the energy crisis that Fairbanks is currently facing.

Alaska energy use per capita second in nation, behind Wyoming; Alaska ranks fourth in total electricity produced by petroleum

The Energy Information Administration (EIA) has launched a beta site with energy production and consumption profiles for Alaska and other U.S. states. Their 2010 shows Alaska with the second highest per-capita energy consumption in the United States, behind Wyoming, at 899 million btus of energy equivalent. Total consumption in Alaska includes:

• 14.5 trillion btus of coal
• 335 trillion btus of natural gas
• 276.8 trillion btus of petroleum
• 21.3 trillion btus of retail electricity sales

Alaska ranks fourth in the nation in total electricity produced by petroleum. The EIA explains:

Alaska's electricity infrastructure differs from that of the Lower 48 states in that most consumers are not linked to large interconnected grids through transmission and distribution lines; rural communities in Alaska rely primarily on diesel electric generators for power.

 

October 12 summary of recent economic news for Alaska

In energy news, Alaska Governor Sean Parnell issued a press release October 3 outlining progress by Alaska's three major oil producers in advancing an Alaska LNG project. The letter from the producers and TransCanada estimates total project costs at $45 to $65 million. The news received extensive coverage, from Bloomberg, Reuters and others. Meanwhile, Cheniere Energy in Louisiana made a deal to sell LNG at Henry Hub pricing, which undercuts potential long term LNG contracts based on the price of oil. Shell, which started drilling in the Chukchi Sea in early September, began drilling in the Beaufort Sea on October 3. Baker Hughes released September rig count data showing Alaska with 6 land rigs and 1 offshore rigs working, one more than the August count. Golden Valley Electric (GVEA) and the EPA signed a consent decree to allow GVEA to restart the Healy Clean Coal Plant. GVEA's timeline to restart the plant is 18-24 months. On October 4, Alaskans received a total of $567 million in Alaska Permanent Fund dividends. Yesterday, Alaska Airlines ordered 50 new Boeing aircraft worth $5 billion.

Video Clip: The Alaska State Legislature has helped the construction industry, and consumers, by funding utilities in capital budgets recently

Utilities and state grants in the capital budgets are discussed by Associated General Contractors’ Executive Director John MacKinnon during the AGC Alaska Construction Forecast in February 2012. Click here to view the full report.

Alaska's Electricity Costs 5th Highest in Nation; gas leads generating capacity

Alaska's average retail price for electricity was 14.76 cents per kilowatt hour (cents/kwh) in 2010, the latest data released in new information by the U.S Energy Information Administration. The U.S. average was 9.83 cents/kwh. Hawaii leads the nation with costs just over 25 cents/kwh; other state with higher costs than Alaska include Connecticut, New York and New Hampshire. The cheapest power in 2010 was in Idaho, with an average retail price of 6.10 cents/kwh.

Alaska generates electricity primarily with gas, followed by hydro and diesel. The ten largest plants by generating capacity in Alaska for 2010 were:

Read the full report here.