ALAMEDA, Calif. — Alaska officials have nailed down their preferred location to build a $5 billion hydroelectric dam project that will require significant state subsidies and is also likely to utilize some form of municipal debt financing.
The Alaska Energy Authority chose a remote site on the Susitna River as its preferred location for a hydro project, and Gov. Sean Parnell quickly signaled his support.
“In order to provide low-cost electricity for the Interior and the Railbelt and to meet the state’s goal of having half of Alaska’s electricity generated by renewable resources by 2025, we must invest in a large-scale hydro project,” Parnell said in a statement Nov. 24, after the authority issued its report recommending the Susitna site.
Earlier this year, Parnell signed an energy bill setting the 50% goal for renewables, a definition that includes hydropower.
He also signed a $10 million appropriation to finance studies comparing two potential locations.
That led to the AEA’s recommendation to pursue a conventional dam design at the Low Watana site on the Susitna River, in remote terrain about 40 miles east of the highway and railroad corridor linking Anchorage and Fairbanks.
The Susitna River dam location is about halfway between the two cities, making for a relatively easy tie-in with the existing electric grid on the Railbelt, as Alaska’s main population corridor is known.
The other alternative considered was at Chakachamna Lake, 85 miles west of Anchorage, where a 10-mile-long tunnel would be built using gravity to carry water between two watersheds, generating power in the process.
At $5 billion, the Susitna River dam would be cost about 50% more to build than Chakachamna, the authority found, but it would generate twice as much power with more reliability, and faced fewer regulatory obstacles.
State officials say up front that the hydro project isn’t going to pay for itself — large state subsidies will be needed to get it off the ground.
“Project financing for either project, where the costs of the project is paid for solely by the sale of power produced from the project, is assumed to be unavailable,” the Energy Authority says in its report. “Without state participation, these projects are unlikely to proceed.”
The state is already participating. Lawmakers authorized $2.5 million in 2009 to study hydropower options, followed by the $10 million this year to study the Susitna and Chakachamna alternatives.
“We have not used a great amount of that $10 million that was appropriated,” said AEA spokesman Karsten Rodvik. That provides time to study financing options, he added.
“We’re working with the governor’s office on this,” he said. “Since the level and nature of state participation is at this time unknown, it’s preliminary to come to any sort of conclusion on how this will be financed.”
That’s not to say there aren’t any ideas. The authority commissioned another report this fall from Seattle-Northwest Securities Corp. to look at the extent to which financing of a new hydroelectric project at either Susitna or Chakachamna could be modeled after the financing of the Bradley Lake hydro project near Homer.
That project, which began generating power in 1991, is owned by the Energy Authority, and is by far the largest hydroelectric facility in Alaska.
The proposed Susitna dam would be much bigger — with 600 megawatts of capacity, compared to 126 MW at Bradley Lake.
“These projects will require state funding, which could be directly via capital _investment and-or indirectly through some form of credit support or backstop, in order to obtain securities market access,” the Seattle-Northwest report said.
“It is also our view that it is reasonable for the state to consider investing in railbelt generation assets with the objective of developing a long-term stable source of base-load power at a cost that will promote economic stability and growth within the railbelt region.”
The Bradley Lake project cost $328 million, of which the state paid $163 million, with the balance financed through the AEA as bonds backed by power contracts with the participating utilities, also supported by a moral obligation pledge from the state government.
Not everything about the transaction can be replicated, Seattle-Northwest found. The initial Bradley Lake financing took place before the 1986 tax reform, and today the authority would not be able to repeat that project’s use of arbitrage, which generated investment returns that paid for 9% of the project’s cost.
What would be replicated, and would be necessary, the firm found, was substantial support from the Alaska government.
“State funding, whether in the form of a grant or loan, can be utilized to defer higher-cost conventional revenue bond funding,” the firm’s report said. “Obviously a grant from the state provides the cheapest form of capital, but even when structured as a loan, state assistance can dramatically lower the overall cost of capital.”
Parnell said he will propose legislation next year to allow the AEA to pursue funding for and ownership of the project.