Charles Gunderman tightens bolts on the exhaust hood where steam is condensed on Unit 4 at the power plant.
For the first time since it began producing in 1955, the Morro Bay Power Plant is operating without a contract to provide electricity to the state.
Houston-based plant owner Dynegy had a contract to produce power for Pacific Gas and Electric Co. But PG&E let that contract expire in January.
“A contract guarantees a source of revenue for us,” said Steve Goschke, the Morro Bay plant’s manager since 1998. “This year, our balance sheet may not look so good.”
PG&E declined to say why it opted not to renew its contract, except that the decision was based on “expected customer load and the availability of products,” said spokeswoman Emily Christensen.
In other words, Goschke said, “they must have found power from somewhere else so that they didn’t need Morro Bay in 2008.”
However, Dynegy officials said they have struck a deal with a Western utility company, which they wouldn’t identify yet, that has agreed to buy power from the Morro Bay plant from 2009 to 2011.
Without the deal, the now little-used plant likely would have ceased operation, Goschke said.
But the deal ensures the plant will remain open at least until 2011 and has given Dynegy impetus to overhaul two of its generators this year, to the tune of $3.5 million a piece, Goschke said.
Each generator will be down 10 weeks while being rebuilt. Although the plant has four generators total with the potential of producing about 1,000 megawatts, two have been out of operation for several years and more than likely won’t ever run again, he said.
When the two rebuilt generators come on line together, they will be capable of producing a total of about 650 megawatts per hour, enough power for 600,000 homes.
The Morro Bay plant, even with the PG&E contract, produced little power since high demand for its energy started dropping in 2002 after California’s energy crisis.
Its lowest production period on record was between 2003 and 2006, when it operated at less than 4 percent capacity.
This year, with the loss of the PG&E contract, Goschke said he expects the plant to produce about 5 percent of its capacity — perhaps operating only five days.
Even though Dynegy does not have a contract with PG&E, the power plant can be called upon by the state’s Independent System Operator—which coordinates usage and output on the state’s power grid—to rev up its turbines during periods of peak demand.
“It’s like farming: It’s weather- dependent,” Goschke said. “Typically, we get calls (from the ISO) when it’s hot in the (San Joaquin) valley.”
Dynegy can also trade Morro Bay’s power on the open market, Goschke said. PG&E can buy power from it on a weekly or daily basis, he said, adding that “if prices get high enough and we can generate power cheap enough, we’ll provide the power.”
Impact on the city
The expected low level of operation this year means continued bad news for the city’s budget. Morro Bay receives natural gas franchise fees when the plant operates.
In 2000 and 2001, the plant averaged more than 50 percent capacity with four generators in operation. This generated $2 million to $3 million in franchise fees a year, paid by then-owner Duke Energy, from the natural gas it used to make electricity, Goschke said.
As the power production plummeted, so have its fees paid to the city.
Last year, Morro Bay received about $307,000 in fees from the plant’s gas use, according to Goschke’s records.
This year, if the plant operates at 5 percent capacity, Goschke estimates the city would collect between $200,000 and $225,000.
With such a hit to Morro Bay’s tax base, some city officials say they should no longer depend on the plant’s operations to help pay for public services.
The depletion of that revenue is one of several financial obstacles that will make balancing the 2008-09 budget “particularly challenging,” Mayor Janice Peters said.
Because the City Council is starting to address the budget this week — including reviewing an efficiency study of the city’s revenues, expenses and operating procedures — Peters declined to speculate what changes to the city’s services may have to be made.
The plant’s diminishing tax benefits also will raise the question of whether the city would benefit more if the power plant were torn down and the site redeveloped into a museum or other tourist attraction — something that would produce a more reliable stream of revenue, she added.
Looking to the future
Dynegy is focusing on the new contract and ongoing renovation. Goschke says rebuilding one unit should be finished for the summer. Work on the second turbine will start in the fall, after the summer peak season, and the turbine should be ready for 2009.
And there remains the possibility that these incremental improvements to the old fossil fuel plant could give way to a more extensive and costly modernization — or a new power plant on the site, said Dynegy spokesman David Byford.
Former owner Duke Energy long pursued such plans, with hopes to start modernizing the plant in 2004 at a projected cost of $800 million. That price included tearing down the existing natural gas-fired boiler plant and its smokestacks—a fixture in the waterfront skyline for decades.
But Duke sold the plant to LS Power in early 2006, before it got all of the permits, Goschke said, and Dynegy acquired LS Power last year.
With the focus on renewable energy and the current regulatory environment, Goschke believes a replacement project would now cost at least $1 billion and Dynegy would need several years to acquire permits.
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