TODAY’S STUDY: THE $2BIL NEW ENERGY OPPORTUNITY IN REMOTE CALIFORNIA

Salton Sea Revenue Potential Study Final

December 10, 2013 (EES Consulting for the Imperial Irrigation District)

Executive Summary

Imperial Irrigation District (IID) has asked EES Consulting (EES) to develop a feasibility study for revenue potential from land leases in the Imperial Valley for renewable energy projects. IID is interested in helping to develop renewable energy resources in the Salton Sea area that would partially fund the restoration of the Salton Sea. IID has asked EES to estimate the revenue potential available to help fund the Salton Sea Projects. Initially, IID would like to know if there is enough economic potential in the Imperial Valley at the Salton Sea to substantially help fund Salton Sea restoration projects. This report reviews renewable project potential and provides a conceptual analysis of the revenue potential available both to IID and to fund the Salton Sea Projects.

This report evaluates the following revenue sources:

 Unit, $/MWh, charge on renewable energy development

 Mining rights and associated royalties

 Algae-based products and associated royalties

 Transmission ownership rate of return

 Falling water charge at Hoover Dam

Each of these revenue sources are described below.

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Revenue Potential Analysis

Renewable Energy

First, renewable resource potential is estimated based on previous work completed for IID regarding geothermal resource assessments, interviews with industry experts and EES’ experience in renewable project development. The costs of renewable resource projects are estimated and compared with publicly available forecasts of renewable energy prices in California. The revenue potential is the difference between renewable energy price forecasts and Salton Sea renewable resource costs.

Three types of renewable resources are evaluated including thermal gradient ponds, solar, and geothermal. Thermal gradient ponds were found to be useful for environmental mitigation and industrial power purposes; however, these resources were not included in the revenue potential estimates.

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Solar Development

Solar resources are available in the Imperial Valley. Currently, these resources are being sited on agricultural land which may have potential negative effects on the local economy. Solar resource development is expected to be constrained by transmission, land issues, and the lower cost of development in other locations. Lands near the Salton Sea may not be desirable for photovoltaic or concentrated solar power generation due to the impact of ambient conditions on solar components. Additional evaluation of the suitability of solar energy located on playa areas is in the planning stages and may further inform the viability of solar energy in these areas. Until those studies are completed it is difficult to accurately project solar revenue.

Therefore, this study conservatively estimates revenue potential of $150 million over the study period from 1,000 MW of solar resources.

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Geothermal Development

Finally, the study concludes that significant geothermal resources are available at the South end of the Salton Sea. As the Salton Sea recedes over the study period, prime geothermal sites are exposed. The resource development costs are estimated assuming economies of scale and a development schedule is estimated based on streamlined permitting processes and assumed recession rate of the Salton Sea. This study estimates that approximately 2,000 MW (15,000 GWh) of geothermal resources are available over the study period 2016 through 2045. The levelized cost of energy for these resources are estimated to range from $90/MWh to $120/MWh depending on resource type (high temperature, or lower temperature gradients) and location (onshore or offshore).

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Renewable Energy Prices

Because renewable energy prices are dependent on several factors that vary over time, four forecasts are reviewed for this analysis:

• Current Market – the Current Market forecast was developed based on the 2012 expenditures of three California investor-owned utilities for geothermal contracts as published annually in the California Public Utility Commission’s (CPUC) Padilla report.

• RFP – The RFP forecast is based on the price cap set in Southern California Public Power Authority’s (SCPPA) renewable energy request for proposals (RFP). The bundled price of $82.10/MWh for 2012 was escalated at the rate of inflation (1.5 percent).

• Market – The Market forecast is based on projected levelized costs for merchant flash geothermal plants estimated by the California Energy Commission (CEC). The average nominal levelized cost for the 2009 and 2018 in-service dates are $78.91 and $120.72/MWh respectively. The average increase is 4.8 percent annually. This increase appears to be high based on information in the Padilla report. Therefore, the Market forecast was developed by using the escalating $120.72/MWh in 2018 at the assumed rate of inflation for this study (2 percent).

• Break-Even – The break-even price forecast was developed to show the prices needed in order for the proposed geothermal projects to produce enough revenue such that the total geothermal based revenue estimated in this report is $2 billion over the study period. Note that the break-even price is not required for geothermal projects to be economic.

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The RFP and Current Market forecasts represent the lowest expected renewable energy prices.

It is more likely that renewable energy costs will increase as base load energy is required to meet California’s renewable portfolio standards (RPS). Current RPS will require 33 percent renewable energy by 2020. A proposed bill (AB 177) could increase the RPS requirement to 51 percent by 2030. The revenue potential estimates in this report assume the break-even renewable energy price. As noted above, the estimated revenue under this price is $2 billion over the study period. Note that the break-even price does not include the value of renewable base load generation. Estimated geothermal resource costs developed in this study range from $89/MWh to $118/MWh in levelized terms (without any base load credit).

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Mineral Recovery

Mineral recovery is possible in conjunction with the development of geothermal projects.

Specifically, minerals such as manganese and lithium may be extracted from the geothermal brines. Revenues from mining royalties are estimated based on high-level gross revenue estimates provided in a draft report developed for IID.

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Algae Product Royalties

These royalties are included in the revenue potential for Salton Sea restoration projects. The mining royalties are estimated at $1.5 billion over the period 2016 through 2045.

The business of growing algae to produce fuel has made significant progress in recent years.

The process utilizes enhanced or genetically altered algae to produce various oil products ranging from fuel oils to cooking oils. Specifically, the production of ethanol is the target of some of the leading companies. The cultivation of algae for fuel production can require large volumes of water varying from 3 to 3,000 times the volume of oil produced. However, the water quality can be saline, wastewater/non potable, or recycled water. In addition, algae cultivation requires nutrients such as nitrogen and phosphorus. Given the receding Salton Sea, algae production could be an alternative to exposed playa. Estimated revenues from royalties on algae-based products are over $260 million for the study period.

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Transmission Ownership

In order to provide transmission services to and from the proposed renewable energy projects, a new transmission line will need to be built in the Imperial Valley. As a part-owner, IID would receive a return on investment for its ownership share of the transmission line. IID has suggested that half of IID’s return be allocated to Salton Sea Projects. The Salton Sea project revenues from IID’s transmission ownership are estimated at $42 million over the study period.

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Falling Water Charge

In addition to the revenue collected through Salton Sea royalties, IID asked EES to develop an analysis of a falling water charge for the Hoover Dam. The falling water charge is a charge in dollars per megawatt hour (MWh) of output produced by the Hoover Dam. Proposed falling water charges are compared to current wholesale rates of electricity at Hoover Dam to determine rate impacts. Revenue collected from the proposed charge would be used to help fund Salton Sea rehabilitation and restoration projects. Figure 3 shows the estimated revenues for various falling water charges. The revenue potential estimates in this report assume the falling water charge is $1/MWh.

The primary sources of revenue from renewable energy development are from geothermal resource development and mineral royalties. The revenue potential estimate from geothermal project development is sensitive to the renewable energy price or the value of an integration credit.

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Conclusion

The break-even renewable energy price is a reasonably attainable forecast; therefore, it may be possible to reach the $2 billion revenue goal over the period. The following requirements are needed for geothermal projects to meet the $2 billion revenue goal:

 Geothermal resource costs are estimated to range from $89/MWh to $118/MWh depending on resource type and location. At current renewable energy prices (RFP price forecast), an integration credit of $18/MWh is required in order for the high temperature, offshore Salton Sea geothermal projects to be economic.

 Given the break-even value of renewable energy $113.89/MWh, a $/MWh charge could be placed on all geothermal output estimated based on the development schedule. Figure 5 shows the projected revenue provided a range of $/MWh charges.

 A 500 kV transmission line must be financed by a third party and the CPUC must allow recovery of costs through rates.

 Blanket permitting for geothermal projects approved by state.

 State provides assistance to Salton Sea geothermal resource development through RPS or financing incentives. These financing incentives could be a loan guarantee program similar to the current Department of Energy loan guarantee program. These incentives are necessary in order for developers to take on geothermal development risk and be able to pay Salton Sea Project charges/royalties.

Based on the analysis, there is significant revenue potential available for Salton Sea restoration and rehabilitation projects. If IID pursues renewable project development in the Salton Sea area, and obtains support from the State of California, the proposed projects could become increasingly economic.

Action Plan

Based on the study conclusions the following actions are recommended to IID:

 Meet with State of California Officials and Regulating Agencies (CPUC, CEC, California Department of Fish and Wildlife, etc) in order to:

o Expedite the transmission line investment/construction.

o Obtain state guaranteed loans or state funds set aside for geothermal project developer access to capital and long term financing.

o Indentify permitting issues and responsible agencies. Seek blanket permits for multiple geothermal project developments located near or under the existing Salton Sea.

o Through the CPUC or CEC, modify California renewable portfolio standards to provide incentives for Salton Sea renewable development or to require utilities to purchase Salton Sea project output.

o Meet with CPUC, CEC, utilities and other government agencies to clarify costs and include value adder to base load renewable energy projects.

o Implement the pilot project to evaluate solar energy facilities located on Salton Sea playa areas.

 Initial Development Activities

o Perform transmission study for 500 KV line to finalize route, right of way issues, capacity and cost. Identify potential line developers and financing parties. Prepare study report on ownership and operation structure.

o Meet with geothermal developers to discuss interest in developing Salton Sea resources, technical, permitting and financing issues and leasing requirements.

o Prepare an environmental study to identify permitting issues and options. Initiate discussions with permitting agencies (U.S. Army Corp of Engineers, State and County Agencies, etc) and stakeholders (local tribes) to mitigate the impact of geothermal development and further improve the environment around the Salton Sea.

o Prepare financing studies and planning documents.

 Funding For 2013-2014

o Initial studies estimated to cost $0.5 to 1.0 million

o Legal, consultants and additional staffing $500,000

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