A $34 million upfront payment by Entergy New Orleans to partially fund the construction of a new substation to provide more reliable power to the city’s drainage and water pumps will cost the Sewerage and Water Board $85.5 million to pay back over 15 years, Sewerage and Water Board Director Ghassan Korban said at a City Council committee meeting on Tuesday.
But Korban said that the financing agreement with Entergy would be set up in a way that would allow the Sewerage and Water Board to pay off the debt early, possibly saving millions of dollars.
Last week, the city announced the major new project to provide more reliable, consistent power to the Sewerage and Water Board’s critical water and drainage pumps by building a new Entergy New Orleans substation dedicated to a key Sewerage and Water Board plant.
“The substation is the single most important infrastructure project in New Orleans,” Councilman Joe Giarrusso said at Tuesday’s joint meeting of the council’s utilities and public works committees. “The substation will help clean our drinking water and power the pumps during rain storms.”
Tuesday’s meeting was overwhelmingly positive and amiable, but some questions did arise about Entergy’s role in the project — including how much the Sewerage and Water Board will owe Entergy over the next 15 years and whether Entergy should get credit towards its mandated carbon reduction goals by reducing the Sewerage and Water Board’s carbon footprint.
The Sewerage and Water Board has faced massive infrastructure issues for years. One of the biggest issues has been getting reliable power to the city’s drainage and water pumps.
Many of the city’s pumps are so old that they require a type of electricity that has been obsolete for nearly a century. The Sewerage and Water Board has traditionally powered those pumps by using it’s own, specialized generators. But those generators have had consistent issues and outages that have exacerbated flooding and triggered water boil advisories.
In addition to the internal generators, the Sewerage and Water Board is also already connected to Entergy’s local power grid. The electricity from Entergy can power the city’s more modern pumps, and the Sewerage and Water Board is now able to convert some of that electricity to conform to the needs of its older, outdated pumps.
However, that still leaves the Sewerage and Water Board vulnerable to the frequent outages that occur almost daily on Entergy’s local distribution grid. One of those outages led to a water boil advisory in May.
The project — a joint venture between the city, Entergy and the Sewerage and Water Board — is designed to bypass all of those issues by building a dedicated Entergy substation for the Sewerage and Water Board’s Carrollton Water and Power Plant.
The substation will connect the water plant directly to Entergy’s regional transmission grid, which is far more reliable compared to the city’s local distribution grid.
The city will also buy and install two “frequency converters” which will allow the city’s older pumps to utilize Entergy’s electricity as well. The entire project is currently scheduled to be complete in time for the 2023 hurricane season.
At that point, the substation will become the Sewerage and Water Board’s primary source of power, and most of the city’s turbines will be deactivated.
Only one of the Sewerage and Water Board’s current generators would continue to operate under the plan — turbine 6, the newest of the generators. The Sewerage and Water Board is also planning to add another generator — turbine 7 — by 2023. Turbines 6 and 7 would continue to act as backups in case of a failure at the new substation.
The city pitched the substation plan as a $74 million project, and said that it won’t raise bills for either Entergy New Orleans or Sewerage and Water Board Customers.
The details are a little more complicated than that.
The $74 million figure is made up of three tranches of money. First, Entergy will pay the upfront $34 million to construct the substation and the city will spend $20 million in bond proceeds to buy the frequency converters.
The city said last week that another $20 million in state capital outlay funds will be dedicated to integrate the substation and frequency converters into the Sewerage and Water Board’s operations. A presentation from Korban on Tuesday said the integration component will cost “$20M+” and will be provided through “State Capital Outlay + SWBNO funds.”
The $34 million from Entergy represents the upfront cost of construction. The Sewerage and Water Board will then have to pay Entergy back. Under a plan presented by Korban on Tuesday, the debt will be paid back over 15 years with $5.7 million average annual payments for a total of $85.5 million.
The ultimate cost is more than double the upfront investment because of Entergy’s guaranteed return on equity and return on debt rates. Entergy’s return rate — around 9 percent, depending on the mix of debt and capital used — is fairly high relative to current interest rates on debt. Those guaranteed returns are a major profit source for Entergy, as The Lens has previously reported.
Korban noted that they were still negotiating whether the Sewerage and Water Board will pay Entergy back over 10 years instead of 15, which would reduce those return on investment costs.
“Obviously the shorter the better in terms of savings,” Korban said.
Korban said that even on the 15-year timetable, the anticipated savings from not having to buy fuel or maintain the older generators would yield enough money to pay for the substation without raising bills. He said that the annual costs of the new substation over 15 years would total $12 million a year — $5.7 million to pay for the substation and $6.4 million in new Entergy bills.
Korban said those costs would be offset by new savings. He said that the Sewerage and Water Board currently spends $13 million a year on gas and power plant operations. He did not say how much of that $13 million would be saved, however. Since the plan is to continue operating two internal turbines, the savings likely will not equal the full $13 million.
Korban’s presentation said that net savings for the Sewerage and Water Board will “eventually reach” $5 million to $7 million annually on average over 30 years.
Korban told the council that although the savings would pay for the 15-year payment schedule, he was interested in finding cheaper alternatives so that money could go to other Sewerage and Water Board needs.
“We’re looking at accelerating that payment,” Korban said. “If there’s a better alternative out there that would cost us less money, if there’s a grant or cheaper money that’s out there, we will pursue it. Obviously we’re going to negotiate a term with Entergy that we will have no penalty for paying our debt early. That would be the responsible thing to do if cheaper money is made available to us.”
The Lens asked Ramsey Green, Mayor Latoya Cantrell’s deputy chief administrative officer for infrastructure, whether the city looked at funding outside of the Entergy plan.
“We explored the hell out of this,” he said.
Green said that the Sewerage and Water Board didn’t have the debt capacity to finance the project itself through bond funding. Plus, he said, it is better to have Entergy build the substation itself.
“What you want is for Entergy to build it and run it. This is what they do. This is their lane.”
Councilman Joseph Giarrusso said that the city will continue to look for alternative, cheaper funding sources for the project to pay back the Entergy debt early.
Jesse George, the New Orleans policy director for the Alliance for Affordable Energy, brought up another cost-related concern. He pointed out that in the Sewerage and Water Board’s 2020 master plan — written by consultants with Jacobs Engineering Group — estimated that a 120 megawatt substation would cost $16 million. The new plan calls for a substation with half that capacity — 60 megawatts — for $34 million.
Entergy New Orleans CEO Deanna Rodriguez would not answer questions after Tuesday’s meeting. An Entergy spokesman did not immediately respond to a request for comment.
Carbon reduction goals
Along with increased reliability, the substation plan has been touted as a way to significantly reduce carbon emissions by reducing the use of the Sewerage and Water Board’s diesel-powered generators.
The City Council recently passed a Clean and Renewable Portfolio Standard, which requires Entergy New Orleans to reach 90 percent renewable energy and net zero emissions by 2040, and reach zero carbon emissions by 2050.
One of the sticking points in finalizing the standard was whether Entergy would be able to get credit for “beneficial electrification.” Beneficial electrification is the process of reducing carbon emissions by bringing inefficient power generation — like a car’s gas engine — onto the electricity grid.
Many clean energy advocates opposed the inclusion of beneficial electrification, saying that it allows the company to continue burning fossil fuels. And they argued that Entergy already has an incentive to take on more electrification projects in order to add new customers and increase sales.
Ultimately the city Council decided that Entergy wouldn’t automatically get credit for beneficial electrification, but that it could apply with the council for credit. Entergy announced on Tuesday that it was giong to file a request with the council to get credit from the substation project.