Hydropower's changing value drives Alcoa contract review

WENATCHEE — Chelan PUD is exploring an early end to its long-standing power sales agreement with Alcoa, saying changes in Western energy markets have created opportunities to extract more value from the utility's carbon-free hydropower resources while strengthening long-term reliability.

The discussion came during a June 1 study session, where commissioners received an update on the future of a contract that traces its roots to an era when Alcoa's Wenatchee Works aluminum smelter was one of the region's largest industrial customers.

In 2008, Chelan PUD entered into a 20-year power sales agreement with Alcoa to supply electricity for aluminum production at the Wenatchee plant. Smelting operations were curtailed in 2015 amid declining commodity prices, and Alcoa announced the facility's permanent closure in 2021. The underlying agreements, however, remain in effect through Oct. 31, 2028.

Today, the unused power associated with the contract is sold into wholesale markets, allowing Chelan PUD to recover costs and generate additional revenue from surplus energy sales.

What has changed, utility officials said, is the market itself.

Jeff Johnson, Chelan PUD's director of energy operations, planning and trading, told commissioners that new regional reliability requirements and clean-energy policies have fundamentally altered how utilities value hydropower.

As Western states pursue carbon-reduction goals and utilities face increasing pressure to demonstrate they can meet peak demand, hydropower is no longer valued solely for the electricity it produces.

"Right now we're able to get the energy value, but we're not able to fully capture the capacity and the environmental attribute value that exists today," Johnson said.

Those additional attributes have become increasingly important as utilities work to comply with Washington's Clean Energy Transformation Act and regional resource adequacy requirements designed to ensure enough generating capacity is available during periods of peak demand.

Johnson said the district is evaluating whether terminating the Alcoa agreement roughly 22 months early could allow Chelan PUD to replace it with a mix of newer contracts better aligned with today's market conditions.

Under the concept being explored, Chelan PUD would retain enough generating capacity to satisfy its own future reliability obligations while marketing the remaining output through a series of staggered agreements designed to capture value over longer periods.

The approach would also reduce exposure to market volatility by avoiding a large uncontracted position when the current agreement expires in 2028.

"Given the evolutions within the market, how can we position the utility today for success for those future generations?" Johnson asked during the presentation.

For customer-owners, the practical goal is straightforward: ensuring the utility continues to extract as much value as possible from its hydropower resources while preserving the low electric rates Chelan County residents have long enjoyed.

Chief Energy Resource Officer Janet Jaspers said the district sees the potential contract restructuring as an opportunity to better align its wholesale energy portfolio with today's market realities.

"By adapting to today's energy market, we're putting Chelan PUD in a good position to maintain long-term financial stability and continue the steady, low rates that our customer-owners have enjoyed for years," she said.

The discussion is part of a broader effort by Chelan PUD to adapt to a rapidly changing energy landscape that increasingly places a premium on carbon-free resources capable of responding quickly to fluctuations in demand.

General Manager Kirk Hudson said the utility's goal is to ensure that Chelan County residents continue benefiting from the value generated by the region's hydropower system.

"The agreement with Alcoa served our community well for many years, but the energy landscape is changing rapidly," Hudson said in a prepared statement. "To respond to new opportunities and growing reliability needs, we must adapt and continually reassess our strategies."

No action was taken during the June 1 meeting. Staff said they will continue evaluating options and may return to commissioners with a proposed termination and replacement strategy at a future date.

Andrew Simpson: 509-433-7626 or andrew@ward.media