The City of Morro Bay has released a peek into the potential future public benefits and tax dollars that might be expected to flow from a proposed battery storage facility project. But it’s keeping under wraps a specific offer sheet it got from plant owners, Vistra Energy, declaring the State’s Public Records Act does not cover it.
An economic study entitled, “Economic and Fiscal Impacts of the Vistra Morro Bay BESS Project,” was prepared by a trio of economists from the Brattle Group, an international economic consulting firm.
The Morro Bay Power Company, LLC, a division of Houston-based Vistra Energy and the applicant commissioned the study for the Battery Energy Storage System or BESS Project. (We will use “Vistra” when referring to the company to avoid confusing readers.)
Project Description
Vistra proposes to build a 600-megawatt BESS consisting of tens of thousands of batteries housed either in three giant buildings or hundreds of smaller ones to store excess electricity generated by renewable sources like solar and wind farms.
Those types of generators don’t always produce energy when demand is high and some sort of energy storage system is needed to even out supply and demand, and batteries appear to be leading the charge.
The State’s scheme to meet its goal of being emissions-free, zero-carbon, fully-renewable electricity generation in about a decade includes building battery storage plants, lots of them, scattered up and down the state.
The Brattle report, while it did come from Vistra, gives a glimpse into what public benefits — i.e. tax dollars and economic activity — the City of Morro Bay and the greater county economy might reap from both construction and operations of the BESS.
The BESS Project also includes demolition of the power plant buildings and removal of the smokestacks, and the report does some analysis on potential benefits from redevelopment of that roughly 19-acres of the 107-acre property.
The City of Morro Bay is in the process now of getting an independent economic consultant to analyze the potential benefits and help negotiate a formal agreement with Vistra. This report is one of the sources of information mentioned in the RFP.
What was Studied
Brattle’s report enumerated the benefits that the study focused on. “These include regional economic impacts of the BESS Project,” the Brattle report said, “tax revenue benefits to the City of Morro Bay from the BESS Project, and tax revenue benefits to the City from potential future development on other portions of the Power Plant Property.”
The study pegs construction costs at some $900 million, a considerable amount more than Vistra’s first cost estimate of $490 million for the project.
(Assuming the project does cost $900 million, and the County Tax Assessor sets that amount as the new value for property tax purposes, the annual property tax bill would be $9 million with the City getting 13% of that, so over $900,000 a year could be expected.)
How Much?
The report said the BESS Project would bring in “a 1-time payment of $11.4 million in tax revenues to the City related to construction [expected to take about 3 years], plus $12.8 million in additional revenues to the City over the first 10 years after completion of the BESS Project.”
The first windfall would come through the local sales taxes (1.5%) on purchases of all the equipment and services that will go into building the BESS, including $8.8 million just for the battery assemblies. The $12.8 million figure is property taxes over 10 years.
And the study said to expect another $1.7 million a year for the City resulting from redevelopment of the power building site, which presumably would be cleaned up for reuse as part of the demolition.
Jobs, Jobs, Jobs
The Brattle Report delves into speculating on the benefits outside City tax revenues, more directly to the people, namely thousands of construction workers that will build it.
The Brattle Report said the BESS Project would create 2,290 construction jobs pulling down an overall payroll of $187.3 million ($174 million in salaries) and add $275.3 million to “Regional Gross Domestic Product” (GDP) support.
Regional impacts are further defined as “Direct,” “Indirect,” and “Induced,” with direct impacts arising from “local spending itself, including payroll and supply,” the report said.
Indirect impacts “constitute additional spending by businesses that support the direct expenditures.”
Induced benefits are those arising from being once or even twice removed from the direct spending, “for example when workers at the facility purchase goods and services from others in the community,” the report said.
“The economic activity associated with BESS construction is expected to be $252 million,” the report said.
Demo Benefits
The report delves into the benefits that will come out of Vistra’s pledge to tear down the old plant as part of the BESS Project.
Their analysis indicated demolition would “support 192 jobs, resulting in labor income of approximately $14 million.” Add to that another $23 million in “regional economic activity.”
The report uses $30 million as the cost for demolition of the old plant and stacks and, using that amount as a basis for addition property taxes, the report said the City could collect another $41,000 a year once the old plant is gone, and potentially much more after it is redeveloped.
The report also notes benefits it says can arise from improving the views of Morro Rock once the trio of stacks and the power building — which at 165 feet is the second-tallest building in SLO County after Diablo Canyon’s twin containment domes — but that’s apparently hard to calculate.
“These benefits are difficult to estimate with standard economic models,” the Brattle Report said, “and are not evaluated in this report.”
Considerable Taxes
The Brattle Report lists the costs of the project at over $900 million (Vistra’s estimate), with the majority of those costs coming from purchase of the batteries themselves, some $586 million. (Vistra used batteries made in South Korea at its plant in Moss Landing.)
The company also expects to spend another $176 million “on other materials and equipment, for a total of approximately $761. 3 million on equipment and materials,” the report said.
The report also said the City may be able to get the County’s share of State sales taxes, 1% of the 7.5%, which would add another $7.6 million in 1-time monies. But this money is not guaranteed and would require an agreement with the County and Vistra to happen, so the report doesn’t include this in its benefits analysis either.
And there’s the little matter of a State Law to contend with that’s directed at energy projects.
“We understand that California law provides a partial exemption for sales and use taxes associated with, among other things, equipment primarily used for the production, storage, and distribution of electric power,” the report said. “However, that exemption only applies to the portion of the sales and use tax that would be collected by and directed to the State, and the law caps qualifying purchases at $200 million per year. “Therefore, we understand that this law would not affect the tax revenues that would or could be collected by the City and County.”
Impacts to City Budget
The report attempts to explain the benefits to the City by looking at its budget, and the various capital projects contained within.
“The City’s 2023-2024 adopted Budget calls for $19.5 million in expenditures across 31 separate capital projects,” the report said.
The Top-3 City projects — totaling $12.3 million — could almost be funded entirely by the $11.8 million the City would get in sales taxes, “and cover more than half the total proposed expenditure for capital projects [$19.5 million],” the report said.
The Top-3 projects considered were: “the Water Reclamation Facility ($6.8 million), Main Street and Atascadero Sewer Main Replacements ($3.4 million), and Annual Pavement Management Program ($2.1 million),” according to the report.
And the additional $1.2 million a year in property taxes would boost the City’s annual property tax revenues by some 25%.
(Ironically, it was the building of the old PG&E Power Plant that provided enough tax revenues for the City to be able to incorporate back in July of 1964.)
What About the Future?
The Report also looks at potential future benefits that might be derived from redevelopment of the old power station, stacks and the cooling water intake building across Embarcadero from the plant entrance and fronting the bay.
They used six potential scenarios that were identified during the City’s scoping meetings on drafting a power plant master plan (excluding the BESS site) — retail, parking, parks/open space, hotel, residential, and mixed retail/residential.
The report notes that each of these uses is allowed under the plant’s current visitor-serving/commercial zoning. However, the BESS Project does not fit that zoning and must be changed to industrial as part of the project permitting.
The hotel/lodging use, the report said, “is expected to provide the greatest tax revenue benefits.”
Hotel use are listed at $158,000 a year in bed taxes and $209,000 overall. Second highest is mixed retail/residential at $66,000; retail (from sales taxes) at $62,000 and just $9,000 from residential. Parks and open space would only garner $5,200, according to the report.
In Summary…
The Brattle Report sums up its analysis, pulling together all the different tax sources and other benefits and concludes:
“As a conservative estimate, and before considering the value of future redevelopment of the Demolition Site or other areas of the Power Plant Property, Vistra’s proposed BESS Project would generate approximately $24.2 million in additional tax revenues for the City from the construction and demolition phases and during the first 10 years of BESS operations.”
Comparisons?
All this begs the question — is this a good deal? As a comparison, the only relevant one we could find, when Duke Energy proposed replacing the power plant with a new more efficient, cleaner burning plant, the City and Duke Energy reached an agreement wherein Duke committed to paying a minimum of $2 million a year to the City.
That sum included property taxes, franchise fees on the gas burned at the plant, and lease payments on the outfall canal at the base of Morro Rock, which would have gone into the Harbor Fund.
The deal included annual increases for inflation and had the potential to be much greater depending on how often the plant ran and how much gas it burned (this franchise fee started when Duke bought the plant from PG&E in 1999 and then had to buy the natural gas to run it, too.)
That new plant was expected to be in service for 50 years, so that deal was potentially worth over $100 million to the City. This amount did not include all the same one-time sales taxes that would have arisen through the building of Duke’s $800 million project. The Duke Project happened before the City voters approved the first 0.5% local sales tax (in 2006), which has since been increased to 1.5%.
Instead, Duke had promised to structure all of its equipment buys so they happened in Morro Bay and the City would be entitled to its normal cut of those sales taxes.
The Duke deal was in effect for a couple of years while it was still pursuing the replacement project, but the project died in 2007 and the windfall died along with the plant in 2014.
The outfall canal lease brought a nice sum to the Harbor Department and instantly became by far the highest lease payments paid of all the harbor’s leaseholders. They have not been able to replace that lease payment, which started out at $250,000 a year but the BESS Project will not need the outfall canal.
