Utility Bonds and Substations Explained
Assuring reliable power in Harbor Springs
The Brief
City Council will vote on the Utility Bond on Monday, May 19, 2025 at 7:00 PM. Zoom YouTube If you have utility or municipal bond expertise, please attend.
The bond will likely be for 25 years and $8M, with a cost of $532K per year.
The increase of renewables on the grid by 2030 to 50% is forecasted to destabilize our power supply.
The MPPA CEO briefed the City Council on January 20th, warning of serious grid reliability problems, and no plan to mitigate. No action was taken.
We will likely need to issue another bond for $5M+ before 2030 to fund needed upgrades by MPPA to maintain current reliability.
The expenditure of $1M to upgrade the marina laundry facilities and bathroom should be put on hold until the need for additional grid improvements from the Ice Storm is understood.
Recommendation
Before moving forward on this bond issue, estimate the need for a further bond issue for grid reliability. Estimate impact on rates, profitability, and credit rating.
Pause the marina project. Conduct a review of the ice storm and potential grid improvements for future storms or grid reliability issues. Assess the need for investment.
The Details
Harbor Springs is preparing to issue an $8-10M revenue bond to upgrade its utility infrastructure. They may also need to make an investment in generation in a few years, issuing more debt. The recent ice storm raises opportunities to rethink underground routing, backup generation, and other new priorities. Increased renewables on the grid may decrease reliability without backup generation.
Should we understand the issues and costs more before moving forward? Yes
The Current Bond Issue and Substation Upgrade
The City of Harbor Springs plans significant upgrades to its electrical infrastructure, financed by a bond issue not exceeding $10 million.
The key projects include:
Substation Upgrades:
Substation materials and construction are estimated at approximately $4.7 million.
Rebuilding of a 46kV transmission line and meter upgrades alongside substation work, estimated at $1.8 million.
M-119 Electric Line Rebuild (Phase 3 and 4):
Estimated at $1.5 million, enhancing reliability and service delivery.
Advanced Metering Infrastructure (AMI):
Estimated at $1.5 million, aimed at modernizing metering technology to improve efficiency and responsiveness.
Total estimated project cost: around $9.5 million.
Council documents in this weeks agenda indicate the recommended bond issuance of $8 million covers the most critical needs, the substation project and M-119 rebuild, excluding the AMI project to manage the annual repayment schedule prudently. The repayment plan is structured over 25 years with an interest rate of approximately 4.5%, translating to an annual payment of about $532,000, totaling around $13.5 million over the life of the bond.
This upgrade is likely necessary due to decades of deferred investment, increased customer power demands, and essential infrastructure maintenance to ensure reliable power for Harbor Springs. The City emphasizes that regular, incremental electric rate increases (around 3%-3.3% annually) will support these upgrades while minimizing financial impact on residents. But provides no financial analysis in support.
The current utility rate is $0.0867/kwh. For reference, that means you pay $0.09 to run the equivalent of 10, 100-watt light bulbs for 1 hour.
The bond appears to be a revenue bond secured against revenue from the utility. Or it could be against the tax base of Harbor Springs. This critical detail is missing in the documents. The nature of the bond and its security affect the City’s credit rating and the cost of borrowing money. Given the bond is 25 years, if we need more upgrades in the next 25 years, we will need to issue another bond, further loading the credit rating.
According to the City Manager’s report, the Utility is not run at a profit. In part because the City siphons off earnings to the general fund. While most businesses would accrue profit for these infrastructure needs, the City seems to operate on a cash basis rather than planning utility capital upgrades. This co-mingling makes it challenging to understand the long-term investment costs. Utility rates will likely need to increase to pay off the bonds. To pay off the $532K bond is essentially an average cost of $147 more per year per customer across the Harbor Springs Utility. But it would vary from actual demand.
Understanding Harbor Springs Utilities
The City of Harbor Springs operates its own municipal electric utility, which provides power directly to the city and some of the surrounding community. This independent utility model gives the city control over service quality, reliability, and responsiveness to local needs. Harbor Springs has some local power generation for emergencies to run water pumps, the fire station, City Hall, and other critical services.
Harbor Springs is a member of the Michigan Public Power Agency (MPPA), a nonprofit cooperative established to supply electricity and related services to its municipal members across Michigan. MPPA functions as a cooperative purchasing organization, leveraging economies of scale to negotiate favorable power purchase agreements, ensuring competitive rates and long-term stability. MPPA also constructs and operates power generation that is shared across its members.
Because of the Municipal and COOP structure, the future plans for Harbor Springs electricity are not subject to the same scrutiny typical of a Public Utility Commission overseeing a for-profit utility.
MPPA CEO presentation to Harbor Springs City Council Jan 20, 2025
Based on the presentation by Patrick Bolan, the CEO and General Manager of the Michigan Public Power Agency (MPPA), to the City Council on Jan 20, 2025, significant concerns were raised regarding renewable energy, grid stability, and the potential need for gas generation to ensure reliable energy supply for members like Harbor Springs. But no power forecast was presented.
Here is a summary of key points from Bolan’s presentation relevant to these concerns:
Renewable Energy Challenges:
Michigan State Public Act 235 establishes a renewable energy standard of 50% by 2030 and 60% by 2035
While Michigan is increasing its renewable power supply, with Harbor Springs' energy from renewables rising from 10% in 2015 to 27% in 2025, achieving higher percentages (like 50%) requires difficult decisions.
Renewables like solar and wind in Michigan do not produce the same amount of energy or provide the same amount of reliability as fossil fuel resources. A typical gas plant produces electricity about 80% of the time, while wind and solar in Michigan are around 20% and mid-30s, respectively, especially in winter months.
Solar and wind projects also require significantly more property – about 10 times more land for solar and possibly 20 times more for wind compared to a fossil fuel plant. This presents property challenges.
Grid Stability and Reliability Concerns:
Michigan is currently classified as being in a high-risk area by NERC (the reliability coordinator for the United States).
This high risk is attributed to the rapid retirement of coal plants, insufficient construction of new gas plants, and the addition of more renewables.
The amount of reliability and reserves on the system has been declining. Reserves are crucial because power plants break down, and other plants must be available to maintain the power supply.
Electric load is forecasted to grow significantly, potentially over 3% per year, largely driven by data centers. This requires the rapid construction of new power plants.
The industry is undergoing profound changes, and while technology is evolving quickly, the pace of adoption and cost of new technologies like energy storage are challenges.
The next five to seven years represent a vulnerable transition phase for the electric system due to aggressive decarbonization goals that may outpace technology adoption.
Need for Gas Generation:
Given the practical challenges of renewables and the need to meet growing load and ensure reliability, the baseline plan for MPPA and Harbor Springs likely involves building natural gas power plants to augment the renewable strategy.
Building new gas resources faces challenges because Michigan law requires gas resources to have a carbon capture system by 2035, and this technology is currently absolutely uneconomical, making financing difficult.
According to the MPPA CEO, while decarbonization is progressing, relying heavily on current renewable technologies alone presents significant hurdles related to energy production volume, reliability, and land use. This, combined with retiring traditional power sources and increasing demand, places Michigan's grid reliability at risk. Any additional generation, like gas plants and solar, will depend on more resources from members of MPPA. Harbor Springs will need to commit additional financial resources to increase renewable generation and backup generation, like natural gas, to improve grid reliability.
Grid Reliability
While renewables reduce carbon output, they depend on wind and sun. Storage has limited capacity. The nature of the electronics in renewable generation also creates certain additional reliability problems when supply and demand are out of balance. Supply and demand get out of balance more often with simple variations like clouds obscuring a solar array.
The loss of power for more than a week in Texas in 2021 during a winter storm, and more than 24 hours recently in Spain on a sunny day, is a product of the instability introduced by intermittent supply typical of renewables, as noted by the MPPA CEO. The problem is generally understood, but the fix is expensive. State governments tend to avoid costly fixes and are happy to set targets without addressing the full risk. Michigan has set a 50% target, but is not underwriting the expense of stability.
The Chain Reaction of Grid Instability
Variable Generation Causes Supply/Demand Imbalance
Solar and wind energy are intermittent, meaning they generate power when the sun shines or wind blows, not necessarily when people need electricity.Frequency Drift Begins
The electric grid runs at a precise frequency (60 Hz in the U.S.). Any imbalance between generation and demand causes the frequency to rise or fall. Spains grid collapses from a 0.8hz drift from normal.
Loss of "Spinning Reserve" Dampening
Traditional power plants (like coal, gas, and hydro) have large rotating generators known as “spinning reserves.” These provide inertia and help stabilize frequency by absorbing fluctuations. As we retire these plants and rely more on renewables, that physical inertia is lost.Inverter-Based Systems Disconnect
Modern electronics (split A/C units, geothermal systems, solar inverters, EV chargers) are susceptible to frequency changes. If the frequency drifts too far, these devices automatically shut off to protect themselves. This includes solar panels, which disconnect from the grid during instability, even if the sun is shining.Sudden Drop in Load and Supply Worsens Imbalance
When all those devices shut off, the grid sees a sudden drop in demand and generation (if solar inverters disconnect). That makes the supply/demand balance even worse.
Power Plants Automatically Shut Down for Protection
The remaining power plants interpret this as a fault and shut down to avoid damage, further reducing supply.Cascading Failure Leads to Blackout
Without enough spinning reserve or grid-forming support, the grid can't recover. A blackout spreads.Restoration Takes 24–96 Hours
Restarting the grid, especially in rural or lightly interconnected areas, requires a process called a "black start," which depends on diesel generators, manual coordination, and slow ramp-up. It can take 1–4 days to restore full service.
The City’s Proposed Mitigations
The City has suggested that more local solar, batteries, and geothermal can mitigate the instability. In the MPPA CEO presentation, he stated that “Natural Gas generation is the only practical way available to mitigate the reliability risk.”
By geothermal, we assume the city means ground source heat pumps, which would reduce natural gas usage and increase demand on the grid. Modern heat pumps for geothermal and split unit air conditioning use inverters to improve efficiency. These inverters make the instability problem worse.
Frankly, as more LEDs and advanced heating and cooling systems are installed, the instability problem can worsen because of the sensitive electronics. This was the unexpected problem in Texas in 2021. The grid operators did not know how people had altered their home energy demand.
Solar-based inverters that can mimic spinning reserves are called grid forming inverters. They cost 2x-3x a regular inverter and would need to be sized in Megawatts. MPPA would need to install these on their side of the grid. They likely should, but Harbor Springs would need to bear some of these costs.
The City uses about 2.5 megawatts of power every hour. An hour of backup battery for solar would cost about $1.5M. So a day of backup (cloudy day and dark night) would be 24 x $1.5M.
There are cheaper grid reliability systems using grid-forming inverters and batteries instead of full backup, which can mitigate short term instability. They still cost millions of dollars and help mitigate some but not all of the instability risk.
MPPA could build a pumped hydro dam to store energy. The Edenville Dam, which collapsed in 2020 in Midland, Michigan, is a pumped hydro storage unit.
There are new technologies like solid state batteries that offer reasonable solutions, but these are not in production or utility scale any time soon.
A 2.5 megawatt backup natural gas generator is about $1.7M-$2M installed and would run for days. Conventional fossil fuel backup is a good worst case affordable reliability hedge in contrast to solar and batteries.
The Winter Storm
During the winter ice storm, it became apparent we likely need to create a bit of a microgrid uptown to assure immediate power restoration to IGA, the hardware store, the gas station, Shay School, and the firehouse. The City utility got the grid there basically working on backup in stages over several days. If we have grid instability or a future winter storm, people need immediate shelter, gas for generators, hardware, and food. Shay housed 130+ people, many on supplemental oxygen and with other medical needs. Perhaps we should pause and have the utility, police chief, fire chief, and essential businesses comment on their power needs in emergencies. That will likely lead to increasing the capacity of the firehouse generator and augmenting automatic switching systems to provide a microgrid for essential services. This could likely be achieved for less than $500K.
It may also make sense to bury some power lines around the city. This is an expensive process, but it improves reliability and safety. Many areas are already buried.
The winter storm cleanup may cause an unexpected charge of $500k to $750K against the City budget. The City recently authorized $1M to add laundry to the City Marina and to move the bathrooms. It’s unclear whether FEMA is willing to fund these emergency cleanups.
Given these various cash flows and shifting priorities, does it make sense to change the focus from the Marina? Instead, boost critical services and protect citizens rather than upgrade laundry facilities for boats visiting the marina?
Summary
The City is preparing for an $8M bond issue. MPPA has told us we must take action to improve grid stability before 2030. City Council has not reviewed or discussed grid stability, future utility rates, or comingling of operating funds. It is difficult to tell how the City is using utility profits. We likely will need another bond issue of $5M or more within a few years to fund MPPA reliability upgrades. That upgrade would be for fossil generation, battery storage, or pumped hydro. These costs will force accelerated rate increases and weaken the City’s bond rating. The Utility should be operated as its own profit center and accrue for upgrades rather than issue bonds. We should also evaluate the storm response and create a micro-grid near the firehouse for critical infrastructure to protect it from future storms and possible grid instability.
Suggesting more batteries and solar is expensive and does not address reliability. Spain and Texas, with many more resources than Harbor Springs, got this wrong despite input from experts. The North American Electric Reliability Corporation, which monitors the entire US grid, has noted that Michigan is less stable than Texas.
Before the City Council approves on Monday, we should have a clear forecast that includes these extra costs and the related cost of interest with a weaker bond rating. Citizens should have a moment to set new priorities.