Naughty or Nice: Is PNM Too Reliable on Coal?

Cover-MAIN-Coal
Anson Stevens-Bollen

Naughty or Nice

Is PNM too reliant on coal?

December 9, 2014, 12:00 am

In February, to comply with the Regional Haze rule under the federal Clean Air Act, PNM executives made a deal to close down half of the 41-year-old San Juan Generating Station, 15 miles outside of Farmington, by the end of 2017. They’ve also agreed to install pollution control technology on the station’s two remaining boiler units at an estimated cost to ratepayers of $400 to $430 million, which would amount to an average customer-price increase of about 7 percent. PNM has not provided estimates for future rate increases, but would have to get Public Regulation Commission approval for any subsequent price hikes.

PNM is gradually adding wind and solar, but it’s also stockpiling coal for its San Juan plant, aware that its contract with BHP Billiton, the sole-source coal provider for the plant, ends on Dec. 31, 2017. That’s the same time the Australian company has signaled it wants to stop operating its mine in New Mexico.

That makes coal supplies and price difficult to forecast. To secure a coal supply, PNM is exploring its options. They’re negotiating to purchase BHP’s mine and reviewing another option to open a strip mine at Ute Mountain. While company executives haven’t made any final supply decisions, they have advised Wall Street investors that uncertainties could impact their operation.

Ultimately, the question of how PNM plans to replace San Juan Generating Station power is at the center of the state’s future energy policies.

There’s a lot at stake.

State law requires PNM’s plan “to identify the most cost-effective portfolio of resources to supply the energy needs of customers.” PNM says its approach is the most cost-effective and “significantly lowers the total tonnage of carbon and other damaging emissions into the atmosphere.” Environmentalists contend the utility’s plan forces ratepayers to absorb all the costs and environmental liabilities, while profits are privatized. Renewable advocates suggest wind and solar are the best options.

To reduce its future reliance on coal, PNM has said it plans to construct a new natural gas plant, but it also plans to take a larger stake in the San Juan coal-generation operation when it acquires the shares from a California utility and its Tri-State Generation partners in two years.

By 2018, PNM estimates its total coal generation would drop to 46 percent of generation sources, down from 62 percent this year. During the same time frame, natural gas capacity would grow 1 percent and nuclear energy would jump to 33 percent of the total energy portfolio. Wind, solar and geothermal would combine for the final 11.2 percent. Those three renewables currently account for only 7.2 percent of the energy mix.

Just last month, PNM won approval to spend $79 million to build four new solar centers. With another 40 megawatts of sun-powered energy, or 4 percent of the replacement plan, PNM says they can power another 16,100 average-sized homes.

Not everyone is happy with PNM’s replacement scenario. Mariel Nanasi, the executive director and president of New Energy Economy, tells SFR her nonprofit advocacy group is fighting the plan because “it results in significant ratepayer costs and risks.”

She believes PNM’s team has underestimated costs related to variable coal prices and uncertain supply, environmental compliance and a “poorly performing coal plant.”

James Conca, an energy market consultant who used to work at the Waste Isolation Pilot Plant in Carlsbad, and who now lives in Washington, tells SFR that PNM needs to secure a coal supply or they’ll be looking for energy from surrounding states.

“All the costs need to be included in PNM’s plan,” says Conca, “because they all get passed on to the consumers.”

State law requires PNM’s plan “to identify the most cost-effective portfolio of resources to supply the energy needs of customers.” PNM says its approach is the most cost-effective and “significantly lowers the total tonnage of carbon and other damaging emissions into the atmosphere.” Environmentalists contend the utility’s plan forces ratepayers to absorb all the costs and environmental liabilities, while profits are privatized. Renewable advocates suggest wind and solar are the best options.

To reduce its future reliance on coal, PNM has said it plans to construct a new natural gas plant, but it also plans to take a larger stake in the San Juan coal-generation operation when it acquires the shares from a California utility and its Tri-State Generation partners in two years.

By 2018, PNM estimates its total coal generation would drop to 46 percent of generation sources, down from 62 percent this year. During the same time frame, natural gas capacity would grow 1 percent and nuclear energy would jump to 33 percent of the total energy portfolio. Wind, solar and geothermal would combine for the final 11.2 percent. Those three renewables currently account for only 7.2 percent of the energy mix.

Just last month, PNM won approval to spend $79 million to build four new solar centers. With another 40 megawatts of sun-powered energy, or 4 percent of the replacement plan, PNM says they can power another 16,100 average-sized homes.

Not everyone is happy with PNM’s replacement scenario. Mariel Nanasi, the executive director and president of New Energy Economy, tells SFR her nonprofit advocacy group is fighting the plan because “it results in significant ratepayer costs and risks.”

She believes PNM’s team has underestimated costs related to variable coal prices and uncertain supply, environmental compliance and a “poorly performing coal plant.”

James Conca, an energy market consultant who used to work at the Waste Isolation Pilot Plant in Carlsbad, and who now lives in Washington, tells SFR that PNM needs to secure a coal supply or they’ll be looking for energy from surrounding states.

“All the costs need to be included in PNM’s plan,” says Conca, “because they all get passed on to the consumers.”

Every year, after the Thanksgiving Day china set is washed and neatly restacked in an antique hutch, Germain Schneider climbs into his garage attic to find a storage box filled with heirloom Christmas ornaments and decorative lights.

A few hours later, with a golden angel adorning the top of his tree, Schneider flips a wall switch and a long strand of colorful bulbs begin to twinkle.

“It’s beautiful,” says Schneider’s wife Amanda, nodding her approval, seemingly unconcerned about the electrical source behind the family’s cherished holiday tradition.

The Schneiders, like most New Mexicans, expect a cheap and reliable supply of power in their homes, offices and public venues. Brownouts and blackouts are rare, even during peak summer demand. Weather-related outages are quickly restored by skilled field technicians.

Electricity flows on demand. While consumer access to power is hassle free, the dominant sources of electricity in the region—coal, nuclear and natural gas—by all scientific measurements, have left a huge imprint on the state’s air, land, water and even public health.

"ALL THE COSTS NEED TO BE INCLUDED IN PNM’S PLAN BECAUSE THEY ALL GET PASSED ON TO THE CONSUMERS."

Dire forecasts predict decadeslong droughts, global warming and damaging floods if greenhouse gas emissions and other detrimental pollutants aren’t drastically reduced—and soon.

Environmental activists wish they could scream climate change warnings from the tallest mountains, even as snowcaps on the peaks shrink more each year. Scientists prepare research and urge politicians to review critical data before making policy decisions.

For years, residential and business consumers have sent a clear message to energy companies across the West: They want their utilities to substitute coal with renewable energy sources. In California, legislators have taken the lead and banned the distribution and sale of energy from new coal-generated sources and blocked its utilities from renewing contracts to import energy from out-of-state coal plants like the one in northwestern New Mexico.

A Conservation in the West poll prepared by Public Opinion Strategies and commissioned by Colorado College for its annual State of the Rockies in 2013 indicates more than half of New Mexico voters (58 percent) prefer solar power to be their primary source of energy. Pollsters report that residents want pure water and air. They also want assurances that wildlife and state and federal parklands are protected from gas emissions and coal ash pollution.

Making the transition won’t happen overnight. Despite considerable pressure from its customers, shareholders and government regulators to move away from fossil fuels, the Public Service Company of New Mexico (PNM), the state’s largest utility with over half a million customers, appears to be committed to coal and nuclear-generated power capacity for at least the next two or three decades.

In February, to comply with the Regional Haze rule under the federal Clean Air Act, PNM executives made a deal to close down half of the 41-year-old San Juan Generating Station, 15 miles outside of Farmington, by the end of 2017. They’ve also agreed to install pollution control technology on the station’s two remaining boiler units at an estimated cost to ratepayers of $400 to $430 million, which would amount to an average customer-price increase of about 7 percent. PNM has not provided estimates for future rate increases, but would have to get Public Regulation Commission approval for any subsequent price hikes.

PNM is gradually adding wind and solar, but it’s also stockpiling coal for its San Juan plant, aware that its contract with BHP Billiton, the sole-source coal provider for the plant, ends on Dec. 31, 2017. That’s the same time the Australian company has signaled it wants to stop operating its mine in New Mexico.

That makes coal supplies and price difficult to forecast. To secure a coal supply, PNM is exploring its options. They’re negotiating to purchase BHP’s mine and reviewing another option to open a strip mine at Ute Mountain. While company executives haven’t made any final supply decisions, they have advised Wall Street investors that uncertainties could impact their operation.

Ultimately, the question of how PNM plans to replace San Juan Generating Station power is at the center of the state’s future energy policies.

There’s a lot at stake.

State law requires PNM’s plan “to identify the most cost-effective portfolio of resources to supply the energy needs of customers.” PNM says its approach is the most cost-effective and “significantly lowers the total tonnage of carbon and other damaging emissions into the atmosphere.” Environmentalists contend the utility’s plan forces ratepayers to absorb all the costs and environmental liabilities, while profits are privatized. Renewable advocates suggest wind and solar are the best options.

To reduce its future reliance on coal, PNM has said it plans to construct a new natural gas plant, but it also plans to take a larger stake in the San Juan coal-generation operation when it acquires the shares from a California utility and its Tri-State Generation partners in two years.

By 2018, PNM estimates its total coal generation would drop to 46 percent of generation sources, down from 62 percent this year. During the same time frame, natural gas capacity would grow 1 percent and nuclear energy would jump to 33 percent of the total energy portfolio. Wind, solar and geothermal would combine for the final 11.2 percent. Those three renewables currently account for only 7.2 percent of the energy mix.

Just last month, PNM won approval to spend $79 million to build four new solar centers. With another 40 megawatts of sun-powered energy, or 4 percent of the replacement plan, PNM says they can power another 16,100 average-sized homes.

Not everyone is happy with PNM’s replacement scenario. Mariel Nanasi, the executive director and president of New Energy Economy, tells SFR her nonprofit advocacy group is fighting the plan because “it results in significant ratepayer costs and risks.”

She believes PNM’s team has underestimated costs related to variable coal prices and uncertain supply, environmental compliance and a “poorly performing coal plant.”

James Conca, an energy market consultant who used to work at the Waste Isolation Pilot Plant in Carlsbad, and who now lives in Washington, tells SFR that PNM needs to secure a coal supply or they’ll be looking for energy from surrounding states.

“All the costs need to be included in PNM’s plan,” says Conca, “because they all get passed on to the consumers.”

Nanasi suggests the world can be powered by renewables today, and she is urging PNM to boost its renewable capacity now rather than “double down on coal.” Nansai wants PNM to build utility-sized solar and wind stations, which she says is also the best plan to create thousands of jobs and boost the state’s economy.

The Public Regulation Commission will have the final say in the months ahead. Before they vote, PRC Hearing Examiner Ashley Schannauer has scheduled a Jan. 5 meeting to review arguments on both sides. PNM has already secured an approved stipulated agreement to its plan by the attorney general, PRC staff and four case interveners, including the New Mexico Renewable Industries Association, NM Independent Power Producers and Western Resource Advocates.

Like most families, the Schneiders haven’t paid much attention to PNM’s energy plans. Instead, they’re considering adding a solar panel on their home’s roof. On Christmas Eve, they’ll go with candle power. Schneider’s already folding paper bags for three dozen farolitos.

Q&A

To help SFR readers determine the pros and cons of the proposed replacement plan, we invited a PNM offical and a community advocate to answer 15 identical questions:

 

POINT >> Gerard Ortiz

 

Vice President, Regulatory Affairs

PNM Resources

A cost-effective mix of resources will serve PNM’s growing customer energy needs. 

 

   COUNTERPOINT >> Mariel Nanasi

 

Executive Director and President

New Energy Economy

Clean energy, powered by solar, wind and gas, is the best energy transformation option.

 

 

What are the advantages and disadvantages of PNM’s proposed replacement power plan?

Point: Our plan includes closing two of four units at San Juan, installing technology to reduce emissions that contribute to haze formation on the remaining units and adding more solar, natural gas and carbon-free nuclear. We will reduce water use and seven types of emissions at the plant by about 50 percent and reduce our share of power from the plant by 37 percent. The retirement of two units at San Juan significantly reduces PNM’s reliance on coal. It is important to note that PNM has made a $270 million commitment to solar energy in the past five years. PNM’s plan is the most cost-effective option for customers out of thousands analyzed for cost, risk and reliability. Closing the entire plant would be more expensive.

Counterpoint: The only plan benefit is PNM’s request to close half the San Juan plant at the end of 2017. PNM’s replacement plan is to buy more coal from other utility partners in the San Juan plant who are fleeing from their own reliance on coal. PNM’s acquisition of more interest in this coal plant will be a de facto bailout of out-of-state utilities and of PNM and its shareholders—shifting liability for poor business decisions by the company onto the backs of unsuspecting ratepayers. The other portion of PNM’s plan is to buy expensive nuclear from Arizona, from shares PNM owns, and charge ratepayers 119 percent above the price it sells nuclear-generated electricity for on the open market.

How does PNM’s energy plan differ from plans in surrounding states?

Point: We have not done a side-by-side comparison with other states. Each state’s circumstance is different. PNM develops its plans based on several factors unique to New Mexico, including our customers’ energy needs over the long term, regulatory requirements, the need for a diversified resource mix and the bill impact to our customers.

Counterpoint: States like Nevada, Colorado, Iowa, Illinois, New Jersey and California, are all divesting from coal and exceeding their renewable energy standards—realizing the financial and economic benefits that clean energy brings for ratepayers and the environment in today’s market. El Paso Electric has declared that their entire portfolio will be coal-free by 2016.

The US Environmental Protection Agency will be setting new standards for greenhouse gas emissions and coal ash. How will these regulations impact PNM’s proposal?

Point: Our plan puts New Mexico well down the path toward meeting proposed carbon regulations, which set a statewide requirement. We believe we are well-positioned to meet future coal ash regulations because of the way we handle coal ash at our plant.

Counterpoint: New regulations will make PNM’s 12 million tons of carbon pollution and 1.8 million tons of coal ash more expensive for ratepayers. The toxic soup of mercury, arsenic and heavy metals generated every day blow in our air, leach into our water and threaten our health.

How will PNM replace its coal supply and secure price certainty for its supply?

Point: The current coal contract expires in 2017. PNM and the remaining plant owners are evaluating options for a future coal supply. We are confident that we will be able to reach an agreement for a cost-effective coal supply.

Counterpoint: BHP Billiton is PNM’s only source for coal. PNM ratepayers could face millions of dollars in environmental liabilities if PNM and its San Juan generating plant partners purchase the mine at the end of 2017.

If the Public Regulation Commission rejects PNM’s proposal, what is Plan B?

Point: In October, PNM came to an agreement with six parties that resolves the issues to the benefit of our customers, and the parties now support approval of the plan. We are optimistic that such a broadly supported agreement will be approved. Should the commission reject or modify any part of the plan, we would evaluate our options in light of the final order.

Counterpoint: New Energy Economy would like to see San Juan shut down. We have abundant resources in New Mexico to replace this coal capacity. If we choose to invest in solar and wind with natural gas to augment, we can lead the nation in clean energy and create a surge in New Mexico’s struggling economy.

Why is PNM opting to invest in older coal and nuclear plants rather than replace the power with wind and solar?

Point: PNM has selected the most cost-effective plan to serve customers going forward. It is not possible to completely replace conventionally produced power that is always available with wind and solar because they don’t produce power all the time.

Counterpoint: PNM makes more money in large, behemoth energy structures that require new infusions of capital, regular maintenance and expensive fuel to operate efficiently. Solar and wind require a one-time capital investment.

Is PNM’s portfolio too reliant on coal?

Point: PNM has a well-balanced diversified portfolio. This plan reduces our reliance on coal.

Counterpoint: Yes, and PNM’s proposal to acquire additional coal capacity is detrimental to ratepayers. The days of coal burning for power generation are coming to a close, not just because it’s dirty, unhealthful and a significant culprit in climate change, but because Wall Street has downgraded utilities that are laden with coal.

In New Mexico, water issues are always a critical environmental consideration. Is nuclear and coal-generated power the best use of New Mexico’s water supply?

Point: PNM’s plan will reduce water use at our San Juan plant by 50 percent. Palo Verde Nuclear Generating Station in Arizona uses treated effluent to meet its cooling water needs and recycles approximately 20 billion gallons of wastewater each year.

Counterpoint: The San Juan coal plant uses 6.3 billion gallons of water per year. This is more than twice the water usage of the City of Santa Fe. The nuclear plant consumes more water per unit of energy than coal, and even though it is in Arizona, our sister arid state, this water should be used for agriculture and life-affirming needs.

Currently, PNM’s portfolio includes 2 percent solar and 5 percent wind. Will PNM have 20 percent renewable energy by 2020?

Point: Yes, we expect to be compliant in 2020. PNM is fully compliant with state renewable energy requirements today. These figures don’t include our rooftop solar program, our PNM Sky Blue program or the three new solar centers that we are currently constructing. Next year, we will add 102 megawatts from the Red Mesa wind center and build four new solar centers. By 2016, our wind, solar and geothermal resources will provide the power used by 150,000 average homes. Our 20-year power supply projections show continued growth in wind and solar. Under our agreement for San Juan, PNM will issue [a request for proposal] for another 50 MW of renewable resources. PNM will seek commission approval for any proposals that prove to be cost-effective.

Counterpoint: Not likely. PNM’s plan includes only 40 MW of solar or 4 percent of the lost energy from San Juan. That only grows to about 12 percent in 2018.

How many new jobs will be created with PNM’s primary plan? Is there an estimate on the number of jobs that would be created by wind and solar?

Point: Several hundred construction jobs will be created building four new solar centers and a natural gas plant. While our workforce at San Juan Generating Station will be smaller, the plant will still be a good employer. We committed to no layoffs as a result of the two-unit retirement.

Counterpoint: There will be no new jobs created by PNM’s plan. If the hundreds of millions of dollars were instead invested in New Mexico’ solar and wind, thousands of family-supporting jobs would be created in a new energy economy.

What is the total price tag for PNM’s replacement power plan, and how much can consumers expect to pay in 2018, 2025 and 2030?

Point: The annual cost to the customer for retiring two units at San Juan, installing haze reduction technology on the other two units and adding more nuclear and gas energy is $66 million. The estimated impact is a $5.25 increase a month for the average residential customer in 2018.

Counterpoint: PNM’s filing states that rates will increase by $66 million in 2018. PNM’s filing does not project rate increase beyond 2018. However, we know that rate increases will continue as the following costs are not factored into their proposal.

1. Fuel cost increases at San Juan estimated by PNM at $78 million per year by 2032.

2. Carbon cost increases estimated by PNM at $297 million per year by 2033.

3. Increasing coal ash disposal costs due to new EPA standards.

4. Ongoing capital expenditures at Palo Verde and San Juan that are required to keep these aging facilities operational.

Why are ratepayers being asked to pay $26 million for shares in the San Juan facility that California utilities gave to PNM for zero dollars?

Point: They aren’t. The amount of the unrecovered investments in Unit 3 is being reduced by $26 million. Attributing this value to the additional 132 MW recognizes that this additional capacity will reduce the cost of the plan to our customers over time. The plan as a whole is the most cost-effective out of thousands of portfolios considered.

Counterpoint: PNM is purchasing the coal from California utilities at a price of zero dollars, when PNM is proposing to sell it to ratepayers for $26 million. PNM has not offered any reasonable explanation, other than that about a year ago they asked to value the same coal shares at $52 million in their original application. If PNM isn’t paying anything for it, we, ratepayers, shouldn’t be paying anything either. It’s absurd.

Is there a difference between what PNM sells its Palo Verde 3-generated power for on the open market, and how much it charges New Mexico ratepayers? If so, why?

Point: Yes, the difference will vary from year to year depending on market power prices. We are proposing to use Palo Verde Unit 3 to serve customers at a much lower value than its market value. PNM’s replacement power plan is significantly less expensive with the inclusion of Palo Verde than it otherwise would be.

Counterpoint: PNM’s desire to add 134 MW of nuclear generated power is understandable, because today they can’t produce that power cheaper than a combination of solar, wind and gas. PNM wants to sell their nuclear energy to New Mexico ratepayers for about 8.1 cents per kilowatt-hour, even though they currently sell it on the open market at 3.7 cents per kWh. New Mexico ratepayers should not be asked to pay 119 percent above market rates when there are cheaper alternatives.

Is PNM’s plan is the most cost effective, and does it benefit the public interest?

Point: Yes.

Counterpoint: No! PNM’s plan is expensive and risky. Their reliance on coal and nuclear capacity is fraught with risks and environmental liabilities and will cost more than alternative energy sources like solar and wind. State regulators have an obligation to protect New Mexico energy consumers from these unreasonable and imprudent costs.

 

The San Juan coal-fired power plant, near Farmington, currently provides most of the electricty PNM sells in the state.
LANL.GOV

 

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