TEP coal-to-gas moves driven by environment, cost

2013-09-15T00:00:00Z 2013-09-16T00:09:31Z TEP coal-to-gas moves driven by environment, costBy David Wichner Arizona Daily Star Arizona Daily Star

Tucson Electric Power Co. is swapping a chunk of its coal-fired power generation for cleaner-burning natural gas.

And while an environmentalist critical of TEP’s coal-burning ways cautiously lauded the utility’s moves, the coal-to-gas swap-out has as much to do with cost as it does “green” policies.

TEP announced last week that it would cut the percentage of power it gets from the coal-burning Springerville Generating Station and buy a natural-gas-fired power plant in Gila Bend.

At Springerville, the company is buying additional ownership shares in the plant’s Unit 1 generator and dropping expiring leases for power it already gets from the unit, for a net reduction in coal-fired power supply.

At the same time, TEP said it is in “exclusive negotiations” to buy a 550-megawatt gas-fired unit of the Gila River Generating Station, a merchant power plant owned by a subsidiary of Entegra Power Group.

The moves will allow TEP to provide cleaner and cheaper power, the utility says.

“We’re reshaping our generation portfolio by pursuing the opportunity to purchase a cleaner, favorably priced resource that will allow us to take greater advantage of low natural-gas prices,” said Paul Bonavia, chairman and CEO of TEP and its parent, UNS Energy Corp.

TEP looked to buy the Gila River plant after Entegra responded to TEP’s request for proposals for non-coal generating assets in May.

The move to cleaner gas comes as TEP is generating more power than ever from renewable sources like solar and wind. In 2012, more than 5 percent of TEP’s total retail sales were generated by renewable resources such as solar, the company says.

Dan Millis of the Sierra Club applauded TEP’s plans but said the company can do more, citing company figures showing TEP gets more than 80 percent of its power from coal.

“It’s a step in the right direction, to back away from coal — we’ve criticized TEP in the past for being addicted to coal,” said Millis, who has been involved in the Sierra Club’s “Beyond Coal” campaign.

“I wouldn’t say buying a gas plant is like buying a Prius, but it will be cleaner than coal.”

Though operating gas plants emits far less carbon and other pollutants than coal, gas production — particularly hydraulic fracturing or “fracking” to free gas from rock formations — emits powerful greenhouse gases and can contaminate groundwater supplies, Millis said. Fracking is responsible for a huge spike in production that has kept gas prices low.

TEP’s move to more gas generation isn’t being driven entirely by environmental concerns.

The deal also is being driven by looming environmental mandates that are expected to cost coal-plant operators billions of dollars over the next decade.

The company said the decisions are part of TEP’s “long-term resource strategy,” which also includes the potential retirement of coal-fired resources at the San Juan Generating Station near Farmington, N.M.

TEP owns a 50 percent interest in both San Juan Units 1 and 2, or 170 MW of each unit.

In February, the state of New Mexico, the U.S. Environmental Protection Agency and Public Service of New Mexico, the operator of San Juan, signed a nonbinding agreement that would require, among other things, the closure of Units 2 and 3 by the end of 2017 and the installation of nitrogen-oxide-reducing technology on Units 1 and 4 by early 2016. The agreement still requires approval by federal and state agencies, TEP noted.

At Springerville, TEP now gets all the output from the plant’s Unit 1 coal-fired generating facility, which has a capacity rating of 387 MW. The Tucson utility gets all of the unit’s power through a 14 percent ownership and leases for the remainder.

TEP has agreed to purchase an additional 25 percent share of the unit and related facilities when the leases expire on Jan. 1, 2015.

Once the transaction is completed, TEP will own 39 percent, or 151 MW, of the unit’s output. TEP may negotiate to buy additional interests in Unit 1, but the utility said it does not expect its final ownership to exceed 50 percent.

Meanwhile, TEP will continue to operate Unit 1 and the other three units at Springerville. Unit 2 is owned by a wholly owned subsidiary of TEP, and Units 3 and 4 are owned by the Tri-State Generation and Transmission Association and the Salt River Project, respectively.

If TEP’s plans come to fruition, the utility’s use of coal will drop by 15 percent by 2015 and, with the proposed shutdown of the San Juan units, another 10 percent by 2018, TEP spokesman Joe Barrios said.

TEP’s moves are part of a nationwide trend of utilities shutting down coal operations and adding gas.

With tougher federal standards for mercury emissions set to take effect in 2015, utilities have been steadily closing coal-fired units, with 8,800 megawatts permanently closed in 2012 and another 5,781 megawatts projected to be closed this year, according to an analysis by the market research firm SNL Financial.

An analyst said TEP’s coal-for-gas moves make sense, with costly environmental regulations on the horizon and the local utility’s reliance on coal.

“This is happening across the country,” said Maurice E. May, an analyst with Power Insights/Wellington Shields. “The environmental pressures nationwide are against coal.”

May said environmental risks of natural-gas production are manageable and, in any case, fracking is regulated by the states, many of which welcome the economic benefit of new gas exploration so long as wells are properly designed and drilled.

Adding gas was an obvious diversification choice for coal-heavy TEP, May said.

“They really need more gas,” May said.

He noted that TEP’s biggest gas plant holding is a third of the 650-megawatt Luna Energy Facility in New Mexico. Its other gas assets are two smaller local plants for peak-demand needs and the roughly 400 MW H. Wilson Sundt Generating Station in Tucson, whose four converted oil units are not nearly as efficient as modern gas plants.

If TEP really wanted to clean up its act, the Sierra Club’s Millis said, it would stop burning coal at the Sundt plant on East Irvington Road, which operates mainly on gas but has one dual gas-coal unit.

The Sierra Club and the Tucson Climate Action Network have unsuccessfully pressed TEP to abandon coal operations at Sundt, citing the public-health danger of the urban plant.

TEP has said that while it uses mostly gas at Sundt, it has no plans to drop the coal option.

“We see no reason why TEP wouldn’t want to switch that particular plant from coal to gas this week, today,” Millis said.

But the healthier option, considering the greenhouse-gas hazards of natural gas, is a major shift to renewable energy sources, he said.

“We really need to see more movement to renewables,” Millis said.

“Swapping one fossil fuel for another isn’t going to necessarily solve the problem.”

Contact Assistant Business Editor David Wichner at dwichner@azstarnet.com or 573-4181.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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