5/28/2019 By Joe Smyth | email@example.com | @joesmyth
Guzman Energy is proposing a deal that would help Tri-State Generation and Transmission Association meet Colorado and New Mexico’s new clean energy policies, by replacing nearly half of Tri-State’s remaining coal fleet with 1.2 gigawatts of new wind and solar power projects, along with a mix of energy storage and natural gas. Guzman Energy executives said that the proposal would also immediately lower costs for Tri-State, and could allow member co-ops to increase the amount of local renewable energy they can build.
“Rapidly changing economics, combined with new carbon reduction goals in states that include the majority of Tri-State’s members, mean there’s a lot at stake for those who own and are served by Tri-State,” said Guzman Energy President Chris Riley in a press release. “We’ve put a proposal on the table that would help Tri-State and its members lower costs right now while simultaneously reaching compliance with new laws. We look forward to taking the proposal directly to Tri-State’s owners and facilitating an open and transparent dialogue.”
In an interview, Riley explained that the company had presented the deal to Tri-State executives, as well as to several Tri-State member co-ops. Riley said that while some member co-ops expressed support for the proposal, Tri-State executives indicated they did not plan to continue exploring the proposal until after rulemakings and implementation of the new climate legislation in Colorado and expanded renewable energy standard in New Mexico. That will likely take several months, and could increase costs as federal tax credits for wind and solar projects begin to expire. Guzman Energy executives hope instead that its proposal will be reviewed in parallel with the rulemakings, and decided to publicly announce the proposal so that it can be considered by Tri-State member co-ops and their members.
A key part of Guzman’s proposal involves an infusion of cash from Guzman Energy to Tri-State of around half a billion dollars, in order to finance the retirement of Tri-State’s remaining coal generation in Colorado and New Mexico. Tri-State already plans to retire the 100 megawatt coal plant in Nucla, Colorado by 2022, and the 427 megawatt unit 1 of the Craig coal plant by 2025.Under Guzman Energy’s proposal, the 253 megawatt Escalante coal plant in New Mexico would also be retired, along with the remaining two units at the Craig coal plant. Tri-State is the operator of the Craig coal plant and owns unit 3 (448 megawatts), along with a 24% share of unit 2 (410 megawatts). Decisions about Craig unit 2 would have to include the other utilities with ownership stakes in the unit: Xcel Energy, Platte River Power Authority, Salt River Project, and PacifiCorp.
Guzman Energy executives also said that the proposal includes financial assistance to communities impacted by coal plant retirements, and that those plans would be developed in consultation with local leaders, organizations, elected officials, and other partners.
Under the proposal, Guzman Energy would sell Tri-State replacement power for the coal units. That would come from 1.2 gigawatts of new renewable energy projects, roughly evenly split between wind and solar, as well as dispatchable generation in the form of battery storage projects and natural gas. Guzman executives said that the new generation portfolio would be more than 70% renewable while also providing the same energy and capacity as the retired coal plants, using Tri-State’s own definition of capacity.
A key factor that makes Guzman Energy’s proposal possible is the declining costs of renewable energy. Last year, Xcel Energy received bids that showed that new wind and solar power in Colorado is now cheaper than the cost of running existing coal plants. Under its Colorado Energy Plan, Xcel plans to close two units at the Comanche coal plant near Pueblo and replace it with 1,100 megawatts of wind power and 700 megawatts of solar power, along with new battery storage projects and existing natural gas plants. Reports published by Rocky Mountain Institute and Moody’s Investors Service have also found that Tri-State could reduce its costs by replacing coal plants with lower cost renewable energy.
In an email, Colorado Energy Office Executive Director Will Toor said:
“As technology has advanced, the costs of wind and solar have come down so much that building new wind and solar is cheaper than operating many legacy fossil fuel generating plants. This is opening up new market possibilities to retire fossil fuel plants and replace them with clean, renewable energy. While we can’t comment on any individual proposal from a private company to a utility, we are excited to see creative proposals coming forward.”
Guzman Energy has pursued other deals in the region that leverage the declining costs of renewable energy: it financed Kit Carson Electric’s exit from Tri-State in 2016, aims to facilitate a similar deal with Delta-Montrose Electric Association, and entered into a “renewable energy swap agreement” with Holy Cross Energy last year.
Guzman Energy’s proposal could also include allowing Tri-State member co-ops to build more local renewable energy projects. Currently, Tri-State policies limit co-ops from generating more than 5% of their energy needs from their own projects. That could be increased under Guzman Energy’s proposal, although the details would depend on negotiations since that could affect other components of the deal.
In an interview, Colorado Speaker of the House KC Becker said that “there are a few reasons that Tri-State should look hard at this opportunity,” including a changed regulatory environment, support from member co-ops for more renewable energy, and the shifting economics of energy projects.
New climate and energy policies in Colorado will require Tri-State and other utilities to significantly reduce carbon pollution. The Climate Action Plan to Reduce Pollution, which Colorado Governor Jared Polis is expected to sign this week, directs the Air Quality Control Commission (AQCC) to develop regulations to reduce statewide greenhouse gas emissions at least 26% by 2025, 50% by 2030, and 90% by 2050, from 2005 levels. The legislation also encourages “the development of clean energy plans that will require greenhouse gas emissions caused by Colorado retail electricity sales to decrease eighty percent by 2030,” and specifies that the AQCC “will consult with the public utilities commission with regard to rules that affect the providers of retail electricity in Colorado.”
So it’s clear that Tri-State will be required by Colorado law to significantly reduce the emissions from its operations, but it could take several months to know the precise details, as the AQCC and PUC develop those rules. Guzman Energy executives hope that Tri-State and its member co-ops will consider its proposal as those rules are developed.
In addition to the climate legislation in Colorado, New Mexico Governor Michelle Lujan Grisham signed the Energy Transition Act in March 2019. That legislation sets a 50% renewable energy standard for electric utilities in New Mexico, including co-ops, by 2030, and a zero-carbon resources standards for investor-owned utilities by 2045 and rural electric cooperatives by 2050.
Tri-State sells electricity to 43 electric cooperatives in four states, with around 80% of its electricity sales to co-ops in Colorado and New Mexico.
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Guzman Energy says it has the capital to make substantial shifts in Rocky Mountain co-ops’ energy supplies.
Guzman Energy burst onto the utility scene in the Rocky Mountains in 2016 as an electrical cooperative based in Taos, New Mexico, sought to get out of its contract with a coal-heavy wholesale supplier in order to develop its local solar potential.
To make that possible, Guzman paid the $37 million exit fee required by Tri-State Generation and Transmission, the wholesale supplier, and began delivering electricity purchased from the energy markets to the co-op. Today, Kit Carson Electric Association is on track to develop solar resources sufficient to meet all its daytime needs by 2020. Its rates, meanwhile, have remained competitive with or less than what it paid under Tri-State.
Now, Guzman wants to do much the same for Tri-State altogether. It’s proposing to buy three of the coal-fired generating units owned primarily by Tri-State, shut them down, and replace the 800 megawatts of generation with a balance of wind and solar backed likely by natural gas generation.
Guzman, which describes itself as an energy marketing, trading and investment company, says renewables have become so cheap that it can make money — and members of the 43 electrical co-ops that together constitute Tri-State can also save money. Guzman believes the same model could be used to expedite the retirement of coal assets owned by other utilities that have become stranded by lower-cost renewables.
“We would finance the early shutdown of these coal plants, giving Tri-State a substantial cash infusion, in the vicinity of a half-billion dollars, and we would replace the portfolio (that would be lost) with in excess of 70% renewables,” said Chris Riley, president of Guzman Energy, in an interview last week at the firm’s office in downtown Denver.
The electricity Tri-State and its members would get, he added, would be at less cost than the electricity generated by the three coal plants. Two units are in the Craig Generation Station in Colorado, and the third, Escalante, is near Grants, New Mexico. The proposal also includes purchase of a Tri-State coal mine near Craig.
Guzman says it would also cover the costs of dismantling the three units as well as remediation costs, which are expected to be substantial. The remediation, however, would be subject to negotiation, Riley said. In addition, Guzman offers to assist communities that would be affected by early retirement of the coal units.
The offer, in Guzman’s telling, illustrates the availability of “flexible capital” to hurry the transition from greenhouse gas-polluting coal plants to renewable generation, doing for Tri-State what it cannot readily do itself.
“We are looking to find a return acceptable to our investors, but this is also a demonstration of how you can help facilitate a transition and do it in a creative way,” said Riley. “There is a lot of capital focused on this problem. There are a lot of people focused on solving this problem.”
An ‘inefficient’ energy system
Guzman’s proposal to buy and close coal plants also aligns with new laws adopted in both Colorado and New Mexico this year. Both states want carbon-free energy by 2050.
New Mexico’s new renewable energy standard requires rural electrical cooperatives hit 50% by 2030 and 80% by 2040. Colorado’s new laws require large utilities file to plans to reduce carbon dioxide emissions 80% from 2005 levels by 2030.
“The administration (of Colorado Gov. Jared Polis) will be actively engaged to advocate for rules that will support he governor’s agenda of 100% clean electricity by 2040 and the carbon pollution goals established by the Legislature,” said Will Toor, executive director of the Colorado Energy Office, in an e-mail response to a request for comment.
Of Tri-State’s 43 member co-ops, 29 are in Colorado and New Mexico, with the others in Wyoming and Nebraska. More significantly, most of the largest members — constituting roughly half of Tri-State’s electrical demand — have told Tri-State they want to see a more rapid decarbonization. Tri-State has lately begun taking steps to accommodate those requests.
Riley declined to identify the source of Guzman’s money in making the offer to Tri-State. However, the company last August announced two Colorado-based funds, Zoma Capital and Vision Ridge Partners, had together invested $130 million.
Zoma Capital, started by Ben Walton, the grandson of Walmart founder Sam Walton, and his wife, Lucy Ana Walton, is focused on “accelerating energy technologies to create a more efficient, responsive and modernized electric grid,” according to Zoma’s website. The website describes Colorado’s energy system as “inefficient and too heavily reliant on conventional fuel sources. Despite growing deployment of renewables, approximately 60% of power generation is still driven by coal. Although the market and regulatory environment is evolving, progress lags and consumer options are limited, particularly in rural Colorado.”
Last October, Zoma announced it had led financing of $150 million for Amp Solar Group, a company that has grown a portfolio of more than 700 megawatts of distributed generation and utility scale clean energy projects since 2009.
Vision Ridge Partners was founded in 2008 by Reuben Munger “in order to bring decades of value investing experience to bear on what he saw as the financial opportunities presented by sustainable solutions,” according to the firm’s website. He’s also a trustee of the nonprofit Rocky Mountain Institute.
The Rocky Mountain Institute last year issued a report that found that Tri-State could close all but one of its coal-fired plants before they were paid off and still save money. That lone exception is Laramie River Station in Wheatland, Wyoming, which Tri-State owns with Basin Electric, another generation and transmission association. Tri-State also owns a 400-megawatt coal-burning unit at Springerville, in Arizona.
Tri-State’s coal fleet is complicated and already in transition. In 2016, in a plan reached with state and federal regulators to reduce haze, Tri-State agreed to close the 100-megawatt Nucla station by the end of 2022 and a 427-megwatt plant at Craig by the end of 2025.
That will leave two units at Craig with a generating capacity of 876 megawatts. The two units are operated by Tri-State, which owns one unit and co-owns the other with PacifiCorp, Platte River Power Authority, Xcel Energy and Salt River Project. All of Tri-State’s partners have indicated plans to substantially shed generation from coal-fired units.
Expiring tax credits a factor
Guzman spent a year putting together its offer with aid of finance, energy and environmental consultants, according to Riley. But it then waited until Tri-State had a new chief executive, Duane Highly, believing Tri-State would be more amendable to the offer under his leadership than under his predecessor, Mike McInnis.
According to a fact sheet distributed by Guzman, Tri-State’s leadership informed Guzman that it did not intend to explore the proposal now, but may do so after rulemaking at the Colorado Public Utilities Commission is complete. A bill adopted by the Legislature firmly puts Tri-State resource planning under the scrutiny of the state’s PUC. This rule-making could go well into 2020 or beyond, Guzman predicts.
Guzman, however, wants more rapid action, citing expiring federal solar and wind tax credits.
“Each year of delay results in an increase in costs from today’s prices of 20% to 25%, which translates to about $1.5 million to $1.8 million per year for a 100-megawatt wind project,” says a fact sheet from Guzman.
Questions remain about whether Guzman has the means to deliver what it proposes. One risk has to do with whether it can put on renewables fast enough. The expiring federal tax credits combined with plunged renewable costs have factories scrambling to meet orders. For example, the Vestas wind tower factory at Pueblo, Colorado, which Vestas says is the largest in the world, is reported to have orders for five years.
Kathleen Staks, director for external affairs for Guzman, reports that the supply chain issues don’t currently concern members of Guzman’s resource planning team. “That doesn’t mean it isn’t a legitimate concern; just that it is one that will have to be considered by developers when they bid into request for proposals.”
Transmission may pose another challenge. Tri-State has 5,665 miles of high-voltage lines assembled to transmit electricity primarily from centralized coal plants. The same transmission system may not as easily work for large-scale wind and solar.
A test case in New Mexico
Leo Guzman, a graduate of Columbia and Stanford, founded Guzman Energy with the intent of helping “transition an outdated energy economy into a renewable age,” according to the Guzman website. Previously, in 1987, he had founded an investment bank and broker dealer, Guzman & Co., after working in corporate finance. Guzman Energy is based in Coral Gables, Florida, and has an office in Denver.
In Colorado, Guzman retained Jeff Heit, the managing director, who had previous experience at several energy companies, most significantly for almost 30 years as a senior energy trader at Xcel Energy.
Riley has the most provocative history, having grown up in Emery, Utah, the son, grandson and great-grandson of coal miners. Others – uncles and cousins – worked in a nearby coal-fired power plant. He says he also had the experience of having the lights turned off in the trailer when his mother – who was divorced from his father – could not afford to pay the electric bill.
After graduating from high school in 1995 he joined the Navy and ended up a graduate of Annapolis before setting out into the financial world. Riley and family members were profiled in March by the New York Times.
Formed in 2014, Guzman Energy began delivering power in 2016 to Aztec, New Mexico, a town of 6,500 people, and to Kit Carson Electric, which has 33,000 members/customers.
This year Guzman has expanded its operations. In January, it reached a swap agreement with Holy Cross Energy, an electrical cooperative that provides power to the Vail and Aspen areas primarily with a partnership with Xcel Energy. Guzman can tap the coal-fired power production owned by Holy Cross in Comanche 3, at Pueblo. Without having to consume the coal power, Holy Cross has set out to develop 100 megawatts of wind, a significant step in its ambitious goals to decarbonize its power supplies.
Guzman also has an agreement to supply Delta-Montrose Electric, one of Tri-State’s 43 members, if Delta-Montrose reaches an agreement with Tri-State about an exit fee. Delta-Montrose appealed the dispute to the Colorado PUC, which had been scheduled to hear the case in late June. That week-long hearing has been posted.
In addition, Guzman has been making its pitch to a group in Pueblo who advocate for a renewable-heavy municipal utility to replace gas-heavy Black Hills Energy, an investor-owned utility.
At Kit Carson, chief executive Luis Reyes Jr. says Guzman has delivered everything it promised. There have been no power outages since Guzman began delivering electricity to Kit Carson three years ago, and prices have been competitive or better.
Before, Kit Carson had been locked into a contract until 2040 with Tri-State that specified that Kit Carson was able to develop 5% of its own power.
Now, Kit Carson is busy developing its solar capacity, with plans — still on track — to be able to meet 100% of daytime needs of its customers by 2022, says Reyes. The solar will be coupled with some battery storage. That will give Kit Carson a 52 percent renewable component, says Reyes.
But importantly, the solar farms are distributed in Kit Carson’s service territory. “We are looking long term, not just building a renewable energy grid, but a resilient energy grid,” he says. “We don’t want all of our eggs in one basket, so to speak. And there are other member benefits by putting solar arrays in every community.”
Guzman offers a similar model for Tri-State altogether. As it shut down the centralized coal-fired units, it says it will help Tri-State’s member co-ops build smaller but more dispersed electricity generation. “In our view, that’s the correct place to be,” says Riley. It will also help local communities benefit by using local labor and resources.
In March, Guzman began presenting its proposal to five of Tri-State’s largest member cooperatives as well as communicating with several other general manager. After hearing Guzman, directors of Durango, Colorado-based La Plata Electric sent a letter to Tri-State on April urging the G&T to “hear them out” while acknowledging that “the devil is in the details.”
The view of LEPA directors, the letter said, is that “this proposal creates opportunities for Tri-State to manage future risk and mitigate costs, and potentially helps LPEA achieve the flexibility it desires.”
La Plata has been examining its options, wanting to ramp up renewables while reducing electricity costs. As part of its research, directors have studied Kit Carson. “No one was more skeptical than I was. We asked them hard questions,” says Mike Dreyspring, the chief executive at La Plata. He was persuaded. “I feel pretty comfortable. It’s working well for them.”
He’s even more struck by the ability to make it work for the town of Aztec. Making the economics work for a smaller place is actually harder than for a larger jurisdiction, because of the economics of scale.
But in sizing up Guzman’s offer, he sees need for continued fossil fuel generation, but from natural gas. “Storage offers some promise, but it’s just not there yet,” he says. Instead, he sees small natural gas reciprocating engines, small enough to minimize water needs but useful in ensuring reliability while dramatically decreasing the environmental impacts.
Dreyspring concedes there’s risk to Guzman’s offer, the potential for creating a giant wholesale provider. The risks must be evaluated.
In Taos, Reyes sees Tri-State as too big and too top-heavy. Co-ops created Tri-State, he points out, but at some point the relationship became reversed. Now, the tail wags the dog.
It’s time, he says, for “right-sizing” Tri-State.
“Tri-State is just too big, and they move to slowly, and by the time they make decision, it’s old,” says Reyes.
Kit Carson’s contract with Guzman “gives us flexibility,” he says. “As energy supplies continue to change, Guzman has put us into a position to address those changes and with technology it’s going to be more affordable to deliver power from your home into the grid than just as delivering to you,” he says. “You have to think outside the box, because technology is driving change so quickly.”
Correction: Tri-State fully owns one of the two coal units at the Craig Generating Station that are not currently slated for retirement. The other is co-owned with several partners. A previous version of this story misstated the unit’s ownership structure.
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