San Antonio Express-News (Sunday)
Report calls into question plan for Spruce plant
In early 2021, CPS Energy’s then-executive leaders — nearly all of whom have since left the utility — sought to make something clear to the public: Closing the carbon-spewing, coal-fired J.K. Spruce power plant would cause bills to increase more than customers in San Antonio could bear.
CPS, they reasoned, still owed more than $1 billion on the Spruce plant as of the end of January 2021. If CPS permanently shut down the plant, it would have to pay both that debt and for a new plant or solar farm to replace the power Spruce generates, with the cost passed on to customers. Last year, CPS said that monthly bills could rise by up to $23 in the coming years if the utility closed Spruce.
But a report from energy researchers that was made public for the first time late last month calls into question CPS Energy’s underlying assumptions in concluding that it must continue burning coal. The report — published by the
Rocky Mountain Institute, an energy and sustainability think tank — says CPS has not explored financial methods that would enable it to shutter the coal plant without a significant increase in customers’ monthly bills.
“CPS fails to outline strategies, such as creating a regulatory asset, that may dramatically decrease or virtually eliminate near-term rate shocks,” the report’s authors wrote. “CPS should consider solutions that other regulated utilities are exploring … to allow for a more responsible retirement of
Spruce with minimal rate shocks.”
The institute’s reference to creating a regulatory asset — a financing mechanism for spreading costs over time — is notable in that CPS has done so recently to handle a different nine-figure debt that threatened to hike electricity bills.
During Winter Storm Uri last year, CPS was forced to buy about $1 billion of natural gas at extremely high prices. Rather than impose a single massive monthly charge on customers, CPS packaged $418 million of gas-related debt into a regulatory asset. For the next 25 years, CPS customers will pay about $1.26 per month to service that debt.
The RMI researchers said CPS could do something similar with Spruce: Close the plant and package the debt remaining on the facility so customers pay it off over time, thereby avoiding a large spike in utility bills.
“The use of these types of structures to address stranded assets is increasingly common in the industry,” the RMI researchers said. They cited the Oklaunion Power Station coal plant in north Texas, where the utility American Electric Power used a regulatory asset when it retired the plant ahead of schedule in 2020.
CPS officials received the
RMI report late last month, and interim CEO Rudy Garza declined to offer an opinion on its findings at the utility’s board meeting on June 27. But the utility’s finance chief said that using a regulatory asset could
run afoul of rules for paying bondholders who financed the construction of Spruce on a certain schedule.
Also, CPS would have to pay for another source of power to replace what Spruce generates.
“The big thing we’ve said consistently is the debt doesn’t go away,” Cory Kuchinsky, CPS’ chief financial officer, said in an interview at the utility’s headquarters. “You don’t have the asset making money any more, but you’ve still got to pay the debt. Then you need to buy another asset to do what (Spruce) is doing.”
Figures released by CPS Energy early last year show that ratepayers on average would pay about $12 extra on their monthly bills for the next 15 years if the utility were to mothball the Spruce plant and replace it with renewables such as wind and solar. Ratepayers would pay about $6 extra if CPS converted Spruce 2 to run on cleaner-burning natural gas, according to CPS’ resource plan.
CPS officials have said those projected figures will almost certainly change as the utility crafts a new long-term plan for generation under Garza’s leadership. The document detailing the effects on customers’ bills was released last year before former CEO Paula Gold-Williams resigned.
Still, although CPS owes debt on the Spruce 2 unit, converting it to run on natural gas or even as a zero-carbon geothermal plant in the future would save CPS money over time, said Reed Williams, a longtime oil and gas executive and former city councilman. He’s leading the Rate Advisory Committee, a group of residents giving input to CPS on its long-term plans.
CPS is set to close the older Spruce 1 unit by 2028. If it doesn’t, CPS would have to spend $150 million at the site by 2028 to install emissions-reducing technology. CPS owes about $150 million in debt on the Spruce 1 unit, so Garza has said closing it makes more sense.
Meanwhile, switching Spruce 2 to run on natural gas would cost CPS about $48 million, which would enable the utility to avoid spending $58 million later this decade on a coal plant scrubber that’s required to reduce emissions of sulfur dioxide, a respiratory irritant.
“You’re not walking away and shutting the thing down and putting a lock on it. You’re converting it to something that will give you more flexibility. And once we get back to normal (natural gas) prices, there’s no fuel advantage to coal,” Williams said. “You’re not shutting that plant down. You’re improving the profitability of the plant.”
Williams has argued that
CPS shouldn’t keep burning coal at Spruce 2 if converting it to gas will save CPS money and reduce emissions.
CPS is also concerned about how credit rating agencies would view the utility closing a relatively new, large power plant that it heavily relies on to produce power. Credit rating agencies grade the utility’s credit worthiness, and those ratings factor into determining interest rates that CPS is charged on the debt that funds much of the utility’s operations each year.
But if CPS can show “rating agencies that you’re going to improve the economics (of Spruce) and avoid an environmental cost for a $48 million investment, there’s not one of them that wouldn’t salute that,” Williams said.
Kuchinsky said the report from RMI raised “fair questions.” Still, he said, closing or converting Spruce will likely require new investments into generation.
“You don’t bring in money, but you’ve got to pay the debt. And then you’ve got to buy something new,” Kuchinsky said. “But our job is to work it out.”