All the troublesome NGS scenarios

To the editor,

Word is a deal is in the works to keep the coal-fired Navajo Generating Station open past 2019.

It’s not an impossible task, but it would come at a high cost, and it would require the owners to pull off two near- Herculean feats.

First, production costs would have to be severely slashed. Tucson Electric Power, one of the current owners, has projected it would cost an average of $56-$57 per megawatt hour (MWh) to operate and maintain the plant from 2020-30. It is extremely unlikely power from the NGS can be sold at anywhere near that price, except, perhaps, for a limited number of peak hours during the summer.

A buyout proposal by Chicago-based Middle River Power assumes NGS could sell electricity at $26.84 per MWh, less than one-half of what Tucson Electric has projected it would cost to produce NGS power. Such a price is achievable and sustainable only if production costs are curtailed drastically.

To get where it needs to be profit-wise, Middle River or any other owner would have to lay off workers and cut wages and benefits for remaining employees at the plant. Miners at Kayenta Coal Mine, which supplies the plant, likely would be similarly affected. Running the plant on a mostly seasonal basis, during peak-demand summer months, as the prospective owners apparently have discussed, could push many current full-time workers into part-time positions.

The second trick to keeping NGS financially viable after 2019 is that the new owners will have to achieve “revenue certainty.” That is, they will want to have an ironclad agreement in place to ensure they will get high enough prices for their electricity to turn a profit.

There’s actually a third way to keep the plant going – but it would require a huge government bailout, something that does not seem likely given the pushback from coal rivals like natural gas and renewable energy suppliers.

Beyond the near future, it’s doubtful that: 1.) production costs can be cut enough to make the plant profitable for more than a few years; 2.) customers can be found who are willing to tie themselves to a purchase agreement for power from NGS. Remember, natural gas prices are low and expected to remain low for a long time. Solar and wind prices are dropping, and renewable-generated electricity is on the rise.

The bottom line is that Middle River has little chance of generating a profit on NGS without a big bailout from the government or the Arizona Corporation Commission, which would require Arizona Public Service (the biggest utility in the state) or Tucson Electric to buy expensive power from NGS. The latter seems improbable, if only because such a move would drive electric rates up statewide.

Barring all that, one other troublesome scenario that could occur is a Navajo Nation takeover of plant operations, or a Navajo Nation move to hire someone else to run the plant on its behalf. This would require the Navajo Nation to absorb the difference between the cost of producing power at NGS and the prices at which it can be sold. It would very likely be a fiscal disaster.

Say the Navajo government were to take over the plant and was able to cut production costs to $45 per MWh from the $56-$57 range that Tucson Electric forecasts (a 20 percent reduction, which would be possible only if severe cuts were made). And say that average peak period energy prices will be $35 per MWh in 2020. That still would mean a $10 loss on every MWh sold and a $100 million loss every year given the plant generates and sells 10 million MWh of power.

Market conditions suggest an economic disaster any way you cut it, and one that would cause pain for workers, miners and other members of the Nation.

There are sensible ways to invest in a region in need of federal attention on many levels. This is not one of them. – David Schlissel, Institute for Energy Economic

and Financial Analysis, via email