DALLAS - Austin Energy, one of Texas' largest public utilities, is bypassing the next phase of nuclear generation while planning to commit $2.3 billion toward the largest biomass energy plant in the state.

With City Council approval, the utility will become sole customer for the energy produced by the investor-owned plant near Nacogdoches in East Texas.

Nacogdoches Power LLC, a joint venture of Energy Management Inc. of Boston and Baycorp Holdings of Portsmouth, N.H., will own and operate the plant in the town of Sacul near the Louisiana border.

Nacogdoches Power will provide the up-front financing based on the revenue stream from Austin Energy. The revenue will come from fuel costs on the bills of Austin Energy customers.

The plant, which would run on wood waste from the East Texas timber and pulp industries, is seen as a key component of Austin's plan to develop 30% of its energy from renewable sources by 2020. While wind energy from West Texas is seen as an abundant source, energy production from the wind farms is typically at low ebb during peak afternoon demand in the summer, said Austin Energy spokesman Ed Clark.

"To reach 30% renewable energy by 2020, you're going to have to have some renewable components that are more firm, and this is firm," he said. "This can operate around the clock."

The biomass plant also provides a hedge against rising natural gas prices, Clark said.

"If you said you were going to build a gas plant over a 20-year period, you'd have a huge number like that [for the biomass plant]," he said.

Though not a major source of energy, biomass suits environmentalists because it captures methane that would otherwise become a greenhouse gas while providing a steady source of power over two or three decades.

"Austin has kind of been in the forefront of renewable energy in the U.S. for a number of years, and they've got a customer base that doesn't mind paying a premium for it," noted Standard & Poor's analyst Theodore Chapman.

Texas' electric grid operator, Electric Reliability Council of Texas, manages power from 37 plants that generate 97 megawatts of power from biomass. The plants typically produce methane or landfill gas, while others use agricultural waste.

Near Lufkin, 30 miles south of Nacogdoches, a 45-megawatt plant running on agricultural by-products is expected to come online in 2009. The Nacogdoches plant is expected to generate twice that power - 100 megawatts - sufficient to supply 75,000 homes.

Meanwhile, Austin Energy has decided to skip participation in construction of two new reactors at the South Texas Project nuclear plant, Clark said. While the City Council has final say on participation, the environmental orientation of the Austin customer base is not seen as supportive of nuclear power.

Austin is a 16% partner in the two existing reactors at the plant in Brazoria County, along with San Antonio's public CPS Energy and investor-owned NRG Energy Inc. The partners are first in line for a permit for two additional reactors under the Energy Policy Act of 2005. The federal law provides as much as $2 billion in insurance against regulatory delays or legal challenges for the first six reactors to receive permits.

"If you're looking for something that doesn't generate any greenhouse gases at all, that's nuclear, and it runs 24 hours a day, unlike solar or wind," Chapman said. "Those have limitations, even though they don't produce greenhouse gases, either. It kind of depends on the tolerance of their green constituency which direction they go."

Standard & Poor's this month updated its outlook on the electric utility's A-plus revenue bond credit rating to positive from stable.

"We do expect them to make some kind of decision in the next couple of years on some kind of investment in a new power plant or buying somebody else's power based on growth, and that's no small investment," Chapman said. "That could affect their finances; it could affect their rates. But we expect to see an upgrade."

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