DALLAS – Austin Energy should shed its investment in a bond-financed coal plant and replace it with a natural-gas-fired plant, according to a report on the Texas utility’s options.

The report presented to the Austin Electric Utility Commission is a step toward seeking offers on the coal plant, jointly owned with the Lower Colorado River Authority, and replacing the power source within two years.

The city of Austin owns Austin Energy, the electric utility, and is seeking to reduce carbon emissions in power generation.

The Fayette plant provides about a third of Austin’s electricity. The Lower Colorado River Authority, which produces wholesale power and manages water sales, built the plant 80 miles southeast of Austin.

Although a federal appeals court recently struck down plans by the Environmental Protection Agency to impose more stringent environmental standards on coal-fired power plants, regulatory factors remain a key element in financial risk assessments.

Austin Energy also recently invested $200 million in emissions controls that officials believe will meet anticipated environmental standards.

With natural gas prices at historic lows, Austin Energy may be able to build, buy or expand a plant at low cost while generating about half of the carbon emissions of coal, according to the report.

The Austin City Council wants to keep costs from rising more than 2% per year, and replacing the coal-fired plant would need to fall within those parameters, officials said.

The move toward natural gas is part of a national trend that Moody’s Investors Service sees as favorable to public utilities. As the power shift occurs, coal power is expected to decline to about 30% of total U.S. electric volume by 2020, down from 50% in 2009, according to a June report from the rating agency.

Moody’s rates Austin Energy A1 with a stable outlook.  The combined electric and water utilities of the city are rated AA by Standard & Poor’s and AA-minus by Fitch Ratings. The agencies maintain stable outlooks on the utility’s senior debt.

In January, Standard & Poor’s rated a separate-lien bond issue A-plus with a positive outlook, based in part on Austin’s proposed rate increase of 12.5% over two years.  The city of Austin has triple-A ratings on its general obligation debt.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.