DALLAS – One of the Southwest’s largest coal-fired power plants, earmarked for closure in 2019, could be saved by a presidential decree and a potential new owner.

The 42-year-old Navajo Generating Station in Page, Ariz., saw its shrinking customer base diminish further on Thursday when the Central Arizona Project board voted to buy 14% of its power from another source. CAP, for now, will continue to buy 86% of its power from the NGS to pump Colorado River water through canals that supply water to more than 80% of the state's population.

The coal-fired Navajo Generating Station is the major employer on the Hopi and Navajo reservation.
The 42-year-old Navajo Generating Station in Page, Ariz., is scheduled to close in 2019 barring federal intervention or a new owner. U.S. Bureau of Reclamation


“I want to be clear: CAP did not have a vote on closing NGS,” said CAP board president Lisa Atkins. “CAP does not own NGS. CAP is not required by law to buy NGS power. At the same time, CAP is not at war with coal. CAP seeks a long-term, cost-effective, reliable and diverse power portfolio for the benefit of its water users.”

The federal government built NGS on the Navajo and Hopi Reservation in 1976 to supply CAP with power to pump water through the canals. As the major customer, CAP’s power purchases were designed to pay off more than $1 billion in debt used to build the power plant.

Arizona’s Salt River Project, a major public water and power utility, owns 42.9% of the NGS and operates the plant. The U.S. Bureau of Reclamation owns 24.3%, while the state’s other major utility, the investor-owned Arizona Public Service Co. owns 14%. Nevada’s NV Energy has an 11.3% stake, and Tucson Electric Power Co. holds a 7.5% share.

The plant lost one of its major customers in July 2016 when the Los Angeles Department of Water and Power decided to phase out purchases from coal-powered generators. SRP bought LADWP’s 21.2% share of the NGS, paying about $16.2 million in cash and transferred property valued at $11.3 million.

In 2017, the SRP decided to allow the plant to close when its lease expires in 2019. The closure date extended the plant’s life by two years beyond its original planned 2017 decommissioning.

“Although challenging, this decision makes us leaner by ultimately removing large financial and operational obligations,” SRP’s annual report said. “It makes us greener by ultimately and substantially reducing our emissions intensity. It makes us even more customer-centric, as our customers will clearly see relatively lower prices than otherwise.”

The plant is unlikely to be competitive in an open energy market, according to an April report by Cleveland-based research group, the Institute for Energy Economics and Financial Analysis.

"The cost of producing power at NGS will certainly continue to be much higher than the market prices at which that power could be sold," the report said.

However, the plant could operate until 2044 if a new owner comes through or President Trump forbids its closure.

On June 1, Trump under the pretext of national security ordered Energy Secretary Rick Perry to find a way to prevent coal and nuclear-powered plants from closing. Restoring the coal industry was one of Trump’s major campaign promises.

“The president is right to view grid resilience as a serious national security issue," Perry said June 6 in Austin, where he addressed a Department of Energy conference on cybersecurity. "And he’s directed me to prepare immediate steps to stop the loss of these critical resources.”

Timothy Petty, President Trump’s appointee as assistant secretary for water and science, wrote to CAP on June 1, telling the agency's leaders that they are required under 1968 federal legislation to purchase the coal plant's power.

"With the 1968 Act in mind, the Department (of Interior) expects to consider several options going forward, including the feasibility of continued use of NGS-provided power," Petty wrote.

The U.S. Energy Information Administration anticipates 11.9 gigawatts of coal capacity will close in 2018, twice as much as in the previous year. The federal estimates do not include the 1.2-GW Pleasant Prairie plant operated by We Energies in southeastern Wisconsin.

In 2017, coal plants nationwide were producing power 53% of the time, down from 61% in 2014. Natural gas plants saw operating use jump to 54% in 2017 from 48% four years ago. Wind production time rose to 36% from 34%, as solar increased a percentage point to 27%.

With the federal government already a stakeholder in the NGS, keeping the plant open could enhance its appeal to a buyer. Trump wants to require grid operators to buy power from coal-fired plants claiming it is a national security issue.

“The Department of Energy’s likely response to the directive will be to require grid operators to purchase electricity from ‘fuel-secure power facilities’ – those that have a significant on-site supply of fuel,” said Moody’s analyst Joe Mielenhausen. “If this action is adopted, it would be credit positive for owners of uneconomic coal and nuclear power plants, along with U.S. domestic coal producers.

“However, customers would likely pay more for electricity to cover the costs of the subsidy, while cheaper, more efficient gas-generating units would likely be dispatched less often by grid operators,” Mielenhausen added. “The broader wholesale power market could also experience a decline in power prices.”

About 35 gigawatts of nuclear and coal-fired generation are expected to shut down over the next five years, according to Moody’s. That represents 3% of the country’s total capacity as of 2017, with 34% in the mid-Atlantic states or the PJM region. Grid operators have commented that they experience no immediate threat to system reliability from plant retirements, Mielenhausen noted.

At the 1,786-acre plant site outside Page, NGS has 538 employees, and pays about $52 million per year in total wages. The Kayenta mine that supplies the plant has 430 employees, and pays about $47 million per year in wages.

NGS and Kayenta Mine payments account for about a quarter of the Navajo Nation's revenues, and 65% of the Hopi Tribe's revenues.

“At stake are hundreds of mine and power plant jobs, hundreds of Navajo and Hopi government jobs and thousands of support jobs,” Navajo council delegate Nathaniel Brown said at a June 6 rally in Phoenix seeking to keep the NGS open an additional 90 days to allow a new owner time to work on a deal. “And remember, the value of these jobs is spread far and wide across tribal communities.”

Despite the threat to employment, the Navajo Nation saw its S&P Global Ratings rating raised to A from BBB-plus on May 30.strengthening the Nation’s financing options with respect to infrastructure and capital projects.

“Raising our credit rating is a great accomplishment,” Navajo Nation President Russell Begaye said. “The Nation has remained diligent in maintaining low debt burden while also implementing strong financial management policies.”

As the Trump proposal works its way through channels, potential buyers of the NGS are considering ways to keep the plant and the nearby coal mine operating.

Chicago-based Middle River Power said Thursday it is developing a proposal to buy the NGS with Avenue Capital Group.

Peabody Energy, which runs the Kayenta Mine, hired the Lazard financial advisory firm to find a buyer for the power plant to keep the mine in business.

Decommissioning costs are projected to range from $109 million to $151 million, likely spread out over three years following the retirement in 2019. CAP’s repayment obligation is estimated at $1.1 billion over the next 28 years or annual payments of $50 million to $60 million.

CAP’s customers would see “significant increases in water rates and additional taxes to recover the decommissioning costs and any lost revenue from NGS that was used for the debt repayment obligation, should NGS retire at the end of 2019,” according to a study commissioned by Peabody.

Emails between Lazard and the Central Arizona Project were disclosed by IEEFA. The emails show that Lazard set up an early April meeting with CAP to talk about the canal operator purchasing power from the coal plant if it were to be run by the potential buyers.

“We have said repeatedly that CAP is willing to consider purchasing cost-competitive energy from NGS after 2019,” Atkins told the CAP board Thursday. “CAP has been meeting with multiple parties contemplating continued operation of NGS to explore the possibility of future energy purchases.”

However, Atkins said it could not afford further delays in planning power purchases.

“We have already delayed our process, and we continue to put ourselves at greater and greater risk if we delay action any further,” she said. “We have no way of knowing how long it will take a new owner to complete the many agreements and actions that will be necessary before they can commit to providing CAP energy after 2019.”

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