The Long Island Power Authority says major technological shifts will allow it to reap $5 billion in long-term savings by walking away from plans to build a new power plant and overhaul two aging natural gas facilities.

A three-year study released in late April by the public utility's private operator, PSEG Long Island, showed “dramatic” changes to previous expectations of high power demands over the next two decades due to greater energy efficiency and increased solar panel use.

The report predicts surplus energy generation capacity through 2035 and recommends LIPA not proceed with a $2.9 billion, 706-megawatt plant in Yaphank, N.Y. It also urged the authority to abandon plans to modernize two older National Grid-owned plants in Island Park and Port Jefferson at a cost of $2.1 billion.

“Energy efficiency is up and that changes our expectations,” said LIPA CEO Tom Falcone. “As we add more renewables to the system the demands of these plants go down.”

The Long Island Power Authority, which owns this natural gas generating plant in Northport, N.Y., is planning new bond sales this fall.
The Long Island Power Authority, which owns this natural gas generating plant in Northport, N.Y., is planning new bond sales this fall. Bloomberg News

LIPA’s expectations for low gas prices in the next two decades also weigh against the power plant projects. The study notes that gas prices have dropped 72% since 2008 and are back to late 1990s levels, which reduces the value of savings from newer plants. Falcone said LIPA’s recommendations are based on projections of gas prices returning to 2008 levels by around 2035, but a new study is planned in three years to reevaluate if energy needs will change.

The 2017 study, which was independently reviewed by the Brattle Group and the Department of Public Service, states that neither of the three power plant projects is "needed for reliability or economic purposes.” LIPA is planning a separate analysis next year to determine whether re-powering is needed for a plant in Northport.

LIPA and PSEG cited clean energy mandates from New York Gov. Andrew Cuomo requiring LIPA to add 800 megawatts of clean energy in the next 20 years as another reason not to invest more in natural gas power plants that were built between the 1950s and 1970s. The utility is eyeing potential off-shore wind sites off Long Island’s coast and the study notes that adding green resources “significantly” cuts into how long old power plants would be used.

“Off-shore wind has become much more cost effective,” said Falcone. “When you think about the future of renewables it makes even less sense to repower the older plants.”

LIPA’s review of long-term energy needs occurs after it restructured its large debt burden in 2016.

LIPA refinanced about 60% of $7.6 billion in outstanding debt last year by issuing Triple-A-rated bonds through its Utility Debt Securitization Authority. Falcone said the conduit bond sales, which were enabled by the LIPA Reform Act of 2013, led to $450 million in savings and electric rates are now the lowest for customers since 2005.

LIPA received its first rating upgrade in 11 years last August when Moody’s raised the public utility’s senior lien revenue bonds one notch to A3 from Baa1 and its subordinated lien revenue bonds to Baa1 from Baa2. Moody’s cited a three-year rate plan with modest increases that took effect on Jan. 1, 2016 as a key factor in the enhanced credit profile. S&P Global Ratings and Fitch Ratings both rate LIPA’s debt at A-minus.

“They have some positive momentum,” said Moody’s analyst Scott Solomon. “I see the possibility of additional upgrades in two to three years.”

Solomon said LIPA achieving a credit rating in the mid-A range is reachable in the near future. He credits the leadership of Falcone for steering LIPA’s finances in the right direction. Falcone, who spent 14 years working in public finance at Morgan Stanley, was promoted from CFO to CEO last May.

“Tom Falcone has done a great job displaying his vision for the company keeping rates low for ratepayers,” said Solomon. “The management team is laser-focused.”

State Sen. Todd Kaminsky, D-Long Beach, criticized the LIPA study saying upgrades are needed to the Island Park plant, which is located in his district on Nassau County’s South Shore. Kaminsky emphasized the need for a generating plant in southwest Nassau County and that the plant also generates important tax revenue for the Island Park School District.

LIPA has brought court challenges against municipalities that house power plants arguing that the facilities are over-assessed and is seeking to lower tax payments.

“For the next 10 years, we can either have an aging, dirty plant or -- what I think is preferable -- a repowered plant that is more efficient, friendlier to the marine ecosystem and resilient to storms,” said Kaminsky. “The power demands of this area will remain high.”

Mitchell Pally, CEO of the Long Island Builders Institute, said the report demonstrates the need for localities to reach an agreement with LIPA on tax revenue. LIPA recommends in the study efforts toward “fair property tax reductions” on existing plants that reflect past and future expected declined usage.

“The Long Island Builders Institute continues to be very concerned over the significant real property tax impacts of a number of electric plants which are only used for a very limited amount of time but pay taxes far in excess of their usage,” said Pally. “This report clearly indicates that the time is now for all parties to come to an agreement on both the future of the plants and the taxes being paid by all Long Islanders, as the cost of retrofitting these plants is far in excess in meeting the electric needs of our community.”

Green energy advocates praised LIPA’s recommendations hoping it signals more embrace of renewable sources. The New York State Energy Research and Development Authority is slated to issue an off-shore wind master plan for the Empire State by the end of the year.

“What we are witnessing here is a historic game changer on how Long Island produces its electricity,” Gordian Raacke, executive director of Renewable Energy Long Island, said in a statement. “LIPA’s latest electric forecast proves that energy efficiency and renewable energy have successfully stabilized the unrelenting growth in electricity usage of the last decades.”

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.