The Farmington, New Mexico, city council on Aug. 15 unanimously approved a deal to transfer 95% of the ownership interest of the coal-fired San Juan Generating Station (SJGS) to Enchant Energy, a company run by executives of a New York- based hedge fund that wants to utilize what it calls “state-of-the-art environmental technology” to capture carbon dioxide (CO2) from the plant and keep the facility in operation.
The contract agreement dated Aug. 16 is the latest chapter in the city of Farmington’s effort to keep the SJGS in operation. Farmington officials have worked to find a new operator for the 847-MW San Juan plant after local utility PNM, which operates the facility, in 2017 said it would close the plant’s two remaining units in 2022, 30 years ahead of schedule. The city is part owner of the plant.
Two units at SJGS were retired in 2017. Several California utilities formerly owned some of the plant’s generation, but they ended their ownership agreements in 2017 after 2015 legislation in California required them to divest from coal-fired generation.
The SJGS and its adjacent San Juan coal mine are major employers in northwestern New Mexico, and many of the workers at the mine are from the Navajo Nation. The San Juan Mine, the sole provider of coal to the SJGS, will operate under new ownership after the bankruptcy of former owner Westmoreland Coal Company, with creditors expected to take ownership. The mine’s current supply contract with the mine expires in 2022.
Enchant Energy said the council’s support was needed for the company to complete several negotiations related to keeping the plant open, including the coal supply contract. Larry Heller, chairman of the board of Enchant, said the next steps for the company include:
- Negotiating with PNM on water, land, right of way, and access to transmission.
- Continuing discussions with the tax equity financing community.
- Reviewing a draft project labor deal with the state’s construction trades council.
- Finalizing a coal purchase contract.
- Finalizing contracts with companies interested in buying CO2.
Said Heller: “We probably have seven or eight large paths that we have to follow, all of which we’ve begun.” He said he expects one of the biggest issues for the plant will be finding customers for its electricity; he said Enchant has hired a Nebraska-based company to find power buyers.
Enchant, led by Heller and CEO Jason Selch, an energy analyst and investor, proposed their carbon capture and sequestration (CCS) plan to save the power plant to Farmington officials earlier this year. Analysts have said a makeover of the plant could cost more than $1 billion.
Heller said Enchant Energy expects it will know within 6 to 12 months whether it can complete the project. Farmington officials said if the project does not come to fruition, they still plan to close the remaining operating units at SJGS—Units 1 and 4—in 2022. If Enchant does take over the plant and continues to operate it, the deal says the city of Farmington can purchase power from the SJGS for 13 years at a cost 20% below its current electricity price. Hank Adair, the city’s electric utility director, said last week that rate is about 6% lower than what Farmington pays for power from the wholesale market.
“I cannot see in any way, shape or form how this isn’t a positive thing for the city of Farmington, the state of New Mexico, the entire Four Corners region,” Farmington Mayor Nate Duckett said during the Aug. 15 city council meeting .
SJGS is owned by the city of Farmington along with Tucson Electric Power, Los Alamos County in New Mexico, and Utah Associated Municipal Power Systems. Farmington officials said the city has spent more than $930,000 in recent years related to seeking an agreement for new plant ownership—including the deal with Enchant Energy—as well as developing an integrated resource plan for SJGS.
San Juan entered commercial operation in 1973. At its peak, the station had almost 1,700 MW of generation capacity with its four units, according to PNM, with Units 1 and 2 each with 340 MW of capacity. Unit 3, which along with Unit 2 was retired at the end of 2017, had 497 MW of generation capacity. Unit 4 can produce up to 507 MW.
Enchant has said its deal to operate SJGS is “intentionally designed to further New Mexico’s dual goals of substantially reducing its statewide CO2output, and supporting New Mexico’s economy by employing hundreds of people in San Juan County and on the Navajo Nation by providing reliable, low- cost and extremely low-emission wholesale electricity.” The group said its agreement with the city of Farmington means the city will not take on additional liabilities related to the plant, and will pay less for its power purchases from the SJGS after 2022. The deal also includes some reimbursement of legal fees.
The CCS plan for SJGS is considered a project even larger than the Petra Nova carbon capture project in Texas, the world’s largest CCS retrofit of a coal plant. The Petra Nova project was named POWER’s Plant of the Year in 2017.
CCS Project Has Critic
Critics have said Enchant’s plan is not realistic. The Institute for Energy Economics and Financial Analysis (IEEFA), a pro-renewable energy organization, said in a recent report, “While Enchant Energy has an alluring name and while it purports to have compassionate community intent … its business model is not workable and its San Juan Generating Station retrofit pitch appears to be largely self-serving.” Other groups have called the plan “preposterous” and a “pie-in-the-sky idea.”
Karl Cates, an IEEFA analyst, in an Aug. 16 report said the project is “dead on arrival. To us, it’s a paper tiger.” Cates said the deal with Enchant is short on details, including financing and timeline information. City officials have said those details will be discussed as conversations with Enchant continue.
Selch and Heller have said their plan is a way to capture carbon and address climate change. Heller said earlier this year, “We fully expect that four or five years from now this will be a showcase asset for the entire energy world.” The company said in a statement earlier this year, “In the course of the transaction Enchant will take over as the operator from PNM, will install [a] state of the art carbon capture system, and reposition the plant to be a merchant power plant that will provide low-emissions dispatchable power into the Western power market.”
Tax Credits Key for Project Cost
Heller and Selch are managing members of New York-based hedge fund Acme Equities LLC. They said they discussed their plan to operate SJGS with the United States Energy Association in June, and said they have applied for a US Department of Energy grant to fund a study of their technology. They made a presentation about their plans for SJGS to San Juan County, New Mexico, officials in July.
A Sargent & Lundy study earlier this year, detailed in the July presentation, said that tax credits for the project under Section 45Q of the tax code could bring in more than $2.5 billion, nearly double the estimated SJGS retrofit project cost of about $1.3 billion. Enchant has said the $1.3 billion cost could be reduced through competitive bidding on the project.
Selch said the project would make money with off-take agreements for CO2, and through power purchase agreements.
The Sargent & Lundy study said about 6 million metric tons a year of CO2 could be captured at the San Juan plant. Captured CO2 is often used for enhanced oil recovery, and possible customers could be oil and gas operators in the Permian Basin of New Mexico and Texas.
The New Mexico Public Regulation Commission, which overseas utilities in the state, has said it will not regulate Enchant Energy’s operations. Farmington Electric Utility will have a 5% share of the entire plant after Enchant takes ownership, according to terms of the deal, and the Farmington City Council will regulate the utility’s ownership stake. Farmington currently owns a portion of Unit 4 at the plant.
Adair, the utility director, said keeping SJGS open will save the Farmington utility system millions of dollars, including $97 million to replace the power plant, and $30 million in unrecovered investment into equipment at SJGS.
Farmington City Manager Rob Mayes said the state’s Energy Transition Act allows PNM—also known as Public Service Company of New Mexico—the plant’s current majority owner, to recover its investment in the power plant through low-interest, securitized bonds, though that option is not available to the city.
The contract also requires Enchant to pay the city’s legal costs and other transaction costs up to $4 million, after the carbon-capture unit comes online. Cates said if the system does not enter commercial operation, the city could lose millions of dollars.
The agreement with Enchant also does not preclude layoffs at the plant or the mine prior to Enchant assuming ownership. PNM has said it hopes to use low-interest, secured bonds to assist laid-off workers.
—Darrell Proctor is a POWER associate editor (@DarrellProctor1, @POWERmagazine)