New Mexico’s San Juan coal carbon capture project could put investors at risk for $450M: IEEFA

Dive Brief:

• A company proposing to retrofit the San Juan coal plant with carbon capture is underestimating the project’s cost and overestimating its viability, according to a report released Wednesday.
• Project investors are at risk for up to $450 million due to optimistic market assumptions by Enchant Energy, the company developing the project, according to analysis from the Institute for Energy Economics and Financial Analysis (IEEFA). The firm argues Enchant lowballed cost estimates, while overestimating the plant’s capacity factor, meaning the project won’t be as lucrative as the company says it will be, and could cost twice as much.
• Enchant’s estimates are based on analysis from engineering firm Sargent and Lundy, and the company said it is confident in those results. “We have done our homework and we’ve had access to data that [IEEFA hasn’t] had,” Enchant Chief Operating Officer Peter Mandelstam told Utility Dive.

Dive Insight:

The 847 MW San Juan plant is a fixture of the Farmington, New Mexico, community, providing economic benefits in jobs and taxes that the city is not ready to give up. In August 2019, the city formed an agreement with Enchantallowing the company to take over 95% of the plant’s ownership, leaving the city with the remaining 5%.

Enchant estimates total retrofit costs will fall just under $1.3 billion, assuming the plant operates at 85% to 100% of its potential capacity over the next 12 years. Under that level of production, the company found it could capture 6 million tons of carbon per year — or 90% of the plant’s emissions, assuming the 85% capacity factor — and transport that carbon through the Cortez pipeline up to the Permian Basin to be used for enhanced oil recovery. Revenue from that CO2 is anticipated to range from $15-$20 per ton.

But IEEFA says the assumptions those numbers rely on are too optimistic, starting with the assumed capacity. The firm points out that only around 3% of coal-fired plants in the US operated at such a high capacity factor in 2018, and the two remaining San Juan units have only operated around 63% since 2017, a gap PNM has noted as well .

“We’ve run the plant for quite a while and we’ve never gotten up” to a consistent 85%, utility spokesperson Raymond Sandoval told Utility Dive.

Coal generation in general is anticipated to be less competitive over the next decade as more renewables and natural gas are added to the system, so plants with such high capacity are anticipated to become an even rarer breed, according to Sandoval and IEEFA.

And if the plant operates at a lower capacity, it won’t produce as much carbon, placing assumed revenue and tax credit benefits at risk, one of the report’s authors IEEFA Director of Resource Planning Analysis David Schlissel said during a webinar on the report’s findings Wednesday. key also provided testimony on behalf of the Sierra Club in opposition to the project to New Mexico utility regulators in November.

Ultimately, IEEFA says the project could present a major risk to the city.

“Right now, I think that the people and the city of Farmington should be leery about accepting that they will have any protection if the cost goes up,” said Schlissel.

But Mandelstam said the risks are well known and cost increases under its current contracts would not fall on the city, but rather the engineering and construction groups Enchant is partnered with — Sargent and Lundy and Mitsubishi.

“Whatever cost overruns or time delays are the province of our counterparty … they eat it,” Mandelstam said.

“I appreciate that IEEFA and other groups are concerned. But Farmington is a sophisticated city with a sophisticated municipal utility and they’re going to fully vet and review and approve every aspect of every contract, which includes the risk allocations.”

He also maintains the company is confident in Sargent and Lundy’s numbers.

“We make the assertion because it’s not an assertion, it’s an analytical conclusion. Our engineering firm has done the analysis, they have had access to proprietary data that no one else has access to.”

Farmington Mayor Nate Duckett presented the project at the National Association of Regulatory Utility Commissioners conference in Washington, DC, this week, and also disputed IEEFA’s findings.

“To say it was a shameful attempt to undermine a project that will protect jobs, schools, community, and environment would be an [understatement],” he told Utility Dive in an email. “Carbon Capture projects are popping up all over the US because true environmentalists don’t chain themselves to one solution to reduce CO2 emissions.”

The city and Enchant met with PNM and the plant’s other three owners earlier this month for preliminary ownership negotiations, and have plans to meet later this year to sort out outstanding liability concerns of the utilities.

Sandoval categorized the meeting as “very, very preliminary.”

“We want to give every opportunity for Enchant and the city to succeed but there are a lot of challenges,” he said.

The stakes are not low — though the state’s Energy Transition Act allocates $40 million toward transitioning the city of Farmington, PNM recognizes jobs and economic opportunity may cost more. With those jobs on the line, the utility said negotiations will focus on being “blunt” about the challenges and liabilities the ownership transition will entail, in order to give San Juan workers a realistic picture of their future.

“We want to get as much information as possible because they need to be informed about their future,” said Sandoval, “People are making decisions about their livelihood.”

The process will definitely take time, agreed Mandelstam.

“This is a very complicated transaction. A lot of parties were viewing it. A lot of eyes, the eyes are good, but having so many eyes on stuff means that it takes longer.”