IMG_6682CC“To understand where you’re going, it helps to understand where you’ve been.”

That hoary cliché is particularly applicable when seeking to understand why Colorado Springs Utilities clings to the Martin Drake downtown coal-fired power plant.

Exasperated Drake opponents have argued that the plant’s three generating units are old (dating from the 1960s and 1970s), accident-prone and inappropriately located. They note that downtown power plants have virtually disappeared from American cities, as municipal elected officials have seen them as dangerous, polluting and inhibiting economic redevelopment.

Yet Drake puffs happily along.

Despite its travails, the plant produces low-cost, base-load electricity, and CSU has made substantial investments in upgraded pollution control equipment during the past several years. The eventual capital cost of these upgrades, performed to bring the plant into compliance with Environmental Protection Agency requirements, is currently estimated by CSU to be $183 million.

While estimates vary, replacing Drake’s 254 megawatts with a new, combined-cycle, natural gas power plant would cost about $1 million per megawatt. That’s just the construction cost — ancillary costs would include decommissioning Drake and either tearing it down or repurposing it, as well as site acquisition and gas and electric transmission upgrades.

It seems obvious to opponents that CSU should have scrapped Drake years ago. Had that happened, ratepayers wouldn’t be on the hook for the $173 million Neumann investment, and those funds would have been available for constructing a new plant. Combined-cycle gas plant emissions of particulates, sulfur and nitrogen oxides (SOx and NOx) are negligible, obviating the need for such pollution control equipment.

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As a bonus, such plants emit only half as much carbon dioxide per megawatt as coal plants, thereby substantially reducing the region’s carbon footprint.

So why hang on to the old coal burner?

A long and smoky road

The three generators that supply power in the Drake complex were installed in 1962, 1968 and 1974. They replaced smaller units that were no longer adequate to the city’s increasing power needs. Coal wasn’t only the fuel of choice, it was the only choice. Natural gas was expensive, and gas generators weren’t classified as baseline units. The new units performed beautifully, but an unexpected problem emerged.

Coal prices skyrocketed in the wake of the 1973 energy crisis, and Utilities needed a reliable, long-term supplier. In 1976, CSU made a deal with the Colowyo Coal Co.

In return for a fixed-price contract at $32 per ton, Colowyo agreed to open a new mine near Craig in northwestern Colorado and supply the city with premium low-sulfur, high-BTU coal for 23 years.

It seemed like a good idea at the time — until vast new deposits from the Powder River Basin came on the market, dropping the spot price of coal to a fraction of the contract price. The city tried to squirm out of the deal but was rebuffed in the courts.

A generation of CSU managers absorbed the bitter lessons of the Colowyo contract. They understood that the municipal utility couldn’t depend upon a single-source supplier, that the city never again should be held hostage to fuel-price volatility, and that long-term fuel contracts were inherently dangerous.

That hard-won knowledge is embedded in CSU’s corporate culture.

Since the late 1990s, when the Colowyo contract finally terminated, CSU has taken steps designed to shield ratepayers from energy price spikes, diversify fuel sources and build predictability and reliability into the system.

Those steps included strategic natural gas price hedging, construction of the gas-powered Front Range Power Plant with a private partner, and bringing both the Drake and Nixon coal-fired power plants into compliance with state and federal pollution control mandates.

Three fateful decisions

The 460-megawatt Front Range plant opened in 2003 after a four-year construction period. In 2010, CSU exercised its option to buy out the private partner.

“We’ll save $150 million over the life of the plant,” Utilities CFO Bill Cherrier said in 2010. “It’s been a very good productive plant for us, and [100 percent] ownership gives us a better, more diverse mix for our power plants.”

Owning Front Range has worked out well. Declining natural gas prices may have benefitted customers; refinancing the plant with tax-exempt bonds saved millions annually.

But gas hedging cost CSU approximately $100 million because of the prolonged downward trend of natural gas prices. Hedging works when prices are volatile, or when the year-to-year price trend line is upward. In times of falling prices, most hedging strategies result in substantially higher prices to customers because of the expense of upside protection. As of last year, CSU had unwound all of its hedges.

Whether CSU’s decision to retain and upgrade Drake was a good one is also debatable.

As EPA regulations have tightened during the past several years, more than 200 coal-fired plants nationally have been mothballed or permanently decommissioned. The owners of such plants concluded that the required investment in pollution-control equipment was financially untenable, especially since federal regulation might eventually extend to carbon emissions. Bucking the national trend, CSU will have invested a total of $293 million by 2017 in controlling NOx and SOx at Drake and Nixon.

Of the total, $183 million will be spent at Drake, almost all to control sulfur dioxide with equipment supplied by Neumann Systems, a local firm without previous experience in utility-scale pollution control equipment. Critics claim that the Neumann installation is both overpriced and underperforming.

“The installed cost (for Neumann) per ton of SO2  removed annually is $33,200,” said energy consultant Maureen Barrett in a recent email. “For other plants in Colorado the installed cost per ton ranges from $5,854 to $381.”

Barrett’s figures are from the Energy Information Administration’s 2012 database, the last year for which figures are available.

“Very few plants have higher total installed costs than Colorado Springs and those that do are HUGE plants,” she continued. “The citizens of the Springs are being taken for a very expensive ride.”

Other opponents have focused on Drake’s less quantifiable impacts, including those upon public health, property values and downtown economic development.

But CSU’s managers and a majority of City Councilmembers appear to focus on costs, dismissing externalities.

“We’re always talking about low cost,” said Val Snider, who has been deeply involved in discussions about Drake during his four years on City Council, “but what do we mean about low cost? That’s never really been defined.”

Fire crews remained at Martin Drake for weeks after the May 2014 fire that disabled the plant.
Fire crews remained at Martin Drake for weeks after the May 2014 fire that disabled the plant.

It’s all about debt

Suppose your daily drive is a 1970 Ford pickup. If the engine blows, do you replace it or buy a new pickup? That depends on your income, your current debt and your expectations for the future. And if you’re short on cash, you’d better have a great credit score.

When a 2014 fire shut down Drake for months, CSU’s decision was easy. Insurance paid most of the $30 million cost of rebuilding, and CSU was in no position to spend hundreds of millions on a new power plant.

System debt currently stands at $2.3 billion, putting Colorado Springs Utilities’ debt/income ratio at an undesirably high level. Abandoning Drake would saddle the enterprise, and the city, with hundreds of millions in stranded assets, as well as undetermined environmental remediation costs. Funding the new debt might trigger rate increases for all classes of customers, an outcome sure to displease a majority of City Councilors.

At present, the company’s major generating assets are evenly distributed between gas and coal. CSU has enough renewables from wind, solar and hydroelectric sources to comply with state mandates.

Despite apparent cost overruns, CSU management has expressed confidence in the Neumann technology and appears to believe that the EPA’s proposed regulation of power plant carbon emissions will be blocked by congressional Republicans.

And if things don’t work out as planned? As Scarlett O’Hara said in Gone with the Wind, “I can’t think about that right now. If I do, I’ll go crazy. I’ll think about that tomorrow.”

(Editor’s note: This is the first of a two-part series. Next: an in-depth examination of the Neumann Systems deal: who made it, who approved it and the original cost estimates.) 

5 COMMENTS

  1. Mr. Hazlehurst, thank you for a cogent article. I’ve wondered for years why this monstrosity has been allowed to continue polluting our air and ruining the downtown and mountain skylines. Your article explained so much so well. Kudos!

  2. We should start investing into the following:

    a 254MW gas powerplant cost 254Million
    a mix of Solar pv and Wind at about a mix of 1.8 Million per installed MW (using a ppa model to capture federal tax credits)

    This is the cheapest long term model as you use the gas plant only for back up and you reduce the fuel cost in years to come. I understand the debt argument but at current interest rates this is not such an issue looking at Exel which is BBB+ and CSU which has a AA rating. In my opinion we are not leveraged enough…

  3. Only $183 million! That’s a bargain in the world of retrofitting coal plants.

    For the last 3 years I had the honor of serving as the chairman of the Kansas Corporation Commission, which regulates utilities, oil and gas drilling and transportation in Kansas.

    One of the first cases I presided over was a retrofit of a single coal fired power plant in Kansas City to comply with EPA clean air mandates and the regional haze rule to protect air quality in surrounding states, like Colorado. The price tag for that retrofit was a whopping $1.23 billion in a state that spends about $3.5 billion annually for electric energy. The fines for non-compliance were greater than the costs of compliance, which was cheaper than mothballing the plant and converting to other forms of energy or any other of the scores of alternatives we priced.

    The federal government is at war with fossil fuel plants, particularly coal fired power plants, and the federal government’s environmental regulators do not care whether the plants are the most efficient or not. Eventually, the EPA will come knocking at CSU’s door, and the price tag for keeping coal-plants, even efficient ones, will be astounding.

    IMHO, the most interesting municipally owned utility is the city of Austin, which converted a significant portion of its generating capacity to off-peak wind (stored in a chilled water facility) to provide cheap air conditioning to spur a downtown development boom.

  4. I believe that plant has a 25-40 year life still and should be maintained to save the rate payers of Colorado Springs for as long as possible. But the question is, will the EPA allow us to operate it that long and at what price….If not then expect to pay more is what I believe will happen and maybe as much as 20-25%…..

    I like your idea Peter Miller, seeking solutions is something needed in the not to far future for CSU, but Mark’s comments make me believe this plant could be shout down for good someday and rates will go up regardless.

  5. None of the alternatives to coal plants are riskless or costless.

    Wind energy is typically generated on the plains, but must be transported to market via transmission lines that cross hundreds of parcels of private land. In Kansas, transmission siting cases often attracted hundreds of landowners concerned about the impact such projects have on their property. Remember when the Army wanted to condemn land for Ft Carson’s tank training in Pinion Canyon? Condemning land for wind turbines and transmission lines can be politically worse, especially when wind energy costs more than coal fired generation.

    Natural gas requires pipelines that connect gas fields to transportation lines to processing plants. In today’s depressed natural gas market, oil producers often flare the gas rather than invest capital in gathering lines and pipelines to take the gas to market. Take a trip to eastern Colorado and count the rigs that are idle. As a rule of thumb, natural gas wells are not profitable for drillers/operators unless they are “wet” wells that produce gases used in medical devices (e.g., helium) or oil. Counting on continued, long term low prices for natural gas is risky.

    Solar panels on rooftops (distributed solar) is coming down in price, but it pits wealthy consumers against poor consumers who cannot afford the power and has the potential of raising rates when solar consumers drop off the grid and their lost demand is distributed to remaining consumers. Many electric utilities are insisting on “stand by” tariffs where consumers who drop off the grid pay a fee for their lost demand. Electric rates are basically common costs divided by volumes, so when heavy users drop off the grid (e.g., Ikea or Walmart choosing to put solar panels on their rooftops), their lost demand is spread among the consumers who remain on the grid and cannot afford any alternatives.

    The cheapest electricity is electricity consumers do not use — conservation. Just changing ballasts in florescent lights to electronic ballasts recoups the cost in less than a year, for example. Unplugging the transformers that charge consumer electronic batteries has a big impact on bills.

    Many electric utilities are getting out of the vertically integrated model where one company owns generation, transmission and distribution facilities. They choose to operate in one market segment or the other, but not all. Distribution utilities buy power from a Regional Transmission grid (e.g., Southwest Power Pool), and leave the risks (market, environmental) to firms that specialize in generation and the capital costs and headaches of transmission to yet other companies.

    I have always found it ironic that in conservative Colorado Springs, which prides itself on being pro-private enterprise/capitalism, would continue to operate a vertically integrated utility as a government entity.

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