Transitioning Navajo Generating Station reflects changing energy economics

The Navajo Generating Station (NGS), located on the Navajo Nation just outside of Page, is one of the largest coal-fired power plants in the West and has been a source of electricity for millions of customers for more than 40 years.

As an owner and operator of the plant, Salt River Project, along with the four other NGS participants, has invested hundreds of millions of dollars into the plant over the years to keep it running efficiently and to meet increasingly stringent environmental regulations. Over the past decade, we worked closely with the Navajo Nation and many others to assess the possibility of extending the plant’s life beyond the end of its current lease in December 2019.

While weighing the potential for keeping the plant open beyond its current lease, a number of circumstances happened that compelled the owners to analyze whether extending operations would make good business sense, beginning with a 2006 California law that would not allow the Los Angeles Department of Water & Power, a previous co-owner, to approve any life extension of the coal plant. A similar law in Nevada was passed in 2013 that would force part-owner NV Energy to leave after 2019 as well.

As SRP continued to work through those ownership issues, as well as how NGS could afford to meet new and costly environmental requirements, a very significant change occurred recently that has fundamentally altered the economics of coal power. Natural gas, once a comparatively expensive resource, very rapidly began to emerge as a viable economical and long-term alternative to coal generation. In fact, this year we have seen record low prices from 2016 drop again for both immediate and long-term gas purchases.

According to a recent study by the National Renewable Energy Laboratory, “electricity produced at NGS is currently more expensive than electricity purchased on the wholesale spot market,” and that “price trends examined suggest a turnaround might be years away, especially if natural gas prices remain low.”

This type of price signal cannot be ignored because SRP, as a community-owned, not-for-profit public power utility, has an obligation to provide low-cost service to our more than 1 million residential, commercial, municipal and industrial customers – just not at the higher cost they’d face if we continue to operate NGS.

Additionally, the plant’s largest customer and the state’s largest provider of water, the Central Arizona Project, determined that it could save millions of dollars annually for its customers if it was able to use energy resources other than NGS to move water across Arizona.

Accordingly, the current utility owners voted on February 13 not to continue operations of the plant beyond the end of the current lease term. The vote means SRP efforts will now focus on reaching an agreement with the Navajo Nation that lets the plant run through December 2019 by allowing access after that date for removal and restoration work.

It was a decision that was not made lightly. However, this measure would prevent the plant from closing at the end of this year and provide greater certainty and optionality for the dedicated employees of NGS and surrounding communities, such as Page. It would also provide additional revenues for the Navajo Nation and Hopi Tribe and give the Navajo Nation, or others, the potential to operate the plant beyond 2019 should they so choose. We are committed to working closely and helpfully with all during this significant transition.

While SRP has no plans to participate in the plant beyond 2019, we will work with the Navajo Nation on several fronts, including transmission and water rights, developing gas reserves and partnering on renewable-energy projects, such as the Kayenta Solar Project, as the Nation charts its energy future. SRP will also join the U.S. Department of Interior when it hosts various stakeholders in an effort to explore ways in which the plant could operate economically after 2019.

We deeply respect and admire the efforts of the NGS employees and owe a debt of gratitude to those who, for more than four decades, have kept the plant safe, reliable and efficient. The energy landscape is rapidly changing, however, and we are very possibly in the midst of writing a new energy chapter for Arizona.

Mike Hummel is deputy general manager/resources & finance of Salt River Project.

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