Future energy investments hang on the fate of Navajo Generating Station

Future energy investments hang on the fate of Navajo Generating Station
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Word last week that two potential buyers are interested in the failing Navajo Generating Station (NGS) in Arizona turned heads regionally and nationally — perhaps even globally.

The fate of NGS, as the power plant is known for short is a major story in the state. NGS is in remote far-northern Arizona, almost 300 miles from Phoenix, and is an important local employer. The plant and its Peabody Energy source mine at Kayenta, which produces coal solely for NGS, account for somewhere around 800 jobs on Navajo and Hopi tribal lands. The mine and plant taxes and royalties support tribal budgets, so the local economic implications of whatever happens are significant.

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Also feeding the Arizona angle of the story: The likelihood that if the plant were to somehow remain open under new ownership past its scheduled retirement date at the end of 2019, it would continue to produce electricity that would not compete price-wise with cheaper power from natural gas, solar, and wind. Indeed, the current owners of NGS are closing it because they no longer consider it a viable business.

 

Navajo Generating Station, which dates from the 1970s, is of note nationally as an emblem of both market and policy forces.

It is a big plant — the largest coal-fired generation station west of the Mississippi — and is often held up as a prime example of a U.S. electricity-generation transformation in which natural gas has overtaken coal as the main power-generation fuel of choice and as ever-cheaper renewable energy continues to gain market share from coal and gas alike.

My colleagues at the Institute for Energy Economics and Financial Analysis have estimated that the only way to keep the plant open through the 2020s would be for either the federal government — or electricity ratepayers — to provide $2 billion to $3 billion in subsidies. NGS has been cited as a test case of Trump administration support for the declining coal industry, though no plans have come forth yet from any federal agency to preserve the status quo. This despite the fact that Peabody is working desperately to arrange some sort of deal — very likely subsidized in one way or another by ratepayers — to keep the plant running. 

Peabody just today announced it was suing Central Arizona Project, the state’s main waterworks and the largest NGS customer, to compel it to keep buying high-priced power from the plant.

This leaves market forces and public policy at odds, in some respects, and makes the future of Navajo Generating Station so interesting to energy-sector investors.

Last week, Bloomberg News reported major industry news that two out-of-state companies, Avenue Capital Group of New York and Middle River Power of Chicago, have talked of buying NGS. A follow-up Bloomberg story revealed the largest owner of the plant says it will start dismantling the plant unless new owners are found within the next couple of weeks. This shows money managers, investments banks and institutional funds around the world are watching the Navajo Generating Station story closely.

Will NGS shut down as anticipated, signaling regional and national momentum around a global electricity-generation transition that favors cleaner, cheaper power?

Or are there government subsidies and such in the works to keep the plant — and one small but symbolic corner of the U.S. coal industry — on life support, a possibility that might make coal mining a more attractive investment than it has been in a long time?

Whether Avenue Capital and Middle River Power really see NGS as a long-term going concern is another matter. It is possible the power station represents no more than a tax-beneficial loss or a scrap-metal sale for anyone who buys it.

Regardless, what investors seem to want to know is which will prevail in U.S. electricity generation: market forces or politics?

What they might also like to know is that the region has better investment opportunities than in an outdated and failing coal plant.

Plant and mine workers have skills that can be harnessed by other, more modern industries, and Arizona, as the buckle of the sunbelt and in a region with huge open spaces, has vast untapped solar and wind energy possibilities too.

Karl Cates is managing editor at the Institute for Energy Economics and Financial Analysis.