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Changing energy landscape shakes up rural co-ops

Copyright © 2019 Albuquerque Journal

Editor’s note: This is the first part of a three-day series exploring how rural electric cooperatives served by wholesale power supplier Tri-State Generation and Transmission are struggling to meet new renewable energy and carbon-reduction mandates and transition to a cleaner, lower-cost grid.

Kit Carson Electric Cooperative in Taos is pioneering a radical new strategy to power all of its daytime electric needs exclusively through solar energy by 2022.

By year-end, the co-op will be halfway to its goal, thanks to a contract it signed in 2016 with Guzman Energy LLC, an upstart power provider that’s shaking up the traditional regional dominance of wholesale supplier Tri-State Generation and Transmission, which sells electricity to 43 distribution cooperatives in New Mexico, Colorado, Wyoming and Nebraska.

Kit Carson abandoned Tri-State three years ago to pursue an alternative energy route that it says will provide much cleaner, lower-cost electricity for its customers than it ever could under Tri-State, which remains heavily reliant on coal and other fossil fuels.

New Mexico’s new Energy Transition Act mandates that all local utilities derive 50% of their electricity from renewable generation by 2030, a goal the Taos co-op expects to reach a decade ahead of schedule. And, thanks largely to the plummeting price of renewables, the co-op projects between $50 million and $70 million in total savings for its members by 2026, compared with costs it faced under Tri-State.

100% solar goal

“We expect to hit our 100% daytime solar goal by 2021, a year ahead of our original schedule,” said Kit Carson CEO Luis Reyes. “That will put us at 50% renewables at least eight years ahead of the state’s 2030 target. That never would have happened under Tri-State.”

Kit Carson’s break with Tri-State, which cost the cooperative $37 million to end its long-term contract with the wholesale supplier, is encouraging more rural co-ops in Colorado to consider that route.

Delta-Montrose Electric Association in western Colorado reached a settlement in July with Tri-State on an exit fee to break its contract and sign up instead with Guzman.

Durango-based La Plata Electric Association also recently put out a request for proposals for alternative providers, Guzman among them, and has asked Tri-State for a price to buy out its contract.

The co-ops want freedom to build or purchase a lot more renewable energy independent of Tri-State, which limits self-generation by its member utilities to 5% of their total electric load, meaning 95% of their power must come exclusively from Tri-State under long-term agreements that stretch to 2050. Paying a hefty exit fee to then sign with alternative providers like Guzman is becoming more appealing to some co-ops because they can rapidly integrate renewables onto their grids at potentially lower cost than the wholesale power Tri-State provides.

Fundamental changes

That emerging trend could fundamentally alter the generation, transmission and distribution structures that rural cooperatives have relied on for generations, especially given state mandates in both New Mexico and Colorado to replace most fossil fuels with renewables over the next two decades and achieve carbon-free generation by 2050.

With or without Tri-State, all rural electric cooperatives must strive to meet those targets, ushering in profound changes in the rural energy landscape.

In New Mexico, however, where 11 of the state’s 19 electric co-ops continue to buy their power from Tri-State, not one is considering the Kit Carson route. Unlike in Colorado, all the New Mexico-based Tri-State members appear satisfied with the wholesale services they receive.

In good part, that’s because Tri-State itself is pursuing major administrative and structural changes to add a lot more renewables to its system, phase out coal to comply with state mandates, and lower the cost of electricity it provides to the distribution cooperatives.

Those efforts include changes in Tri-State’s bylaws that could soon give co-op members a lot more flexibility to pursue renewable generation on their own.

For New Mexico co-ops, the jury is still out on whether Kit Carson will actually achieve the cost savings it projects through its partnership with Guzman, said Keven Groenwold, general manager and CEO for the New Mexico Rural Electric Cooperative Association.

Wait-and-see

“I’m not aware of any other New Mexico cooperatives looking to leave Tri-State,” Groenwold said. “They’re all looking at what’s happening in Colorado … and they’re closely watching the Kit Carson experiment, which is only three years into a 10-year deal with Guzman. The New Mexico co-ops are taking a wait-and-see approach to it all.”

Unrest did build in previous years, because Tri-State continually raised its rates from 2000 to 2014, putting pressure on the distribution co-ops. That triggered a protest against one Tri-State rate hike in 2012 at the New Mexico Public Regulation Commission.

But since then, Tri-State has made a concerted effort to keep rates flat.

“In the last five years, we’ve had only one rate increase, and we will not have an increase in 2020,” said Tri-State spokesman Lee Boughey. “We forecast flat rates at least for the next three years.”

Arguments vary on the causes for previous rate hikes. Some blame the generation and transmission co-op’s $3.4 billion debt load, about 80% of it tied to covenants that force Tri-State to maintain capital reserves at 1.1% of its debt, or $1.10 for every $1 owed. If it goes below that, it must raise rates to meet debt obligations.

Coal dependence

Others say Tri-State’s heavy dependence on coal is the culprit, since that fuel is now significantly more expensive than renewables.

Nearly 50% of Tri-State’s generation comes from coal plants in Arizona, Colorado, New Mexico and Wyoming that together supply about 1,835 megawatts of electricity.

That includes Tri-State’s four-unit, 1,426 megawatt Craig power plant in western Colorado, and its single-unit, 250 MW Escalante coal plant west of Grants.

But while coal is a factor, the generation and transmission co-op says the cost hikes in previous years largely reflect load growth in its four-state service territory.

Peak load for Tri-State’s member co-ops has grown 68% since 2000, forcing Tri-State to add more transmission and generation to ensure system reliability, Boughey said.

In addition, rural generation, transmission and distribution cooperatives face much higher costs than urban utilities given the vast, sparsely-populated regions they serve.

The rural challenge

“Our service territory covers 200,000 square miles – about 20% larger than the state of California – yet we only have about 5% of the energy load relative to the number of electric users compared with California,” Boughey said.

Tri-State says it can meet new low-carbon mandates by steadily replacing coal generation with renewables going forward while still controlling costs.

It contracted for an additional 204 MW of solar and wind generation last January, raising its renewable portfolio to nearly 680 MW. It also put out a new request for proposals in June for more renewables that it expects to contract for by year-end.

Counting the renewable projects independently built by member distribution co-ops under their 5% self-generation cap, Tri-State says 30% of all the electricity now delivered to end users comes from renewable resources.

Tri-State also shut down a 100-MW, coal-fired plant in Colorado in September, nearly three years ahead of its previously scheduled 2022 retirement. That closure is part of a new “responsible energy plan” that Tri-State released in July to transition to cleaner power that includes new utility-scale generation owned by Tri-State, plus more flexibility for member distribution cooperatives to pursue their own renewable generation.

A contract committee with representatives from all of Tri-State’s member cooperatives is now meeting monthly to design new self-generation caps that Tri-State hopes to announce at its 68th annual meeting next April, Boughey said.

But Tri-State must still demonstrate that it can, indeed, keep rates flat, or at least moderately stable, as it shuts down coal generation and adds renewables, all while paying off debt on infrastructure it already built.

And in the meantime, Guzman Energy is aggressively working to lure distribution co-ops into its own fold.

“Tri-State faces huge costs to transition its system away from coal, and that will have major impacts on the communities it serves through distribution cooperatives, which are on the hook for those bills,” said Guzman President Chris Riley. “The distribution cooperatives and the communities they serve have a right to hear about what we can offer. We’re interacting directly with them.”

In fact, the company just struck a deal with the City of Socorro to help it build a municipal utility and supply local electricity independently of the Socorro Electric Cooperative, a Tri-State member that has served the city and surrounding communities for 75 years.

Tri-State is betting its new transition plans will stave off discontent among its membership.

“All the member co-ops have seats on the Tri-State board, and they want to see Tri-State succeed,” said Duane Highley, who took over as Tri-State CEO last April. “We’re coming together to change the bylaws and provide more flexibility. That can help those who are less happy with Tri-State’s history to stay with us.”

Coming Monday: Upstart provider Guzman Energy LLC takes on Tri-State.

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