Tuesday, November 10, 2015

While Nevada’s Largest Utility Aims to Replace Coal with Natural Gas, its Customers Seek Other Options

By Amelia Schlusser, Staff Attorney

Next month, the Nevada Public Utilities Commission (PUC) will issue a decision on NV Energy’s long-term plan for supplying electricity to Nevada ratepayers. NV Energy’s most recent integrated resource plan (IRP) is nearly 5,000 pages, and includes a number of proposals that will impact the type and cost of electricity in Nevada for many years. The PUC’s decision may ultimately lay the foundation for the state’s energy future by indicating whether the largest utility in Nevada should continue to invest millions of dollars in fossil fuel resources, or should instead develop a plan for investing in new renewable energy.

Over the next four years, NV Energy plans to retire 512 megawatts of coal-fired capacity. However, the utility proposes to replace much of this coal-fired capacity with natural gas-fired power. According to the utility’s 2016 IRP, NV Energy is considering constructing a billion dollar natural gas-fired power plant to replace its coal-fired generation and expiring power purchase agreements. The utility recently asked the Nevada PUC to approve spending $2.4 million to “maintain optionality and flexibility” to construct the plant in 2020, if the new plant is “needed.”

This billion-dollar plant would provide significant profits for NV Energy’s shareholders, who stand to earn a 9.8% rate of return on the investment—roughly $100 million—from the utility’s ratepayers. NV Energy’s investments in natural gas will also expose Nevada ratepayers to significant risk and uncertainty related to future natural gas price volatility and carbon regulations. According to the Las Vegas Sun, NV Energy may invest in an additional 2,253 megawatts of natural gas capacity over the next fifteen years, which would provide nearly 80% of the utility’s power in 2030. (Renewable energy, meanwhile, would represent a mere 16% of NV Energy’s resource capacity in 2030.) The company’s ratepayers already pay the highest electricity rates in the Mountain West, and NV Energy’s preference for natural gas over renewable energy may expose the utility’s ratepayers to additional and disproportionate risks over the coming decades.

Jumping Ship

Some of NV Energy’s largest customers, including Wynn Resorts, Las Vegas Sands, MGM Resorts, and Switch (a large data storage company), oppose the utility’s investment strategies. The companies all filed applications with the PUC seeking authorization to generate and purchase power from sources other than NV Energy. These applications were motivated by concerns over the utility’s meager renewable energy offerings and NV Energy’s tendency to make large capital investments that earn substantial profits for shareholders at ratepayers’ expense. For example, MGM’s application to leave the utility stated that between 2012 and 2015, NV Energy earned at least $84 million over its allowable rate of return, which it is not required to reimburse to ratepayers.

Changing Tides?

According to the Las Vegas Sun, Switch’s attempt to leave NV Energy was motivated by the utility’s refusal to provide it with electricity entirely from renewable sources. In November 2014, Switch filed an application to leave NV Energy. In May of this year, the PUC determined that Switch would need to pay NV Energy $27 million to cancel service from the utility. (This “exit fee” would purportedly help protect ratepayers from cost increases resulting from the industrial customer’s departure.) Switch and NV Energy then started developing a compromise solution that would enable the company to purchase renewable energy directly from the utility. In July, Switch announced that it would stay with NV Energy. Under the companies’ new agreement, NV Energy will serve 100% of Switch’s load with renewable energy from a new 100-megawatt solar array constructed by First Solar.

The new Switch–NV Energy agreement may be a sign of changing tides in the energy world. Large industrial customers—and tech companies in particular—are becoming increasingly attracted to renewable energy. Companies like Facebook and Amazon Web Services have made commitments to use 100% renewable energy (for example, Facebook’s new data center in Forth Worth, Texas, will be entirely powered from a nearby wind farm). 

Rather than fight consumer desire for renewable energy, utilities like NV Energy should work with regulators and industrial customers to develop alternative tariff or service structures that enable large customers to purchase renewable energy. As more and more customers choose renewable power, investments in new natural gas plants and related infrastructure will become increasingly unnecessary.  

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