Austin buying back biomass plant at a painful price

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Austin biomass plant

Austin Energy is spending $460 million to buy back a biomass energy plant it spent $128 million to build and has paid at least another $54 million annually for eight years to keep staffed, mostly on a standby basis.

Shortly after the wood-burning plant was finished, it was purchased by Southern Power, which has operated it since then for the benefit of Austin. When it was completed in 2011, it was the largest biomass plant in the United States, intended to diversify the city’s energy-generating options.

However, it soon took on the look of a massive boondoggle, when plummeting natural gas prices undercut the plant’s economic usefulness.

The city in 2012 signed an unusual 20-year, $2.3 billion contract with Southern Power to operate the plant. In the first year, however, the plant generated electricity for just a few months. It has been idle for much of the time since, but was kept fully staffed in case its power potential was needed.

Now, however, the city has decided to cut its very large losses. It has spent nearly half a million dollars on attorney’s fees to work out its get-out arrangement with Southern Power. The $640 million agreed-on figure to get out of the contract will still save the city $275 million compared to carrying through with the contract.

An attempt to reach Jackie Sargent, general manager for Austin Energy, was unsuccessful Friday. “Acquiring the biomass plant relieves our obligation to make escalating capacity payments to a third party and, over time, reduces the associated cost impacts to our customers,” Sargent said in a release when the sale was announced Thursday.

A year ago, Mayor Steve Adler, called the biomass contract “a big mistake for Austin.” This week, he applauded the repurchase of the plant.

“Saving $275 million is a great result!” Adler said in the Austin Energy release. “We play the hand we’re dealt, and here it means we’ll be able to provide value for our customers and maintain leadership on renewable sources of power.”

Because the $54 million a year in standby costs has for the past eight years factored into the rates Austin Energy customers pay, the $275 million in savings over the next 12 years will factor into potential rate decreases, David Green, city media relations manager, told The Texas Monitor.

Austin Energy intends to hire a contractor to continue the operation of the plant, Green said. “It’s premature to speculate on whether we would shut down the plant,” he said. “It’s not always economical, but in the peak summer months it may make sense. We’re going to look at it as another Austin Energy asset.”

When he began considering wood-burning, or biomass, energy in 2008, Roger Duncan, the former general manager of Austin Energy, decided to bet big. He convinced the city council to approve spending $128 million to build the plant.

Duncan said several years after leaving Austin Energy that he acted in the belief that Austin needed a renewable energy source that, unlike solar and wind power, would be available on demand.

Experts at the time warned that Duncan was ignoring the explosive growth of hydraulic fracturing, which has driven down the cost of natural gas and made biomass power generation uncompetitive.

Southern Power, which took over operation of the plant shortly after it went on line, did not discuss details of its operation, but in the first year the plant generated electricity for just a few months. The plant has sat idle for much of the past eight years.

Austin Energy was the plant’s only customer.

Over the past few years, natural gas prices have shut down more than half of California’s 50 biomass plants and three in Minnesota. This month, representatives of the biomass industry in New Hampshire asked the state supreme court to uphold a law being challenged by a ratepayer group that would force the state’s biggest power company to buy biomass energy at artificially discounted prices.

Austin, however, followed the example of Gainesville, Fla., which in 2017 paid $754 million to buy the biomass plant it had been contracting with, to get out from under $700 million due over the 11 years remaining on its contract, the Texas Monitor reported.

Adler last year authorized paying lawyers almost $200,000 to examine the possibility of buying the Nacogdoches plant. In December, Southern Power made Austin Energy aware that it was considering selling the plant, Green said. The city council at its March 7 meeting approved another $300,000 for outside legal help to negotiate with Southern Power.

The council voted in executive session on March 28 to offer $460 million for the plant, which Southern Power accepted on Wednesday, Green said. The council used an exception to state law that allows the governing body for a utility (i.e., the council) to negotiate details of a contract in private, Green said.

“I think this is going to be seen down the line as a good deal overall,” he said.

Roger Borgelt represents a group of Austin Energy customers living outside the city who successfully challenged their rates in 2013. The attorney disagreed with Green. Borgelt won a settlement for a rate reduction, arguing that Austin Energy pours $150 million of its revenue into the city’s general fund to pay for services not available to its out-of-town customers.

Borgelt had asked to see the original contract with Southern Power, but Austin Energy settled rather than give it up.

“This crap that they didn’t know what they were getting into is just that — crap,” Borgelt told The Texas Monitor Friday. “I hope they shut it down. If it’s too expensive, they ought to take it off line so people aren’t being paid to keep operating for no reason.”

Mark Lisheron can be reached at [email protected]

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