Customer demand for renewable energy is shaking the electric utility business again. But it’s not the usual suspects this time.

In the beginning, residential and small business customers started demanding more energy options, forcing utilities to respond. The most prominent example is the proliferation of rooftop solar in Hawaii, Arizona and other states with high solar potential. Customers are now propelling utilities to come up with ways to answer their demand for distributed generation while preserving their revenue streams.

More recently, investor-owned utilities have begun facing similar demand from major corporate customers, such as the Utility-Corporate Buyer Collaborative Forum, forcing IOUs to come up with renewable energy rider programs to satisfy their key accounts.

Now, some cooperative and municipal utilities are jumping on the bandwagon, beginning to demand a cleaner power mix from their generation suppliers.

New Mexico’s Kit Carson Electric Cooperative (KCEC), for instance, recently completed a settlement to end its contract with the Tri-State Generation and Transmission Association and begin sourcing its power from Guzman Renewable Energy Partners on July 1.

The Tri-State contract capped KCEC’s renewables usage at 5%, Kit Carson CEO Luis Reyes said, which clashed with a community-wide demand for more solar.

“The Guzman contract gives us more flexibility to add solar to our system based on local demand,” he said. “There is no outside third party telling us what we can and cannot do.”

KCEC is not the first member cooperative to ditch its G&T. The Federal Energy Regulatory Commission (FERC) recently ruled in support of Colorado’s Delta-Montrose Electric Authority, another Tri-State member to buy renewable energy from independent suppliers. And back in New Mexico, the City of Aztec became Guzman’s first utility customer after its municipal utility’s contract with the Public Service Company of New Mexico (PNM) expired.

Demand for renewables and access to greater price certainty drove these and other utility moves away from fossil-heavy generation suppliers, sector insiders told Utility Dive. Such decisions — and the underlying consumer demands driving them — could have major consequences for utilities in years to come, whether or not they own generation.
 

Cutting cords

There are 64 G&T cooperatives in the nation, with 668 of 840 local distribution co-ops obtaining their power from them, according to Tracy Warren, spokeswoman for the National Rural Electric Cooperative Association (NRECA).

G&Ts vary widely nationally, she said, when it comes to owning assets, whether or not they are owned by co-op members and how the state regulates them.

Tri-State’s main power supply comes from “a combination of owned baseload and peaking power plants that use coal and natural gas,” according to its website. The power provider gets supplemental generation through contracts, federal hydroelectricity allocations and renewables.

KCEC became a Tri-State member in 2000. Tri-State worked with KCEC to address their issues, spokesman Lee Boughey told Utility Dive, “but it became apparent KCEC’s issues could not be addressed without affecting and shifting costs to other Tri-State members.”

Along with access to more renewables, KCEC’s Reyes said the other factor motivating the split was the appeal of price certainty.

“Under the Tri-State contract, we did not know until October of each year what the rate would be for the following January or whether it would go up or down,” he said, “but with Guzman we know now what the fixed price will be yearly for the ten-year contract term.”

Boughey said they haven’t received other requests by members to withdraw from the association, calling the split between KCEC and Tri-State “mutual and amicable.”

The agreement also includes provisions for Tri-State and KCEC to sell each other some transmission and distribution infrastructure facilities and jointly operate others, Boughey said of the deal finalized June 21.

"This separation serves both our cooperatives well, allowing us to move forward to best serve our respective members’ needs and wants," KCEC’s Reyes said.

Reyes said KCEC and Tri-State simply had different views. “We wanted more renewables and they thought 5% was fine. We wanted price certainty and they couldn’t give it to us. So we found a power supplier that fits our needs.”

Guzman’s asset-light approach

KCEC expects cutting ties with Tri-State will save 30,000 customers an estimated $50 million over the term of the 10-year agreement, according to a co-op statement.

“The reason Guzman is able to do that is we are an asset-light utility,” said Chris Riley, a Guzman executive. “We don’t see value in long-term ownership of assets that other players are strapped with, and have to pass the cost of, to their customers.”

Guzman was formed in 2014 to apply expertise in the energy and power sectors developed by Leopoldo Guzman, an investment banker and CEO of Guzman Energy Group.

The company’s portfolio is “contracts, assets, and markets, and we lean more toward the markets,” Riley said. “We own and control renewable energy and conventional energy in a combination of agreements and contracts that allows us to move with the market to whatever is most efficient.”

The cost of generation has been falling in recent years, Riley said, as gas and coal prices collapse. But the electricity prices charged by many incumbent power suppliers kept rising for small municipal utilities and co-ops, and many providers also failed to build or contract for renewable energy at rates demanded by consumers.

“We gave them lower rates and more renewable energy,” Riley said.

As KCEC shifts to Guzman, the 5% cap from Tri-State will initially remain unchanged, he said. “But [Guzman] will not place the same restrictions on them that Tri-State did and we will actively work with them to build renewable energy when they are ready to say how much they want and where they want it,” Riley said.

Guzman will procure electricity primarily through the Western Electricity Coordinating Council, but will also access the California Independent System Operator (CAISO) and the Southwest Power Pool (SPP).

“What is common is for a customer to ask for the bulk of its power to be cheap and some to be from renewable energy and to offset the cost of buying the more expensive supply with the least expensive energy available on the grid,” he said.

Market and supply uncertainties can be resolved in two ways. One is through call options for a flexible power plant’s generation, exercised if the primary source is unavailable. A second is obtaining supply through energy imbalance markets.

“There is fundamentally no difference operationally between what we do and what Tri-State or PNM did,” Riley said. “The difference is our fixed price and our contract terms.”

The price certainty allows utilities to signal rates to their customers while planning budgets. The greater resource flexibility allows them to meet customer demand for renewables.

Guzman protects itself from market fluctuations by owning some assets or through five-year and ten-year hedge contracts.

“We use a variety of strategies to be sure we know what our costs will be,” Riley said. “By no means are we just crossing our fingers and hoping the markets will go our way.”

Inside the KCEC contract

Throughout the 15 years that KCEC sourced power from Tri-State, the co-op watched its rates increase 105%, from $0.04/kWh to about $0.08/kWh, Reyes said. The 10-year contract with Guzman gives more price certainty “so we can plan our budget, and we can allow our customers to plan their budgets.”

Knowing what its price of electricity will be each year is important, but knowing the price will drop 45% from year six to year seven is of particular value, Reyes said.

“That 45% decrease will mean significant savings for our members in real dollars,” Reyes explained. “If our load stays the same, we will get those savings. If our load increases, there will be even bigger savings.”

The power mix delivered by Guzman is mostly natural gas, coal, and wind. “We already get 5% of our energy from the five 1 MW to 1.5 MW solar plants we own and we are planning two more solar arrays,” Reyes said.

The solar doesn’t help with KCEC’s night and winter peak demand, but New Mexico’s overall demand peaks in the summer. “If we can generate $0.05/kWh power in the summer and the state average blended price is $0.075/kWh to $0.08/kWh, we win,” Reyes said.

“We are also developing a renewable energy plan with Guzman and it is clear our intention to obtain more of our generation from local renewables aligns with what they are willing to provide,” he added.

This mindset echos City of Aztec’s reasoning when the municipality decided to part ways with PNM.

City of Aztec’s bid for energy independence

As in the Kit Carson contract, two important features of the Guzman offer for the City of Aztec were "the lower price and the option to use more renewable power,” said Joshua Ray, the city manager.

Guzman beat multiple bidders to win the City of Aztec contract.

“PNM is a lot larger and a lot more frustrating to deal with,” Ray said. "Also, Guzman's seven year contract provides us power at about $0.04/kWh and we have a power purchase agreement for the solar array’s output at about $0.05/kWh.”

“The rate from PNM was about $0.08/kWh,” he said.

PNM declined to comment on the City of Aztec contract.

Guzman will also build a 1 MW solar array for the town, deliver solar electricity through a fixed-price power purchase agreement, and turn give the city ownership of the array after a seven-year contract term.

“The solar array was an important feature of our moving to Guzman because it allowed us to add a tangible asset to our system,” Ray said. “PNM never gave us anything.”

Despite the fact that Aztec is Guzman’s first utility customer, Ray said he is confident they will deliver.

Down the road

Whether utility decisions to ditch their incumbent providers will become a larger trend is still too early to tell. But whether it’s a co-op looking for a new supplier or a company contracting directly for wind and solar power, “demand for renewable energy is fundamentally changing the marketplace,” Guzman’s Riley said.

“Municipalities and co-ops locked into long-term contracts with incumbent suppliers are bristling at the restrictions because their customers are screaming from the rooftops that they want renewables.”

Customers’ rates are also going up when market prices are declining, adding to the friction, he said. “These deals are tangible evidence the market has to start shifting to accommodate the demand for lower prices and renewables.”

Despite the clear increase in demand for renewables, NRECA’s Warren has a different take. The implications are not yet clear, but "there are good reasons why this may not be indicative of a trend," Warren said.

Cooperative principles call for collaboration and a democratic process, she said, which means differences between member-owners and a G&T can be settled cooperatively. “A concern of only one member-owner is not indicative of a trend.”

From a larger perspective, she added, “there is so much change in the utility sector, in technology, in policy, even in personnel, that all cooperatives will have to work together to figure out how to adapt.”

Whether or not other providers follow the lead of Aztec and Kit Carson, the path is open for co-ops and other local utilities looking to switch suppliers.  

“Tri-State members may or may not want to do this, but the option is now there,” Reyes said. “It seems to me co-op boards are obligated to at least explore the option of a shorter term contract that allows the co-op to be more nimble.”

“Once people see how this deal works and how much money we will save over time, other co-ops will start looking at these opportunities and other Guzman-type companies will likely start courting them."