New Mexico's second largest coal plant is slated for closure, succumbing to poor economics and further pushed to the brink by the state's comprehensive Energy Transition Act (ETA) passed earlier this year. But a fight to extend the plant's life is playing out in a state regulatory proceeding where carbon capture may provide the key to survival.

In testimony filed in October before the Public Regulation Commission, Dhiraj Solomon, acting engineering bureau chief of the commission's utility division​, proposes the state side with the city of Farmington, New Mexico, which houses the San Juan plant, and retrofit the facility with carbon capture technology.

Solomon says the modified plant could meet the requirements of the state's ETA with CCS technology putting the facility's emissions well below the law's 1,100 lbs-CO2/MWh requirement for power facility emissions.

The clean energy law mandates the state reach 100% carbon-free electricity by 2045 and 80% renewable power by 2040. It does leave the door open for carbon capture technology up until 2045 and Enchant Energy, based in Farmington, New Mexico, where the plant is sited, is working on plans to retrofit the plant and take over 95% of its ownership.

But the method will cost plant owners hundreds of millions of dollars without capturing carbon as effectively as claimed, according to testimony from utility engineering and economics consultant David Schlissel, on behalf of the Sierra Club.

At the heart of the proceeding is a fundamental dispute over how or if the state's landmark energy bill will be applied to the plant's retirement.

Can CCS save San Juan?

Globally, only two commercially operational CCS projects currently exist on coal plants — the Petro Nova project retrofitted on an NRG facility in Texas and the Boundary Dam 3 project in Saskatchewan, Canada.

Both projects claim to capture up to 90% of carbon emissions, though net carbon reductions are closer to 72%, according to May 2019 measurements, NRG spokesperson David Knox told Utility Dive in October in response to a report that disputed the effectiveness of carbon capture technology.

Solomon and Schlissel in their arguments looked at assumptions made by engineering firm Sargent & Lundy (S&L), which will retrofit the plant under Enchant's plan, though some proprietary information was confidential so the testifiers may not have had the full picture, Enchant Chief Operating Officer Peter Mandelstam told Utility Dive. No testifier was able to comment on the record because the proceeding is ongoing.

The company has three more partners on the San Juan project it will be announcing before Christmas, which Mandelstam hopes will boost the project's credibility: Its technology provider, which he says is a "global firm," its engineering, procurement and construction contractor, which is from "a nationally known firm" and they have a letter of intent with a "credit-worthy counterparty" who will be the project's CO2 buyer.

"Those are the three important, credible partners for us," he said.

For a number of reasons, the plant is perfect for a project of this scale, according to Mandelstam​. Some existing retrofits for reducing NOx emissions are already in place, meaning "money was spent [to keep the plant operating] and New Mexicans should get the benefit of the bargain​," he said. It's also in a prime location 22 miles from a CO2 pipeline and could potentially have geographic attributes that could be good for storing carbon onsite, though the last factor is not yet certain, he said.

"We're trying to do a complete package on the pollutants and the carbon and we're trying to ... run this plant as what we believe to be the largest carbon capture facility in the world," he said.

The project is also estimated to capture 90% of the carbon produced, leaving 218.2 lbs-CO2/MWh, according to Solomon's testimony, based on data provided by Enchant and S&L. Retrofitting would cost less than the Petra Nova project, with San Juan's CCS system likely coming online by 2023 and allowing the plant to operate under that approach until 2045, when the ETA would mandate 100% carbon-free technology. 

And under the 45Q tax credit passed under the 2018 Federal Budget Act, the project would earn a $160 million tax credit in 2023, increasing to $210 million in 2026, based on an estimated 6 million tons of carbon produced. The facility would also engage in enhanced oil recovery through the nearby Kinder-Morgan Cortez pipeline, which would require an approximately 20 mile transmission addition.

CO2 from enhanced oil recovery will be worth around $26 per metric ton in 2020 and $40 per ton in 2050, according to Solomon's testimony, based on U.S. Energy Information Administration projections.

But there are flaws to industry's optimistic forecasts, Sierra Club consultant Schlissel argued, including assumptions that new technology costs will go down over time. Unlike wind and solar, there just isn't the same level of commercially operating projects to bring costs down that quickly, he said. And the 940 MW San Juan retrofits would be significantly larger than retrofits on the 240 MW Petra Nova plant.

There are also issues with estimates over how much revenue the project will generate from enhanced oil recovery and carbon tax credits, said Schlissel and David Posner, an independent energy consultant who also testified on behalf of the Sierra Club.

"[The suggestion that 45Q tax credits could be monetized to provide the upfront capital for the City of Farmington/Enchant project is highly suspect," Posner testified. "Potential tax equity investors would have strong grounds to demand a higher discount above the 8-10% range that Enchant deems normal."

To capture 6 million tons of CO2 per year, the plant would also have to be operating at an 85% to 100% capacity factor, according to Schlissel. San Juan has operated at around 70% for the past decade, going down to 62% at the end of 2017 when two of its units retired. And how often the plant runs will likely continue to fall as the economics of operation are undercut by low natural gas and renewables prices. 

Based on capacity factors and realistic capture targets, he estimates a retrofitted San Juan station would capture no more than 2.2 million to 4.4 million tons of carbon per year, shortchanging how much the plant would make on tax credits and enhanced oil recovery applications.

And the economics are worsened by the capital costs as well, Schlissel noted. S&L put capital costs at $1.295 billion. Schlissel estimates a median cost of $2.21 billion and a high cost of $3.31 billion.

Clean energy law in question

Though carbon capture is one proposed way to lengthen the plant's operating life, the question of how and when the plant will be retired is now up in the air. 

State regulators opened up a docket on part of the San Juan retirement proceeding in January, and because the ETA was not passed until June, regulators in July voted to continue with their proceeding on the plant's retirement, despite specific provisions in the clean energy law that laid out when the plant would shut down and how costs would be managed. The commission's move sparked outrage from several environmental groups as well as the state's executive and legislative branches. 

Democratic Gov. Michelle Lujan Grisham threatened dramatic regulatory restructuring and a state senator asked lawyers to begin exploring impeachment of the commissioners within a month of the PRC's ruling. Environmental groups and PNM asked the New Mexico Supreme Court to clarify whether the ETA applied, but the court denied that petition in October, allowing the current proceeding on the San Juan Generating Station to move forward.

Now, the proceeding is focused on "abandonment," a process started after the retirement of the plant's first two units, which PNM agreed in 2013 to close, eventually shutting them down in 2017, as a way to economically meet federal emissions requirements.

That case set the precedent for how the plant's units would retire and what say the commission would have in that process. Now some, including PRC bureau chief Solomon and environmental group New Energy Economy, say the ETA's model is too generous to PNM. 

Securitization, which is the approach agreed to by clean energy advocates, labor groups, PNM and the state under the ETA, fixes the cost of recovery for the plant through bonds. But some say the utility should be held accountable for making poor investments in the plant in the first place. 

"In my opinion the 'opportunity'" provided by the ETA "is the 100% recovery, from PNM customers, of undepreciated investments in coal-fired units," he said. Ignoring the securitization portion of the ETA could risk $379 million in savings from retiring the units, according to estimates from the state, plus over $60 million across three funds borne from costs saved by securitization.

"Coal plants have been closing at an accelerated rate across the United States, and the primary driver is economics … PNM's ratepayers will suffer economically if PNM is locked into coal units that are not flexible and not able to compete economically in regional electricity markets," Jeremy Fisher, Senior Strategy and Technical Advisor at Sierra Club who also testified in response to Solomon, said in his testimony. 

PNM did not respond to Utility Dive's request for comment. The hearings on the proceeding are expected to take place in December.