Report: CPS Energy should cease investments in Texas coal plant

Dive Brief:

A report prepared for Sierra Club by Synapse Energy Economics recommends CPS Energy not make any major new investments on its Spruce coal units at Calaveras Power Station in San Antonio, Texas, as they are unlikely to pay off in the future.
In particular, the report focuses on Spruce Unit 1 because CPS Energy may reportedly decide to install a Selective Catalytic Reduction (SCR) to control NOx and reduce smog. But Synapse's analysis shows CPS would be unlikely to recover that investment and the units may be uneconomic regardless of upgrades.
The report calls on CPS to end all coal pollution from San Antonio sources and replace that power generation with clean energy. However, CPS officials did not comment at press time.

Dive Insight:

The report, backed by Sierra Club, concludes both Spruce Unit 1 and 2 have lost millions of dollars in the last five years — and that replacing the power with renewable sources may be more cost effective. Only under a narrow set of assumptions do the units return to profitability, the analysis shows.

From 2012 to 2016, Spruce 1 cost $8 million more than market-based energy, and Spruce 2 cost $36 million more than market alternatives, according to the report. And both units have become increasingly uneconomic over the past two years.

The analysis finds that Spruce earned positive net revenues in 2014, but each unit lost more than $20 million in both 2015 and 2016, for a total of more than $135 million in plant-wide losses in two years.

"CPS should refrain from embarking on major capital investments at either Spruce unit until it has fully assessed their forward-going economic viability," the report concludes, and calls on the generator to explore its options for entering into an increasing number of large-scale renewable power purchase agreements as a way to possibly replace the capacity.

Additionally, if future analyses shows the Spruce units are likely to remain uneconomic, Synapse recommended CPS "should proceed with developing retirement plans."

According to CPS webpage, however, J.K. Spruce 2 began operation in 2010 "with more than $250 million of the best available emissions-control equipment."

Replacing Spruce 1 with generation from renewables "can be expected to save ratepayers money," the report found. "Under current PPA prices and market dynamics, investing in solar and wind would generate levelized net benefits two to three times greater than the benefits offered by Spruce 1 — even in the absence of an SCR investment that would make the unit even less economic."

According to Synapse, "only under a series of favorable assumptions, and with no new major capital expenses, could both Spruce units become marginally profitable in the 2020s."

For that to happen, gas prices would need to recover rapidly, coal prices would need to remain relatively flat, and Spruce units must faces no new environmental costs. The units must also be dispatched "optimally." Under those conditions, analysts concluded Spruce could produce average annual net revenues of $20 million for Unit 1 and $43 million for Unit 2 from 2020 to 2037.

"However, if gas prices increase only moderately, Spruce will remain uneconomic indefinitely," they concluded. Under one projection, should gas prices rise gradually, both Spruce units would cost more than market-based energy throughout the period from 2017 through 2037— potentially incurring combined losses almost $300 million.