EnergyWire: In far West Texas, solar boosts an isolated utility

July 28, 2015
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In far West Texas, solar boosts an isolated utility as coal exit approaches 

Edward Klump, E&E reporter

There's a saying about El Paso, Texas, that may seem hard to believe: The city is closer to San Diego than it is to Houston.

"It is true," said Mary Kipp, president of El Paso Electric Co. (EPE). "And we're even a little bit west of Denver."

Geography is crucial to keep in mind when discussing El Paso and the publicly traded electric company that calls it home. The city in far West Texas is close to both Mexico and New Mexico, and EPE doesn't connect to the main Texas power grid.

In fact, the company is one of just four investor-owned utilities in Texas operating outside of the grid managed by the Electric Reliability Council of Texas (ERCOT). In EPE's territory, which includes part of New Mexico, vertical integration -- not competition -- is a fact of life for power generation and retail electric sales.

EPE has estimated its region sees more than 300 days of sun a year, which helps explain why it's turning to solar power to augment a generation portfolio heavy on natural gas and nuclear.

The company doesn't rely on coal the way others have -- and it plans to phase out use of the fuel altogether in about a year. The push to boost solar and exit coal has attracted some attention in Texas, where federal proposals to curb emissions frequently draw rebukes from government leaders.

"I'm generally pleased that El Paso Electric is moving in this direction," said Cyrus Reed, conservation director with the Sierra Club's Lone Star Chapter. "Nobody has a better solar resource than El Paso Electric's service territory."

Shortly after U.S. EPA issued its Clean Power Plan proposal last June to reduce carbon dioxide emissions from power plants, EPE made clear where it was heading.

EPE said it aimed to reach coal-free status in 2016, and it touted solar investments while saying it was well positioned for new carbon standards.

"We're starting off from a very advantageous point simply because of our mix as it stands today," said Richard Turner, vice president of corporate development, in a recent interview that included Kipp and CEO Thomas Shockley.

For now, EPE said it has about 2,010 megawatts of company-owned generation, including more than 1,200 MW of natural gas assets and 633 MW of nuclear. There's 108 MW tied to coal and about 1 MW of renewables. In addition, EPE has purchased solar power totaling about 107 MW.

Surviving bankruptcy

The company now has more than 400,000 customers, and net income last year was $91.4 million, or $2.27 a share. Earnings may be bumpy this year, but hope is emerging for better returns in 2016.

Maurice May, an equity analyst with Wellington Shields & Co., said in a report last month that it was time to upgrade the stock to a buy as Texas and New Mexico rate cases start to come into view. It's unknown exactly how much EPE will be able to recover, and it still needs to make a filing in Texas.

EPE has invested about $1.3 billion in generation units and infrastructure that hasn't been recovered yet in rate base, May said in a recent interview. He said regional growth has benefited EPE over the years, as have the Fort Bliss military base and a move toward air-conditioning equipment in the region that uses more power.

But the road to where EPE is today hasn't always been smooth.

The company filed for Chapter 11 bankruptcy in 1992, emerging in 1996. A story from the El Paso Times in 2011 detailed past missteps related to nuclear spending and diversification the newspaper cited as contributing to bankruptcy. The company is an investor in the Palo Verde nuclear plant in Arizona.

"Prior to our bankruptcy the Company had recently completed an extensive capital development program, most notably the completion of Palo Verde," EPE said in a statement this week, adding that it had more moderate levels of capital spending in the years following the bankruptcy.

The utility has endured complaints at times, including concerns about reliability amid cold weather in 2011, as the El Paso newspaper noted. In 2012, the company agreed to a settlement that saw some rates lowered in Texas.

Discussions of costs may come up again as rate cases advance, but EPE executives expressed optimism in an ability to grow and focus on the utility business, including through solar investments.

In a presentation last year, EPE said Texas represented about 78 percent of megawatt-hour sales and non-fuel base revenue. It noted that it's interconnected with the Western Electricity Coordinating Council and Mexico, and Kipp said recently that regional geography informs the discussion of EPE's territory.

"El Paso may have more in common in some ways with Las Cruces, which is our largest city in New Mexico, than it may with Houston," she said.

As Shockley tells it, EPE's move into renewables began several years ago with "progressive" requirements coming from New Mexico. Texas is known for its wind power, but Shockley said El Paso's region is not all that conducive to wind energy, as the wind can blow too strongly or not enough.

Turning to the sun

That led EPE to look to the sun, including agreements to take power from solar developments in New Mexico.

The Sierra Club's Reed said he used to live in the El Paso area, which he described as essentially having two conditions -- "really sunny and, sometimes when it's windy, it's dusty." While some new resources may be fueled with gas, Reed called for as much as possible to involve renewable sources.

Shockley said solar energy "has proven to be something that is very valuable, and we've got a lot of days where there's virtually no clouds at all."

He said people in the area have been keen on using and expanding solar, and it had a "really good feel" for a number of elected officials. And while there were some concerns about costs, Shockley said recent projects have had attractive prices.

Still, May stressed that EPE's solar exposure must be considered in context, with a focus remaining on gas and nuclear. He said EPE should be "sitting pretty" from a carbon standpoint.

Shockley said El Paso isn't finished with sun-derived energy. A tripling of the roughly 100 MW of solar exposure might be possible, he said.

The CEO said one peak period hits from about 2 to 5 p.m. on many days, and another smaller peak is around 6 to 8 p.m. The second peak comes when solar isn't helping the grid, he said, so that can limit how much solar can be added without needing backups.

The company's filings with regulators in Texas show continued solar momentum, including plans for a 20-MW solar development at Fort Bliss. EPE also is seeking regulatory endorsement in Texas for a voluntary community solar program.

Last June, EPE said it was in the best interest of its customers not to be part of operating the coal-fired Four Corners power plant after a scheduled retirement in July 2016. The company is planning to sell its 7 percent interest in the facility in New Mexico.

"In looking at that, we decided that really because it was such a small part of our fleet and because there was so much uncertainty surrounding the future of coal regulation, we were fortunate to be in a position that we could exit from Four Corners" and focus on options such as gas and solar, Kipp said.

EPE was quick to say it made the decision that was best for its area, while other utilities face different options. Kipp said the company needs to see any final carbon plan from EPA before it can comment more definitively.

"I think a lot of us are just trying to see exactly what the situation's going to be at the end of the day," she said.

Future of the grid

While shifts continue in where and how power is generated, don't count Shockley among those who see the grid fading away anytime soon.

"The grid has created a great reliability asset for the industry for years and years, and I think that it's not going to dramatically change because it does create the opportunity for power shortages to be ameliorated by neighbors and backup available from others," he said.

But EPE recognizes that some changes are coming. Take storage, which the company plans to explore with a pilot project.

"We are following all the developments with baited breath," Shockley said.

EPE also has more than 3,000 customers that have connected or want to connect a solar installation to the company's system for a total of a little more than 13 MW, according to Turner.

Shockley said the growth of electric cars could have a positive effect on regional utilities, although he recalled talk of the vehicles' potential four decades ago.

"We were planning to have a huge boom in electric cars then," he said. "The boom has always been about two years in front of us, and it's kind of like still two years in front of us."

One of the benefits of helping to serve Texas is growth, and the company continues to add customers, even if per-customer usage numbers are relatively flat.

Kipp said the company has strived to provide safe, reliable and affordable service, and she downplayed any suggestion that EPE might fold into ERCOT.

"The odds of us ever becoming part of ERCOT would be very, very low because then that means ERCOT would be interconnected with the western grid, and that would subject ERCOT to all kinds of federal regulations to which they're not currently subject, and it would drastically change the very nature of energy in Texas," she said.

Looking ahead, given programs to add generation and transmission, Shockley said the company's focus is making sure there's proper regulatory treatment of those assets. More gas units are coming, and he said new rates could go into place in Texas and New Mexico by the second quarter of next year.

Shockley said it's never really business as usual as challenges emerge and EPE tries to stay aware of trends. He didn't suggest any major shifts are afoot, even as the company retools its generation mix.

"We're really a very simple company in so many ways," he said. "We don't have a lot of businesses doing things other than providing electricity for our customers."

Reprinted from EnergyWire with permission from Environment & Energy Publishing, LLC. 202/628-6500