Austin's best way out of one-sided biomass deal? Buy the plant?
The East Texas biomass power plant at the center of a costly, controversial, decade-old $2.3 billion contract with Austin Energy is up for sale, but city officials and members of the Austin City Council have stayed quiet about a possible deal.
What's been left unsaid is the possibility that City Council members will follow the lead of a Florida city similarly burdened with a one-sided biomass contract and opt to buy the 100-megawatt Nacogdoches Generating Facility, seeing the move as the only way to tear up the city's contract with the plant's owner that has cost Austin untold millions.
Eleven years ago, the council sparked the construction of the renewable power plant by inking a 20-year contract amid concerns that fossil fuel prices would skyrocket in the wake of new federal carbon taxes. But those carbon taxes never materialized, natural gas prices plummeted and biomass-generated energy became an expensive afterthought.
The developments have led Austin Energy to use the East Texas plant, initially valued at an estimated $500 million, sparingly since the facility went online in 2012. In the interim, the utility has lost an estimated $54 million annually under the contract to pay for operations at the biomass plant, as changes to Texas' energy market have made natural gas and wind power far cheaper than biomass, a little-known energy source that is powered by burning wood waste.
Two energy trade publications, SparkSpread and Power Finance & Risk, recently reported that the plant in Sacul — about 30 miles northwest of Nacogdoches — is on the market. Austin Energy is its sole customer.
In 2017, Gainesville, Fla., found itself in a similar quandary: decidedly upside down thanks to a one-sided biomass contract. City leaders there opted to buy the 102.5-megawatt plant for $754 million instead of letting a 30-year, $2 billion contract continue. At the time of the purchase, Gainesville officials estimated it would save the utility $768 million over the contract's term, the Gainesville Sun reported.
After the sale was completed, Standard & Poor's called it a "bitter pill to swallow" but "prudent."
For now, secrecy shrouds any future plans for the Nacogdoches Generating Facility. The American-Statesman sought comment from Austin council members, Austin Energy officials and employees in the city's legal department regarding the possibility of the city buying the biomass plant. Nine council members declined comment on whether the city was engaged in negotiations with Southern Company, the plant's owner. One other member, Delia Garza, did not respond to requests for comment.
Mayor Steve Adler issued a statement when asked if the city was pursuing a purchase of the biomass
"As the governing body of Austin Energy, we are briefed regularly on Austin's Energy's efforts to make system improvements that benefit the environment and reduce customers' bills, all in accordance with Council-approved policies and goals," Adler said. "However, we cannot always comment on particular issues or briefings — particularly those held in executive session — due to the competitive nature of Austin Energy's activities in the (Texas electricity) market."
Austin Energy spokeswoman Jennifer Herber said in a statement that the utility and the city "cannot comment on potential competitive matters."
Southern Company, an Atlanta-based Fortune 500 corporation, also declined to comment.
In recent weeks, the City Council has quietly conducted closed-door discussions related to "Austin Energy generation resources," as described on meeting agendas. On March 7, the council authorized a $300,000 contract with a national law firm to negotiate "electric utility transactional matters." When the Statesman asked the city's legal department to elaborate on the purpose of the legal work, officials refused.
The biomass contract has remained something of a mystery since it was approved in 2008. In 2012, the city began making payments, even as the plant was left largely idle. Since then, the plant has generated less than 20 percent of its potential output if it ran 24 hours a day, according to Austin Energy production data.
Natural gas prices fell drastically in 2008, according to the U.S. Energy Information Administration. Austin's biomass contract, meanwhile, set prices at somewherebetween three to five times the going rate for natural gas electricity.
"It's expensive to run (the biomass plant) so we only run when we think we will be able to cover the cost by the market price of electricity," Austin Energy spokesman Robert Cullick said.
The amount Austin Energy pays Southern Company while the plant remains idle has not been made public because the utility has maintained that confidentiality is paramount to it operating competitively. A rate appeal nearly made the contract public in 2013, but the city settled with a coalition of Austin Energy customers the day the contract was to be released, the group's attorney, Roger Borgelt, told the Statesman. The Statesman submitted a request for the contract under the Texas Public Information Act, but the attorney general's office backed the city's decision not to disclose the contract.
"I would've liked to have seen it," Borgelt said.
Former City Council Member Don Zimmerman has seen the contract. During his stint on the council from 2013 to 2016, he conducted an investigation into the deal that ultimately led to no council action. However, Zimmerman said that, based on what he learned about the contract, he believes the amount Austin loses on the contract could grow to more than $90 million a year by 2032.
"It is a scam of epic proportions," Zimmerman said.
Ed Bielarski, Gainesville Regional Utilities' general manager, told the Statesman that utility and city officials there were required to sign nondisclosure agreements when talks about a possible purchase of the Gainesville Renewable Energy Center biomass plant began. But later Bielarski opted to conduct negotiations in public.
For now it remains unknown whether Austin council members, like their Gainesville peers, are considering swallowing their own bitter pill. But Greg Owens, vice president of capital markets at the renewable energy focused firm Karbone, said the city would have more incentive to buy the biomass plant than most potential buyers.
An Austin Energy spokeswoman said the city's contract would remain in place if the plant was sold, and Owens said that fact might lead potential buyers to view purchasing the Nacogdoches Generating Facility as a risk, because the one-sided nature of Austin's contract creates volatility between the plant and its sole customer.
That volatility raises the likelihood that a new owner would worry about the city suing to escape its contract.
Without an agreement similar to the one-sided deal Austin has with owners of the Nacogdoches
Generating Facility, a biomass plant is likely worth the value of its scrap, Owens said.
"Biomass is just hard to move these days," Owens said. "Economics dictate everything."