IEEFA Op-Ed: Market Forces Are What’s Killing the Navajo Generating Station

The question of whether the Navajo Generating Station will stay open past 2019 is of special regional interest for the implications it raises about jobs and local economies in the Rocky Mountains and the Southwest.

But it’s a national issue too, as shown by pleas this week for President Trump to take executive action to protect the plant, which is known as NGS.

There’s no good economic reason to keep NGS on life support, however, and indeed the time for closure has come. The plant is emblematic of a core challenge facing the traditionally hidebound U.S. electricity-generation industry, as the market for coal-fired electricity is shrinking (and that’s regardless of recent political events).

This shrinkage is happening because of competition from natural gas and from the rise of renewables. Coal-fired generation simply isn’t price-competitive anymore, and market forces are forcing utilities to change how they generate power.

The 2,250-megawatt NGS is owned by a consortium of public and private utilities with significant service areas in several states. While Peabody Energy—the company that supplies NGS from its Kayenta mine in west-central Arizona—naturally wants the plant to stay open and is lobbying hard for that to happen, the utilities have presumably found cheaper ways to provide electricity to their customers—which of course is their priority. Utilities, after all, have a responsibility to supply the most affordable power possible, and they meet that responsibility in part by choosing the most affordable providers.

Navajo Generation Station fails this test in large measure because the coal it buys from Peabody costs too much.

The deeper truth is that far from being the economic engines that their proponents argue, aging and outdated plants like NGS are drags on the local communities they serve. The longer they operate, the worse their effects are—not just in terms of “external costs,” which include those to public health and the environment—but to the bottom lines of businesses and households.

To believe otherwise is to ignore reality, which is a strategy on painful display in Peabody’s struggle to emerge from bankruptcy. The company, which is the largest investor-owned coal producer in the world, says it sees the U.S. coal industry recovering when in fact it is in a state of long-term decline.

The shutdown of NGS alone probably blows a hole in the reorganization plan Peabody has laid out in bankruptcy court. The company for much of the past decade supplied almost eight million tons of coal annually to NGS from the Kayenta. Last year that figure dropped to five million, which is a still not-insignificant amount of business that Peabody can now ill afford to lose.

We don’t know precisely how much coal Peabody projects will be coming out of the Kayenta mine under the bankruptcy reorganization plan the company has put forth. What the filings do make clear, however, is that its estimates of what it will produce from its three main Peabody Western mines—Kayenta, El Segundo in New Mexico and Twentymile in Colorado—are probably absurdly optimistic.

When the company fails to deliver on its projects, its profits will plummet, and Peabody will very likely find itself in bankruptcy once again.

Electricity-generation markets across the U.S. are changing, which is to say they are modernizing. Our research shows time and again that coal-fired generation plants are no longer the viable business propositions they used to be. The story is much the same from state to state—in cases we have studied recently in Texas, Kentucky, Montana, and Pennsylvania.

A global energy transition is under way, and there is no evidence of its abatement. The best way forward for communities most directly affected by this transition is to embrace and invest in it.
Tom Sanzillo is director of finance for the Institute for Energy Economics and Financial Analysis. This op-ed first appeared in the Arizona Capital Times.