TXU plan crumbles: What’s next for North and Central Texas

By Amethyst Cavallaro
Online Editor, Power Engineering

Environmental advocates are rejoicing over TXU Corp.’s decision to join the growing number of utilities that have pledged to follow a greener path. The utility’s sudden conversion, however, resulted from a privatization plan that has left many uneasy about the long-term future of the area’s electricity market. Meanwhile, ERCOT continues to warn of a declining capacity margin with the possibility of blackouts in just a few years. TXU’s next steps will be crucial in deciding its long-term fate.

In the weeks leading up to TXU’s announcement of a leveraged buyout proposal valued at $45 billion, talk had intensified that the utility was planning to drop at least several of its planned power plants in the face of public opposition. Now that the plan to build eight reference plants at a cost of $10 billion has been scrapped, it’s uncertain how the gap left by the cancelled 6,800 MW will be filled.

TXU reversals
Some major shifts on key issues took place with the merger proposal resulting from the coordination of TXU, environmental groups Natural Resources Defense Council and Environmental Defense, and the investment group led by Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group (TPG). Consider the following strategy reversals in the proposed merger agreement:

  • CO2 — In November, TXU formally acknowledged its customers’ growing concerns about global warming, but would not commit to reducing carbon dioxide (CO2) emissions until “viable technology” was available to both capture and sequester the gases. It had long supported a voluntary approach to reducing carbon intensity and provided funding for CO2 capture R&D programs. As a privately held company, TXU has committed to reduce its own carbon emissions at generating facilities by up to two percent through efficiency improvements. The utility will also seek membership in the United States Climate Action Partnership (USCAP), a group of businesses, utilities, environmental and financial entities that support a mandatory cap and trade program to reduce greenhouse gases (GHG).

  • IGCC — TXU had refuted demands by the public to explore using integrated gasification combined cycle (IGCC) technology at its proposed plants. It circulated information against the technology, preferring what it deemed as proven technology in super critical boilers. Under the new deal, TXU will explore using IGCC technology and will join the FutureGen Alliance to support the Department of Energy’s project to build an IGCC plant that captures and sequesters CO2. Two sites in Texas are being considered for the location of the FutureGen plant.

  • Capacity — TXU settled on coal-fired generation because it provided cheap, reliable electricity for Texas’ fast-growing population. It also promised big profits, something TXU investors had grown to expect. The new company would throw out eight of 11 planned coal-fired plants and would more than double its purchase of wind energy. It would provide solar power rebates to customers and has pledged to become a leader in providing electricity from renewable sources. The privately held utility will invest $400 million in demand-side management programs over the next five years.

TXU will keep its previous commitment to reduce mercury, SO2 and NOx emissions by 20 percent from 2005 levels. Part of that reduction will come from emissions controls it will install at the remaining three units that survived the merger agreement. The two environmental groups agreed not to protest the continuation of projects at the Oak Grove and Sandow plants. In return, TXU agreed not to apply or reapply for permits to build additional coal units using current pulverized coal technology.

Next Steps
Under the merger agreement, TXU may solicit proposals from third parties through April 16 and TXU’s board of directors said it intends to solicit proposals during this period. Rumors of several other bidders have circulated the financial world. The Financial Times reported that Credit Suisse plans to fund another incentive package for TXU by other private equity groups, including Blackstone and Carlyle. New Orleans-based utility company Entergy Corp. has said it has received requests to head a competitive offer on TXU, but has declined to comment on whether it would pursue a bid or not.

KKR and TPG have said they intend to hold TXU as a long-term asset, later qualifying that statement to say more than five years. To satisfy ERCOT’s requirement for immediate additional capacity for electricity demand, TXU will continue building two units at the Oak Grove site and one at the Sandow site. The new company will institute a 10 percent price decrease for residential customers and provide price protection through September 2008. But looking to the track record for private equity firms, some electricity experts have their doubts about how good this deal may be for customers over time.

“Although I understand KKR has promised to reduce prices in the short-term, I have my doubts the TXU privatization will assist in lowering prices long-term,” said Ehud Ronn, Professor of Finance and Director of the Center for Energy Finance Education and Research at The University of Texas.

“My concern is that the reduction in generation capacity sacrifices Texas’ long-term energy needs. I fail to see how three coal-fired plants can satisfy what was envisioned to be produced by eleven.” In Ronn’s opinion, renewable energy alone cannot meet the high capacity and reliability demands that ERCOT requires. He also raised the concern of whether the potential scarcity in generation capacity will cause power prices to increase even further.

One way to pad ERCOT’s decreasing reserve margin may be by restarting mothballed gas-fired plants, TXU’s CEO told reporters last week. But analysts point out that this stopgap measure puts customers at the mercy of volatile gas prices and may lead to the same price crisis that pushed TXU to take those same plants offline years before.

Dan Bakal, Director of Electric Power Programs at Ceres, doesn’t think the answer lies in building new power plants or restarting older ones. He said the lowest cost solution remains on the front-end of the problem.

“The number one way to meet electricity demand is by investing in energy efficiency and demand management,” Bakal said. Ceres released a study in mid-January of the ERCOT system that provides data on how demand could be met through a variety of efficiency measures. Change would not come overnight; it would require policy changes from the state legislature and an $11 billion investment across all sectors of the economy. “We think it’s the best answer; not that it’s easy, but that it’s the best path forward,” he said.

Coal-fired generation isn’t going to disappear from Texas’ future generation plans. Bakal said he expects some coal plants to be proposed to meet future needs, using both IGCC and pulverized coal technologies. But those plans will have to address the risks associated with releasing large amounts of CO2 into the air. “As long as they don’t try to brush off the issue like TXU did, they have a better chance of moving forward with coal-fired plans,” he said. “Clearly, you’ve got to deal with the carbon issue.”