Please Note - Enchant Energy...2020/02/28 · Please Note The original slides from the IEEFA webinar along with City of Farmington /Enchant Energy (Farmington/Enchant, and separately

Please Note

§ The original slides from the IEEFA webinar along with City of Farmington /Enchant Energy (Farmington/Enchant, and separately Farmington and Enchant) response slides are contained within this document. IEEFA’s slides bear their organization’s logo in the lower right corner.

§ Farmington/Enchant’s responses to IEEFA assertions and arguments are shown in Bold on separate slides following the original IEEFA slide.

§ Slides containing information from Farmington/Enchant bear both Farmington and Enchant’s logo in the lower right corner of the slide.

§ Except for this slide, all Farmington/Enchant responses are presented in Bold text.

§ Some slides contain both IEEFA’s original statement (in regular text) and Farmington/Enchant’s response in Bold text. These slides bear both the Farmington and the Enchant Corporation logo in the lower right corner.

1

False Promisesand

Major RisksEnchant Energy’s Proposal to Retrofit San Juan Generating Station with Carbon Capture

David Schlissel and Dennis Wamsted

February 12, 2020

Report Assertion: “Enchant Energy’s Proposal is Based on a Set of False Promises”

§ Enchant and its allies repeatedly claim that retrofitting San Juan will be a win for ratepayers, a win for the community and a win for the environment.

§ This is not true. Enchant’s promises are based on a number incorrect facts, misleading statements, and the dismissal or failure to acknowledge the major risks that the project entails.

§ Among Enchant’s most critical assumptions are that:

§ San Juan will capture 6 million metric tons of CO2 each year

§ Doing so will require that the plant will operate at an 85% capacity factor and that the new CO2 capture facility will capture 90% of the CO2 the plant produces for at least 85% of the hours each year over a 12-year period.A plant’s capacity factor compares how much power it generates in a month or a year with how much power it would have generated if it had run at full power for the entire period. The higher the capacity factor the better.

3False Promises and Major Risks

“Enchant Energy’s Proposal is Based on a Set of False Promises”-Response

§ The numbers, facts and analysis presented by Farmington/Enchant are a realistic look at the project’s economic and operational issues. Farmington/Enchant’s numbers, facts, and analysis come from a variety of sources and recognized experts. IEEFA uses only IEEFA as its source and acknowledges it doesn’t talk with recognized energy experts including the DOE.

§ All projects have risk. Farmington/Enchant is managing the risks of this project in several ways that IEEFA consistently disregards or disparages: often with apples to oranges comparisons with unrelated projects. The project risks of SJGS CCUS do not fall on society or New Mexico electric customers. There is risk to the sophisticated investors in the project who are fully capable of assessing the project’s risk without the biased input of IEEFA.

§ Farmington/Enchant confidently expects to achieve an 85% capacity factor at the Units 1 & 4 power plant over the 12-year operations period. However, like all endeavors of this magnitude, sensitivity and scenario analyses has been performed and will continue to be performed to manage the financial and operational risks of the project. PNM’s operation of SJGS and Farmington/Enchant’s are not remotely comparable. PNM runs SJGS for its generating needs and plans, and spends accordingly. The incentives for PNM to maximize SSJGS output and hence capacity factor have likely also been impacted by their “glide path” operational approach to their planned closure in 2022.

§ The carbon capture tonnage and capacity factor will be addressed in more detail in later slides.

4

Enchant Energy’s Proposal is Based on a Set of False Promises

§ It will cost only $1.3 billion to retrofit San Juan for CO2 capture and that the retrofitted San Juan will be online in the 4th Quarter of 2023.

§ There will be a market in the Permian Basin for selling the CO2from San Juan for use in Enhanced Oil Recovery (EOR), at a price that would produce a positive revenue stream for the plant’s owners and investors.

§ San Juan will be a low-cost generator and, therefore, that the power produced at the plant could be sold at a competitive price.

§ Using the CO2 captured at San Juan will reduce the overall CO2emissions into the atmosphere by 6 million metric tons per year.


Enchant’s Proposal is Based on a Set of False Promises-Response

§ It will cost only $1.3 billion to retrofit San Juan for CO2 capture and that the retrofitted San Juan will be online in the 4th Quarter of 2023. - The $1.3 billion cost estimate is the best number currently calculated for the project. Farmington/Enchant and its engineering, procurement, construction (EPC) contractors continue to refine and cost out the project. A signed EPC contract is expected by year-end 2020. IEEFA’s cherry picking of certain projects that have gone over budget (one is a nuclear plant1) do not adequately address the cost management that is being employed on this CCUS project. In addition, there are infrastructure items from the retired units 2 and 3 at the plant that are being used to control capital costs of the carbon capture facility. IEEFA indicated that it did not use any engineering firms as sources of data or insights. IEEFA appears to have looked sole to publicly available data sources that were frequently incomplete, not comparable, or irrelevant for comparison.

§ The performance of Toshiba and Westinghouse in the nuclear power plant industry are not relevant to assessing the risks of this project1.

1 Southern Company’s Vogtle plant in Georgia was under contact with Westinghouse to build two nuclear reactors.

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§ There will be a market in the Permian Basin for selling the CO2from San Juan for use in Enhanced Oil Recovery (EOR), at a price that would produce a positive revenue stream for the plant’s owners and investors. – Farmington/Enchant is negotiating a contract with a major operator in the Permian Basin at a price that would allow for positive revenues for the project. Every ton of CO2 currently shipped to the Permian is being used today at Farmington/Enchant-supportive market prices, and there are numerous companies operating in the Permian that are seeking to source additional CO2 for EOR.

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§ San Juan will be a low-cost generator and, therefore, that the power produced at the plant could be sold at a competitive price. – Based on lower level, historical SJGS operating data that will be largely increased for CCUS, Farmington/Enchant plans to spend tens of millions on power plant improvements, as well as to rectify deferred maintenance. SJGS is in a good position to compete across a wide range of regional natural-gas-fired electricity generation, and with lower documented CO2 emissions. Firm electricity is required by the Southwest regional power grid in the absence of batteries. No comparably-sized, utility-scale batteries exist anywhere in the world today, as IEEFA has acknowledged, even as a demonstration project. This demand and the cash return on CO2 sales and tax credits make for a fundamentally different economic equation from how PNM operates SJGS.

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§ Using the CO2 captured at San Juan will reduce the overall CO2emissions into the atmosphere by 6 million metric tons per year. – SJGS, post carbon capture retrofit, will be well positioned to capture 6 million metric tons of CO2 per year. As stated earlier, a wide variety of sensitivities have been modeled to determine the viability of the project if numerous negative conditions were to exist. Based on this work, the financial and operational plan for the project is very robust. IEEFA’s arguments for lower carbon capture than those CO2 levels put forward by Farmington/Enchant are based on incomplete and often misleading comparisons using similar power plants with the fatal disadvantage that IEEFA could not see the confidential and proprietary data available to Farmington/Enchant’s consultants and vendors.

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The Operating Performance of San Juan Units 1 and 4 Has Declined Significantly Over Past Decade

82%

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Average SJGS Units 1 &4Capacity Factor 2001-2009

Average SJGS Unit 1 & 4Capacity Factor 2010 to

October 2019

Average SJGS Units 1 & 4Capacity Factor After

Units 2&3 Retired at theEnd of 2017

Enchant Claimed FutureSJGS Capacity Factor

False Promises and Major RIsks 10

But, other than claim, without any evidence that the new CO2 capture facility will run at an average 85% capacity factor, Enchant hasn’t shown how it will turn around San Juan’s declining performance or how much It will cost to do so.

Even if the New CO2 Capture Facility Ran at an 85% Capacity Factor, the Total Plant Capacity Factor

Would be Only 75%

False Promises and Major RIsks 11

70%

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Average CapacityFactor Over the Past

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3 Retired at End of2017

Entire Plant CapacityFactor if Carbon

Capture Facility Runsat 85% Capacity Factor

Enchant's AssumedFuture Annual

Capacity Factor for theEntire Plant

The entire San Juan plant is 914 MW. The new carbon capture facility will require 246 MW of this tooperate. So, even if the CO2 facility ran at 85%, but not the rest of the plant, San Juan’s annual capacity factors would still be far below Enchant’s assumed 85%.

Enchant’s Assumed 85% Capacity Factor Flies in Face of Industry-Wide Experience

1. In 2018, only 13 of the 390 operating coal-fired units in US ran at an 85% capacity factor or higher – barely 3% of the entire fleet – while 57 units, or four times as many, failed to achieve even a 30% capacity factor in the same year.

2. Only four of the 390 coal-fired units operating in 2018 – just 1% of the total—posted an average capacity factor of 85% or higher during the four-year period from 2015-2018. Only 10 units had average capacity factors of 80% or higher. At the same time, 36 units had average capacity factors of 30% or lower during the same 4-year period.

3. W.A. Parish Unit 8 in Texas, which hosts the Petra Nova CO2 capture facility, only had a 72% capacity factor between January 2017, when Petra Nova went into service, and November 2019.

False Promises and Major Risks 12

Capacity Factor Response (Previous 3 Slides)

§ There are many forces that impact the capacity factor of any given coal-fired generating plant.

§ The capacity factors of other plants are in many cases irrelevant since many plants are not needed nor desired to run at a high capacity factor.

§ Indeed, PNM as the SJGS operator has not required a high capacity factor in recent years due to excess generation capacity and the first dispatch of the power from PNM’s interest in Palo Verde (Nuclear) Generating Station.

§ The capacity factor of a power plant is irrelevant if you don’t know the desired output from the plant’s operator. With a coming deferred maintenance program and a plant improvement refresh, Farmington/Enchant is confident that SJGS can operate a capacity factor adequate for financial success.

§ IEEFA’s argument that the power consumed by the carbon capture system removes that power from the capacity factor calculation is incorrect given the economics of a carbon capture equipped SJGS that is selling CO2 where such carbon and electricity sales create both sales revenues and tax credits.

§ Comparing PNM’s recent operational profile of SJGS to Enchant’s plans is irrelevant. For years, PNM and SJGS’s other owners have been working to wind down SJGS and are not spending to operate the plant in such a way as to achieve maximum, sustainable, and a long-term capacity factor and availability. In addition, PNM operated SJGS as a rate-regulated, base-load plant, Farmington/Enchant will operate SJGS as a merchant plant.

§ Over the timeframes shown in the IEEFA slides, SJGS had significant scheduled outages to add state-of-the-art environmental controls and for significant lifecycle capital replacement work. Both activities reduced the historical capacity factors shown and will help to improve the capacity factor going forward.

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Electricity Market Forces and Other Factors Are Likely to Drive Down San Juan’s Future Capacity Factors§ Projected availability of low-cost natural gas

§ Growing competition from declining cost renewable resources and energy storage

§ Increased integration of the Western power grid

§ The impact of plant aging

§ The impact of reduced spending on maintenance by the current owners

§ San Juan will be a much more complicated plant to operate with carbon capture


Electricity Market Forces and Other Factors Are Likely to Drive Down San Juan’s Future Capacity

Factors - Response§ Projected availability of low-cost natural gas

§ The current and expected cost of natural gas has fully been included in Farmington/Enchant’s plans for electricity sales. This factor has an extremely low impact on the future opportunities for electricity sales by SJGS.

§ Farmington/Enchant’s markets for its merchant electricity are wholly different from PNM’s and the other owner’s rate-regulated sales.


Electricity Market Forces and Other Factors Are Likely to Drive Down San Juan’s Future Capacity Factors - Response

§ Growing competition from declining cost renewable resources and energy storage

§ The delivered energy price of non-dispatchable, intermittent, competing renewable resources is well understood. When the sun is shining and/or the wind is blowing AND there is adequate demand, renewables are dispatching to the grid. However, since they cannot be relied on to maintain system integrity (keeping the lights on by balancing supply & demand all 8,760 hours of the year) even at their current low level of renewables utilization, utilities are turning to higher carbon-intensity natural gas generation as a part of the generation mix. Batteries are being used but have not been proven economically or even operationally at the SJGS scale of 847 MW currently. https://apnews.com/5cd81a81345a40f5b1ac2e5556a68ff7

§ Other methods like pump storage that have been around for decades and are getting renewed attention, but are largely experimental at large scale. Pump storage also has land use and water use issues that may be particularly difficult to build in New Mexico.

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https://apnews.com/5cd81a81345a40f5b1ac2e5556a68ff7


Factors - Response§ Increased integration of the Western power grid

§ Farmington/Enchant’s plans consider the current nature of the Western power grid, and they are working through the operational and contractual issues in order to successfully market its power.

§ However, far from being a potential downside, the increased integration of the Western power grid offers tremendous upsides for Farmington/Enchant. A more integrated Western power grid, along with clear operational rules and transmission pricing mechanisms, would make marketing power in the West better and easier for Farmington/Enchant, not worse.

17


Factors - Response§ The impact of plant aging

§ The impact of reduced spending on maintenance by the current owners

§ All power plants require ongoing maintenance and capital improvement plans to operate at high capacity levels, and SJSG is no different. Farmington/Enchant has evaluated and continues to evaluate the condition of SJGS under the “glide path” operating plan being implemented by PNM as it plans to exit the plant in 2022. Farmington/Enchant has budgeted for and is planning to address any deferred maintenance and/or new capital expenditures upon taking control of the plant. Based on analysis done by reliability engineers engaged by Farmington/Enchant, there are no significant items that would prevent SJGS from operating at high capacity factors for the projected 12-year project life.

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Factors - Response§ San Juan will be a much more complicated plant to operate with

carbon capture

§ The engineering design of the carbon capture plant planned for SJGS will utilize a “three train” configuration that allows carbon capture to occur at very high levels even if one of the trains is down for repair or maintenance. Since the goal of Farmington/Enchant is to run SJGS at an 85% capacity factor, and since the carbon capture plant is adequately sized for the power plant, there are no complicated operational issues posed by carbon capture. In other words, the plan is to run the power plant, capture CO2, and sell power and carbon dioxide.

§ There are also operational CO2 performance guarantees being built into the EPC contract to protect investors and the climate.

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90% CO2 Capture Has Not Been Proven Over a Number of Years

§ Enchant assumes that San Juan would capture 90% of the CO2 it produces and that the capture facility would operate at an 85% capacity factor for a period of 12 years.

§ This is extremely optimistic given the lack of supporting operational experience at Petra Nova and Boundary Dam 3, the only two operating coal plants in the world with CO2 capture.

§ Petra Nova’s owners have not provided any evidence to support the claim that it is capturing 90% or more of the CO2 it processes from W. A. Parish Unit 8 coal plant near Houston.§ However, even without any supporting evidence, proponents of CCS

continue to claim that Petra Nova is achieving a 90% capture rate.

§ IEEFA has analyzed the hourly CO2 emissions data that NRG, the owner of Parish Unit 8 and half owner of Petra Nova, is required to file with the EPA. This analysis shows that Petra Nova is capturing 80%-82% of the CO2 it processes, not 90%.


90% CO2 Capture Has Not Been Proven Over a Number of Years - Response

§ Enchant assumes that San Juan would capture 90% of the CO2 it produces and that the capture facility would operate at an 85% capacity factor for a period of 12 years.

§ These assumptions are correct and documented on our website by our world-leading engineers. Farmington/Enchant has the engineering, operational, and financial plans developed to implement the project at the levels specified.

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§ This is extremely optimistic given the lack of supporting operational experience at Petra Nova and Boundary Dam 3, the only two operating coal plants in the world with CO2 capture.

§ This is not “extremely” optimistic, and the experience at Petra Nova and Boundary Dam 3, while partially illustrative, does not tell the whole story. These plants have earlier versions of carbon capture technology, and equally important, different economic incentives regarding capture of CO2. Neither plant was constructed or operated using 45Q tax credits which will provide greater available capital to Farmington/Enchant for its SJGS CCUS.

§ IEEFA disregards the improvements in carbon capture technology and costs over the past decade.

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§ Petra Nova’s owners have not provided any evidence to support the claim that it is capturing 90% or more of the CO2 it processes from W. A. Parish Unit 8 coal plant near Houston.§ However, even without any supporting evidence, proponents of CCS continue to

claim that Petra Nova is achieving a 90% capture rate.

§ Petra Nova’s experience is useful, but not conclusive when it comes to the expected capture rate of carbon at SJGS. We know of no instance of Petra Nova providing confidential data to IEEFA. That is understandable but regrettable for the accuracy of IEEFA’s claims. Sargent and Lundy have done extensive analysis on the current generation of carbon capture technology at Petra Nova and Farmington/Enchant is confident using a 90% planned capture rate for this project. The detailed results of Petra Nova’s plant which uses an earlier version of carbon capture technology tend to support Farmington/Enchant’s plan viability, not disprove it as indicated by IEEFA.

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§ IEEFA has analyzed the hourly CO2 emissions data that NRG, the owner of Parish Unit 8 and half owner of Petra Nova, is required to file with the EPA. This analysis shows that Petra Nova is capturing 80%-82% of the CO2 it processes, not 90%.

§ The capture rate cited based on publicly available data is not directly comparable to the SJGS project due to the limited reporting requirements by the Petra Nova plant. Due to improvements in the next generation of carbon capture technology and financial incentives that the 45Q tax credits provide, the experience at Petra Nova appears to support rather than disprove the Farmington/Enchant plan.

§ Due to the use of 45Q tax credits and the New Mexico Energy Transition Act, Farmington/Enchant’s reporting of carbon capture data will be much more detailed than what is required for Petra Nova.

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90% CO2 Capture Has Not Been Proven Over a Number of Years

§ Petra Nova only operated for an average of 73% of the hours in its first 2¾ years of operation (January 2017-September 2019). This is significantly lower than the 85% (or more) of the hours in each year that Enchant assumes that San Juan’s carbon capture facility will operate.



§ Petra Nova only operated for an average of 73% of the hours in its first 2¾ years of operation (January 2017-September 2019). This is significantly lower than the 85% (or more) of the hours in each year that Enchant assumes that San Juan’s carbon capture facility will operate.

§ This statistic is not particularly meaningful in evaluating the expected capacity factor that SJGS will achieve. As discussed above, the operational goals and financial incentives of the Petra Nova plant are not the same as for SJGS equipped with carbon capture technology.

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San Juan Would Not Capture 6 Million Metric Tons of CO2/Year Even at a 90% Capture Rate

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5.3

4.9

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Amount of CO2 That EnchantClaims San Juan would capture

each year at annual 85% CapacityFactors

Amount of CO2 That San Juancould potentially capture each

year if it operates at annual 75%Capacity Factors

Amount of CO2 That San Juancould potentially capture each

year if it operates at annual 70%Capacity Factors

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Capturing less than 6 million metric tons of CO2 each year would mean that the project would be eligible for far fewer federal 45Q tax credits and that additional funds would have to be borrowed to pay for the retrofit. It also would mean San Juan would generate less revenue from the sale of CO2 for EOR.

False Promises and Major Risks

San Juan Would Not Capture 6 Million Metric Tons of CO2/Year Even at a 90% Capture Rate - Response§ Responding to the previous slide.

§ Farmington/Enchant’s estimate of carbon dioxide capture is based on a detailed engineering and operational analysis. Farmington/Enchant’s operational and financial planning and modeling address all factors significant to the project’s success and are implementing actions to address these issues. The project as structured will be able to capture 6 million metric tons of carbon dioxide annually.

28

Retrofitting San Juan for CO2 Capture Will be Much More Expensive than Enchant Claims

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Enchant claims that San Juan could be retrofitted for a cost 68% lower (on a per-kW basis) than it cost to design and build the Petra Nova CO2 capture facility


Retrofitting San Juan for CO2 Capture Will be Much More Expensive than Enchant Claims-Response

§ Responding to the previous slide.

§ As has been documented on the Enchant Energy website and as has been testified to in the recent NM Senate Finance Committee, Farmington/Enchant is working with the world-leading, experienced team of Sargent & Lundy/Kiewit Power Constructors/Mitsubishi. This team has the most experience in the world, and team members built Petra Nova.

§ The EPC contract that the EPC team will sign with Enchant/Farmington will be a lump-sum, full-wrap EPC that will guarantee a fixed sum for building the carbon capture facilities. The lump sum will be funded by 100% private capital. The EPC high-level terms and conditions will be transparently posted on Enchant’s website once the contract is signed by year-end 2020.

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§ This is contrary to industry experience where the costs of adding new technologies are expected to go down over time as an increasing number of projects are completed. However, San Juan would be the very next (and just the second) coal plant retrofitted with CO2 capture in the US.

§ For example, the cost of installing new utility-scale solar capacity dropped by nearly 70% between 2010 and 2018 as a result of lessons learned in the building and installation of 25 GW of new solar capacity.

§ In addition, the San Juan project will be more than 3 times larger than Petra Nova (914 MW vs. 240 MW)

§ It is possible that the cost of retrofitting Petra Nova with CO2 capture will achieve some cost savings from (1) lessons learned at Petra Nova, (2) reuse of facilities at San Juan and (3) economies of scale. However, also possible that problems will be experienced in scaling up the technology



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§ Other generic estimates of the cost of retrofitting coal plants with CO2capture suggest that retrofitting San Juan could be much more expensive than the $1.3 billion cost Enchant claims, perhaps as high as $3 billion or more.

§ Enchant claims it will soon have a fixed-price contract in place for retrofitting San Juan. Although a Memorandum of Understanding (MOU) has been disclosed, all this means is that the parties have agreed to talk about a contract.

§ There is no evidence of any fixed-priced agreed upon for the retrofit or what categories of costs would be included in the fixed price, what costs would fall outside of the contract, or any of the purported agreement’s other terms.

§ Moreover, having a fixed-price contract does not guarantee that the CO2 capture facility would be built at the contracted-for price or that the owners would not bear any of the risks of cost overruns.


Retrofitting San Juan for CO2 Capture Will be Much More Expensive than Enchant Claims-Response (previous 2 slides)

§ Based on work to date, Farmington/Enchant will be benefiting from technology costs going down over time as has occurred with other energy technologies, especially the analogous wind industry.

§ To overcome the technology risk of a larger-scale project, Farmington/Enchant will use three carbon capture trains of a size that have been proven from a currently installed engineering and operational perspective.

§ Lessons learned at Petra Nova and reuse of SJGS facilities will both help to reduce costs, from those seen just a few years ago.

§ Generic estimates of cost of the retrofit by IEEFA are meaningless in the face of the specific contracts and pricing being negotiated for this project.

§ A fixed price EPC contract is being developed under the Memorandum of Understanding as the process was designed and agreed upon.

§ The specifics of the contract including what costs are included in the fixed price is under active development and negotiation.

§ A fixed-price EPC contract with the terms being negotiated can and does guarantee that the carbon capture facility would be built at the contracted-for price without the owners bearing the risk of cost overruns. The financial resources and legally enforceable guarantees of the EPC contractor ensure that the EPC contract will be fulfilled at the price specified.

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Capturing CO2 at San Juan Will Be Much More Expensive than Enchant Claims

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§ Enchant has claimed that the cost of capturing CO2 would be between $39.15 and $43.49 per metric ton.

§ The lower end, $39.15 per metric ton is completely unrealistic because it assumes that the CO2 capture facility, indeed the whole plant, would run at full power for every hour in the year.

§ Also, the high end of the range, $43.49 per metric ton, is based on the same 3 unrealistic assumptions discussed earlier: (1) 85% capacity factor, (2) 90% CO2 capture rate and (3) a retrofit cost 68% lower than Petra Nova (on a per kW basis).

§ Revising the analysis to reflect a more reasonable 75% capacity factor raises the price of capturing CO2 to $51.78 per metric ton, even with 90% CO2 capture.

§ The per ton cost would be even higher if lower CO2 capture rates and/or higher retrofit costs were considered.


Capturing CO2 at San Juan Will Be Much More Expensive than Enchant Claims-Response

§ Responding to previous slide.

§ IEEFA again reiterates that if costs of construction are higher and capacity factors are lower than those presented, the financial performance of the project and cost of capturing CO2 will be worse than projected.

§ The underlying assumptions IEEFA uses to formulate its calculations are challenged elsewhere in this response document.

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San Juan’s Owners and Investors Would Be Exposed to Significant Electricity Market Risk


$33.56

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Projected SJGS Cost of ProductionSolar PPA Price Signed by NV Energy in 2018Reported Cost of Recent Solar+Storage PPA Signed by NV Energy

San Juan is not the low-cost generator Enchant claims. IEEFA estimates that plant owners and investors could lose between $300 and $450 million from selling power from San Juan at market prices,including $137 million in fixed costs that would have to be paid in 2022 and 2023 even if San Juan was not generating any power.

San Juan’s Owners and Investors Would Be Exposed to Significant Electricity Market Risk-Response

§ There is no doubt that the owners and investors in the project will be exposed to electric market risk. Farmington/Enchant is working to mitigate and manage this risk by negotiating contracts of various durations with customers to buy power from the plant. Since this plant will become a merchant plant, elimination of most of the risk from the electricity market is desirable. Such risk for a portion of the plant’s output offers the opportunity for higher spot prices than may be achievable under longer term contracts.

§ Farmington/Enchant is deep into detailed electricity market studies with nationally–recognized, third-party experts.

§ The City of Farmington, however, is not exposed to electric market price risk or plant operating cost risk because of a long-term contract with the SJGS CCUS for guaranteed electricity supply and prices.

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San Juan’s Owners and Investors Would Be Exposed to Significant Electricity Market Risk


§ The high cost of generating power at San Juan would place the plant’s owners and investors in a Catch 22 situation.

§ On the one hand, owners would feel pressure to run the plant as much as they could to produce as much capturable CO2 as possible, and thereby secure the largest number of 45Q federal tax credits for their investors.

§ On other hand, operating San Juan in this way likely would mean having to sell power from the plant at very low prices – perhaps at below market or renewable PPA prices – or even having to dump some of the electricity altogether.

§ This would mean that the owners would not be able to recover all of the more than $1 billion in San Juan’s projected fixed O&M.

§ Contrary to what Enchant and its allies suggest, selling power from San Juan through a very low cost PPA with a utility would not make the project financially viable.

San Juan’s Owners and Investors Would Be Exposed to Significant Electricity Market Risk-Response

§ Unrealistic and undocumented high assumptions regarding the cost of operation of SJGS post carbon capture retrofit and unrealistically low prices for purchase power agreements and/or spot market sales of electricity lead IEEFA to erroneously conclude that the plant’s electricity sales will not be sufficient to recover even the plants fixed operations and maintenance costs. Their assumptions and analysis are not born out by the detailed financial analysis performed by Farmington/Enchant using a range of reasonable assumptions for both operating costs and electricity prices.

§ Farmington/Enchant have not suggested that selling power through a very low cost PPA (what ever that means) with a utility would make the project financially viable. Farmington/Enchant has said that based on its analysis of expected plant operating costs and a range of projected electricity prices, the plant will be competitive in the Western power markets.

§ Farmington/Enchant can substantially drive down SJGS costs and can use CO2sales to support SJGS expenses if there are periods where long-term wholesale power prices are below SJGS production costs.

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San Juan’s Owners and Investors Would Be Exposed to Significant CO2/EOR Market Risks


§ Enchant’s proposal assumes it will be able to sell all the CO2 from San Juan in the EOR market in the Permian Basin. This assumption is filled with uncertainty that increases the risk to investors.

§ These EOR risks include that:1. The potential demand for CO2 for use in EOR projected by Enchant may

not materialize.2. The economics of the CO2 market are worse than Enchant assumes.3. There won’t be enough available pipeline capacity to bring all the CO2

from San Juan to producers in the Permian Basin.4. The new owners of San Juan won’t be able to fill their contracted CO2

supply requirements because (a) the plant is not operating as much as Enchant claims it will and, therefore, is not producing as much CO2and/or (b) the CO2 capture facility does not operate as well as Enchant claims it will.

San Juan’s Owners and Investors Also Would Be Exposed to Significant CO2/EOR Market Risks


§ Even if Enchant were to announce it has a customer for the CO2 from San Juan, that would not guarantee that it would have a customer for the entire 12-year period that, according to Enchant, the project would run.

§ Oil prices are extremely volatile, so it is likely that both the demand and the price for captured CO2 for use in EOR will fluctuate significantly over time, introducing additional risk for owners and investors.

§ It appears that the Petra Nova project has not been nearly as profitable as NRG expected, as the company took an impairment of $140 million in 2016 on its $300 million investment in its subsidiary that owns half of Petra Nova. NRG cited the reason for the impairment as the continued decline in oil prices. NRG then took a second impairment of $69 million in 2017 based on what it described as a revised view of oil production expectations.

§ It has similarly been reported that in June 2016, the contract for supplying CO2 from Boundary Dam 3 was renegotiated, reducing the expected annual revenues over the life of the plant by about a third.

San Juan’s Owners and Investors Also Would Be Exposed to Significant CO2/EOR Market Risks-Response (previous 2 slides)

§ The project is indeed subject to risks of the CO2 market. That is one of the purposes of the 45Q tax credit, to help mitigate some of that risk by means of a tax credit. In the 2 previous slides, IEEFA once again goes through the laundry list of risks and challenging outcomes if the price of the commodity sold (in this case CO2) goes down, if contracts can’t be executed or fulfilled, if oil prices go down.

§ The implication is that these factors have not been recognized or addressed by Farmington/Enchant in its project and financial plans. Here as elsewhere in IEEFA’s presentation, such a characterization is inaccurate.

§ Enchant has a robust project and financial plan that has identified and analyzes numerous factors for their impact. These factors are then systematically managed to increase the project’s chances for success.

§ IEEFA’s approach implies that all risks should be eliminated by Farmington/Enchant and since IEEFA doesn’t have access to every aspect of the the project’s plans, Farmington/Enchant has somehow omitted prudent risk analysis. By this standard, no private sector project would every meet the completeness and risk elimination “straw man” proffered by IEEFA unless every aspects of a project plan were disclosed in its entirety, and probably not even then.

§ In addition, Farmington/Enchant also has the potential to inject CO2 into the ground bringing higher levels of 45Q tax credits compared to selling CO2 and receiving a lower level of 45Q tax credits. Enchant Energy has applied with a host of New Mexico entities, lead by New Mexico Tech, for US Department of Energy funds to study injecting CO2 into New Mexico certified injection wells, which currently do not exist.

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Enchant Has Ignored Significant Risks and Costs in its Proposal

§ Prudent resource planning and assessment of the financial viability of proposed projects requires considering ranges of assumptions that reflect all significant anticipated costs and risks. This ensures that the project would remain viable over a range of possible future circumstances.

§ Enchant, however, has looked at a single limited set of assumptions about future costs and has dismissed or ignored significant risks that the retrofit would entail.

§ It is not surprising that the single set of assumptions used by Enchant were those that made the project look best.


Enchant Has Ignored Significant Risks and Costs in its Proposal-Response

§ Farmington/Enchant agree that prudent resource planning and assessment of the financial viability of proposed projects requires considering ranges of assumptions that reflect all significant anticipated costs and risks. That is exactly what Farmington/Enchant has done and continues to do regarding this project. Investors and partners in the project demand as much.

§ Enchant has looked at a a wide range of assumptions about future costs and has considered and continues to consider the risks that the retrofit project would entail.

§ Farmington/Enchant has transparently presented a high-level overview of plan in the its public documents, all posted on its website. The assumptions used by Farmington/Enchant are reasonable and are the basis for the ongoing analysis of the robustness of the project that is being done by Farmington/Enchant and its investors. Potential investors can assess project risk and then invest or not according to their own judgement.

§ While IEEFA incorrectly asserts that Farmington/Enchant has ignored risks and costs related to the SJGS carbon capture project, it is also clear that IEEFA has certainly ignored significant benefits of the project including maintaining 1,500 operating jobs, increasing jobs during construction and maintaining the tax revenues so vital to the region especially for the Central Consolidated School District (CCSD).

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§ The risks not considered by Enchant include that:- The cost of retrofitting San Juan would be higher than its $1.3 billion estimate.

- The CO2 capture facility and/or the balance-of-plant do not achieve an 85% capacity factor.

- San Juan does not achieve a 90% CO2 capture rate in one or more years.

- It would be unable to sell all the CO2 captured at San Juan for EOR in the Permian Basin or to permanently sequester that CO2.

- Tax equity investors would not want to fund 100% of the cost of the retrofit and/or would use higher discount rates to reflect the risks associated with funding the project.

- There would not be a substantial market for the electricity generated at San Juan or that Enchant would have to sell the plant’s electricity at prices below the cost of production.



§ Farmington/Enchant has fully considered all the factors on the previous slide in its comprehensive planning and analysis for the project. Enchant continues to carefully consider and manage the factors that are critical to the projects operational and financial success.

§ IEEFA claims that Farmington/Enchant has somehow been negligent in failing to recognize and address critical factors impacting the project. This is an undocumented claim. Farmington/Enchant has been highly transparent and forthcoming with documents and presentations related to the project.

§ IEEFA’s overall methodology in their report fails to meet the standards of nationally-respected nonprofits or peer-reviewed reports. It is not clear why have they chosen to selectively limit the scope of their research. To its report’s great detriment, IEEFA asserts that it won’t talk to anybody with self-interest in the project, not even to gather the best data.

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§ The costs not considered by Enchant include:- Escalation, financing, right of way & land purchase and site security for the

retrofit.

- The cost of the 20-mile spur pipeline that would transport the captured CO2 from San Juan to the Cortez pipeline.

- The cost of transporting the captured CO2 transported to the Permian Basin through the Cortez pipeline.

- Any annual capital expenditures for the repair or replacement of equipment in the CO2 capture facility.

- Any maintenance costs that have been deferred or eliminated by the current owners in anticipation of the retirement of San Juan in 2022.

- The fixed O&M costs that would have to be paid during 2023 regardless of whether San Juan was shut down because it did not meet the state’s new emissions standards.

- The incremental costs of cleaning up San Juan that would be incurred after Enchant took over ownership of the plant in 2022.



§ While not part of the $1.3B capital cost for the addition of carbon capture technology at SJGS, every one of the items on the previous slide are addressed in Farmington/Enchant’s comprehensive model and plan.

§ IEEFA’s analysis implies that the capital cost budget for the addition of carbon capture should be a comprehensive business model and plan for SJGS, post carbon capture. These items are fully considered by Farmington/Enchant in the appropriate areas of its plan.

END OF FARMINGTON/ENCHANT POINT-BY-POINT REBUTTAL OF IEEFA

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Documents

Please Note - Enchant Energy...2020/02/28 · Please Note The original slides from the IEEFA webinar along with City of Farmington /Enchant Energy (Farmington/Enchant, and separately