The Sandy Creek coal-fired power plant—a 900-MW facility in Riesel, Texas—won a major victory in court on August 19 when a McLennan County jury agreed that the plant was appraised at a much higher value than justified by market conditions.
The appraisal district had suggested the plant be valued at $900 million in 2014 and $1.17 billion in 2015, according to a story published by the Waco Tribune-Herald, but the owners disputed the worth, claiming that a willing buyer would pay no more than $380 million for the plant in 2014 and $395 million in 2015. After nearly a weeklong trial, the twelve-person jury concluded the fair market value on Jan. 1, 2014, was $408 million and $431 million for 2015. The combined value was about 40% of what the county had proposed.
A Seemingly Good Investment
There were grand expectations for the Sandy Creek plant when financing for the project was announced in August 2007. Dynegy and LS Power—through a joint venture—chose to invest $1 billion to construct the plant. Brazos Electric Power Cooperative, the largest and oldest generation and transmission cooperative in Texas, purchased a 25% share of the plant’s output through an undivided ownership interest and also contracted for another 150 MW under a 30-year power purchase agreement (PPA).
Construction began in fall 2007 on the state-of-the-art facility, which featured a supercritical boiler and advanced emission controls, including low-NOx burners, a selective catalytic reduction system, and desulfurization scrubbers. The high-efficiency, low-heat-rate design was expected to position the plant for frequent dispatch and energy sales into the Electric Reliability Council of Texas.
In June 2008, the Lower Colorado River Authority thought enough of the project to purchase an 11% stake in the facility, while also signing a PPA for an additional 100 MW of capacity. But less than a year later, Dynegy was ready to get out of the joint venture. Although Dynegy’s decision was driven by a much broader strategic objective and included the sale of eight other generation units in addition to its stake in Sandy Creek, the timing of the deal with LS Power could not have come at a better time.
Sandy Creek was expected to enter commercial operation in 2012. However, during testing in October 2011, the boiler reportedly overheated, resulting in permanent metallurgical damage to its tubes. The entire boiler was replaced, according to a story published by the Waco Tribune-Herald, and the plant did not come online until May 2013.
Market Conditions Hurt Economics
Market conditions have changed significantly since ground was broken. Hydraulic fracturing and horizontal drilling have caused natural gas prices to decrease dramatically. With cheaper gas and the growth of wind energy in Texas, market prices for electricity have plummeted.
The Waco Tribune-Herald reported: “The wholesale price of electricity was $35 per megawatt-hour at the beginning of 2014 and $30 at the beginning of 2015, while the production cost [for Sandy Creek] was $60 per megawatt-hour.” If the current market situation had been expected, Sandy Creek’s attorney reportedly said, “There’s no dispute that this plant would never have been built.”
While admitting that power markets had slumped, the McLennan County Appraisal District’s attorney suggested that the decline was only temporary, so the county considered the property value fairly assessed. The jury, however, disagreed.
The appraisal adjustment is expected to send shockwaves through the local community. Several entities rely on the plant’s tax dollars, including Riesel Independent School District, McLennan Community College, and McLennan County. The county had reportedly granted tax abatement to Sandy Creek, but now that the property tax value has been reduced, it may look for a way to retract incentives previously provided to the plant.
—Aaron Larson, associate editor (@AaronL_Power, @POWERmagazine)
Featured image courtesy: Creative Commons/Michael Barera (image was cropped to fit size requirements)