America's rural electric cooperative utilities are more reliant on coal than the U.S. electricity industry at large. The resource makes up 39 percent of the generation mix for the 800-plus members of the National Rural Electric Cooperative Association, according to data released in June, compared to about 23 percent for all electricity generated nationwide.
And unlike their large investor-owned utility counterparts, co-ops, which deliver about 12 percent of all U.S. electricity, don’t often have the political sway or capital to direct a push towards more renewables.
As large utilities increasingly set out carbon emissions targets, Guzman Energy, a Colorado-based power provider, is working to ensure co-ops — many of which receive power from larger, coal-reliant generation and transmission co-ops — don’t get left behind.
While many traditional energy players have slow-walked towards renewables, Guzman based its business on the power industry’s accelerating transition to clean energy. Promises of a cleaner and cheaper mix have allowed the company to scoop up business from numerous co-op utilities in recent years, helping facilitate the transition for co-ops that are often tied to decades-long contracts with other providers.
“Our perspective was that we were on the cusp of a major shift in the energy landscape and how communities would be served. And we did not think the incumbent providers were incentivized or organized to participate in these changes or to facilitate the change that would need to take place,” Chris Riley, Guzman's co-founder, told Greentech Media this summer. “We saw an opportunity for a disruptive force to come in who didn't have the burden of the legacy assets.”
Guzman has so far concentrated its work in the West. But the tethers binding co-ops to coal are not confined to the region, and Guzman has plans for national expansion, Riley told Greentech Media.
Seeing the opportunity for rural renewables
Riley, who founded Guzman Energy along with Leopoldo Guzman, the CEO of investment bank Guzman & Company, comes from a family of coal workers in Utah. But neither he nor Guzman had traditional experience in utilities.
“We haven’t felt any need to follow any blueprint of how it’s ‘done’ in the industry,” said Riley. But the two did see the change coming in power production, and surmised the incumbent generators would be slow to embrace it.
Guzman originally entered the market focused on renewables trading, but later began providing renewable electricity to customers through wholesale purchases and signing contracts for full renewable portfolios. The company started delivering power in 2016, with the goal of supplanting the established relationship between distribution co-ops and the generation and transmission (G&T) co-ops that provide most of their power.
Because Guzman wasn’t tied down by existing assets, it didn’t have to make the pivot from coal that many utilities are now planning before mid-century. Instead, it has been able to focus on what Riley calls an “optimal portfolio” of energy centered on ever-cheaper renewables, and supply it to rural electric co-ops that want to make cleaner or cheaper choices for their power supply.
In recent years, the pace of U.S. coal retirements has quickened. But the structure of many co-op power contracts makes it difficult for the non-profits to change power supply along with those shifting economics.
“Talking to a lot of distribution-level cooperatives managers, it quickly became clear that they felt trapped” in long-term contracts reliant on coal, said Riley. So far, Guzman has signed contracts with co-ops such as New Mexico’s Kit Carson Electric Cooperative and Colorado’s Delta-Montrose Electric Association.
The model is similar to that of community choice aggregators (CCAs) in California, noted Wade Schauer, research director of the Americas at Wood Mackenzie Power & Renewables. Because renewable energy costs have been falling so quickly in recent years, CCAs have been able to sign power purchase agreements (PPAs) at prices much lower than the legacy renewable contracts held by California's investor-owned utilities.
Kit Carson, the first co-op Guzman worked with, entered that deal after severing ties with Colorado’s Tri-State Generation and Transmission Association, which provides power to 45 members across four states. At the time, Kit Carson CEO Luis Reyes said the new contract would give the co-op “greater flexibility at a lower cost.”
Delta-Montrose is a former Tri-State member, too. CEO Jasen Bronec said its deal with Guzman, finalized this year, would offer the co-op “stabilized rates” as well as the “development of diverse and low-cost energy.”
After working with several of Tri-State’s former members, Guzman went after the mothership last year. The company proposed a plan that would replace a significant chunk of the generation and transmission (G&T) cooperative's coal generation with a 70 percent renewable portfolio while reducing costs for members.
Tri-State rebuffed the offer, saying it was too costly. A few months later, it put out a plan of its own. Riley likes to think Guzman encouraged that goal.
In November of this year, Tri-State increased its ambition: targeting 80 percent emissions cuts in Colorado by 2030. It also plans to retire its coal plants there and in New Mexico.
“I think it speaks to the value of having somebody like us coming in and shaking things up and making G&Ts realize they better get it together and start doing something, or else other people will do it for them,” said Riley.
How Guzman puts together its cooperative portfolios
Guzman builds out a unique energy portfolio for each co-op it works with said Riley, combining local resources and large-scale renewables while meeting interim demand with power purchases.
Co-ops designate what the supply looks like. Kit Carson, which serves about 30,000 customers, wanted solar power to meet all of its daytime demand, reduce portfolio costs and reach high overall penetration of renewables. Delta-Montrose was more focused on economics and local jobs, said Riley. Either way, Guzman aims to maximize the local energy built to serve each community.
“It really doesn't matter if you're coming at it from a decarbonization, clean energy perspective, or whether you're coming at it from a pure, lowest-cost, save as many dollars, community competitive angle. It’s the same outcome,” said Riley.
Reaching that ultimate outcome takes time, though. Guzman designs and builds new portfolios, but at times has just months between signing a contract and serving a community's load.
“As you well know, you can’t typically get a new portfolio of renewable assets online that quickly,” said Riley.
In the interim, Guzman fills the gap with market energy purchases. That’s caused some criticism, since the company buys electricity produced by coal and gas as well as renewables. Guzman does not publicize the makeup of its generation purchases. Robin Lunt, the company's general counsel and chief strategy officer, told Greentech Media the purchases are largely composed of thermal resources, but declined to provide further specifics.
Chris Seiple, vice chairman of Wood Mackenzie's energy transition and power & renewables practice, noted that Guzman's strategy goes beyond a typical renewables developer model, “in the sense that it also requires a sophisticated trading and risk management capability.”
Guzman signs co-ops to contracts with costs set in advance — part of the draw for customers, said Lunt —and Guzman assumes risk for any fluctuation in power price.
“That’s a big part of the selling point because [co-ops are] coming out of these contracts where they pay whatever their G&T decrees they should pay,” said Lunt. “They have no way to plan.”
Guzman's contracts are also shorter than those offered by many incumbent providers: while G&T contracts can last decades, Guzman has signed deals with co-ops for terms closer to one decade.
But before getting access to that flexibility, co-ops have to leave behind existing contracts. For Tri-State members, leaving the G&T has come with a hefty price. Guzman fronted Kit Carson the $37 million fee it paid to leave Tri-State’s service, with payback built into the first six years of the co-op's contract. Overall, Guzman said its service will save Kit Carson $50 million to $70 million —perhaps more, according to Riley — from what it would have paid to Tri-State. Guzman also funded Delta-Montrose’s exit from the G&T, at $62.5 million.
United Power and La Plata, two more Tri-State members, are currently making the case to end their contracts. And though Guzman hasn’t signed agreements with those co-ops yet, it has participated in their requests for proposal.
After several successes in the West, Guzman is now envisioning expansion into other geographies. Riley said many of the largest generation and transmission organizations in the U.S. rely on increasingly uneconomic coal.
“This problem is by no means confined to the West,” said Riley. “It exists nationally.”
Guzman’s greater ambitions have already cropped up in the Midwest. In November the company brought on a new managing director for origination based in South Dakota. That same month, non-profit Dakota Energy Cooperative filed a lawsuit in the state to exit its contract with East River Electric Power Cooperative, which serves 24 rural electric co-ops with a generation mix that includes 37 percent hydropower and wind. Dakota Energy’s contract is currently set to last through 2075, but the co-op wants to sign on with Guzman, according to reporting from a local CBS affiliate.
“We are asking only for a fair exit fee to leave East River so Dakota Energy can have the freedom and ability to determine our own energy future,” said Chad Felderman, the co-op’s CEO and general manager in a statement related to the lawsuit. “We know there are better options.”
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