TVA to buy electricity from Calpine Corp.

TVA to buy electricity from Calpine

BY DAVE FLESSNER
BUSINESS EDITOR

When electrical brownouts cut the power to parts of California two years ago, Tennessee recruiters sent flashlights to Silicon Valley businesses to publicize their claims that TVA will always keep the lights on in the Tennessee Valley.

But to keep the juice flowing, TVA is now turning to a California company, rather than complete its own half-finished power plant, to meet short-term power needs.

TVA has contracted with San Jose, Calif.-based Calpine Corp. to supply most of the baseload power growth in the Tennessee Valley in the next five years. By 2007, TVA plans to restart its oldest reactor at the Browns Ferry plant at an even lower cost, officials said.

Calpine is building two combined cycle, gas-fired power plants in Decatur, Ala., and submitted the lowest offer from among the 15 bidders that responded to TVA's request for proposals.

"Today's agreement confirms Calpine's commitment and ability to market power in the Southeast from our highly fuel-efficient fleet of modern, combined cycle generating facilities," said Paul Barnett, vice president of business integration for Calpine.

Calpine's Decatur Energy Center not only beat out other independent power producers. It also proved more flexible and less expensive than TVA's own combined cycle plant proposed at Arnold Air Force Base in Tulsa, Tenn., TVA officials said.

In March, TVA scrapped its own gas-fired power plant in Tulsa after investing $150 million in the project. The plant design was similar to Calpine but not as efficient, and it wasn't connected with an industry capable of using surplus steam.

"Our Decatur plants are each co-generation plants that will be able to use steam first to generate electricity and secondly to help nearby industries," Calpine spokesman John Flumerfelt said. Calpine is building a $350 million, 794-megawatt gas-fired plant adjacent to Solutia Chemical Co. and another $300 million, 700-megawatt plant.

megawatt plant a mile away next to an Amoco BP plant.

With a less efficient plant and no co-generation in Tullahoma, TVA directors said they decided to buy power rather than build a gas-fired plant for its short-term energy growth needs. A purchased power agreement with Calpine won't cost TVA any more in operating expenses than building its own plant and will avoid the extra debt required to finance the facility.

"It was a tough business decision to make after investing $150 million, but I think it was the right decision," TVA Director Bill Baxter said.

TVA officials originally had expected to need the Tullahoma plant, plus at least 1,200 megawatts of electricity from independent power producers for baseload and peaking power. But when the economy and power demand slowed last year, TVA canceled its plans to buy more peaking power and chose only to buy, rather than build, in the short term.

"The industry and economy has changed since 1999," TVA Chairman Glenn McCullough said. "Our power needs were not as great as we expected in the short term, and there are tremendous opportunities to buy power in the market."

The rush to add more power generation after the power shortages in California encouraged developers to begin planning for 300 new combined-cycle gas plants — the most efficient design of power plants fueled by natural gas. But more than 100 of those plants have now been canceled, TVA President O.J. "Ike" Zeringue said.

With more than $25 billion in debt, TVA is more eager to enter into purchase power agreements with outside suppliers than in the past. Under such arrangements, merchant plants generate the electricity for TVA, which distributes the power to distributors without expanding its own debt.

However, TVA officials insist that in the long run, the restart of the Unit 1 reactor at Browns Ferry will be even less expensive than buying gas-fired power. Mr. Zeringue estimates that the oldest reactor at Browns Ferry could generate power for an average 2.3 cents per kilowatt — or 43 percent less than the estimated costs for the Tullahoma gas-fired plant. "It turned out to be a fairly easy decision," Mr. Zeringue said last week.

But anti-nuclear activists complain that TVA shouldn't abandon clean-burning gas for radioactive nuclear power. Since TVA already had invested $150 million in the Tullahoma plant, TVA could have finished that 510-megawatt plant in two years for an additional $210 million, or $411,765 per megawatt. By comparison, TVA estimates it will spend $1.8 billion for an extra 1,280 megawatts of power at Browns Ferry, or $1.4 million per megawatt.

"TVA is spending more than three times as much for each unit of power at Browns Ferry," said Stephen Smith, executive director of the Southern Alliance for Clean Energy.

TVA officials, however, said the lower fuel, staffing and maintenance expenses at the nuclear unit more than make up for its higher initial cost.

"Our power needs were not as great as we expected in the short term, and there are tremendous opportunities to buy power in the market."

— Glenn McCullough,
TVA chairman