Memphis electricity customers are likely to see their power bills rise by more than 20% if the city's municipal utility splits from the Tennessee Valley Authority, according to an analysis released Tuesday by TVA.
TVA disputed studies suggesting that Memphis Light Gas & Water could cut its energy costs by buildings its own solar and gas-fired generation and replacing TVA's wholesale power supply with electricity purchases through a power consortium. TVA President Jeff Lyash said that the draft integrated resource plan suggesting that MLGW could cut costs if it split with TVA underestimated the risks and costs of building new generation and transmission required to make such a change.
Rather than save $122 million a year as the energy consulting firm Siemens projected, TVA estimates MLGW would end up spending $261 million a year more if it leaves the TVA fold, boosting rates by over 20%.
"We believe that critical assumptions, such as construction costs and schedules, capital recovery costs and ongoing operating expenses are understated in the IRP (integrated resource plan) prepared by Siemens," Lyash said. "The study used costs and schedules that are very aggressive and should have used more realistic estimates."
In a 75-page study released last month, Siemens analysts estimated that the Memphis utility could save $1.9 billion over the next two decades, or at least $120 million a year in 2018 dollars, by replacing TVA with a combination of self-generated power by MLGW and purchased power from the Midcontinent Independent System Operator (MISO).
Memphis Light Gas & Water, the city-owned utility that now pays TVA over $1 billion a year for power, commissioned the Siemens consulting firm to analyze its power supply options for the future. Siemens considered 11 alternatives to TVA, which has supplied electricity to Memphis since 1939.
Under its current contract with TVA, MLGW must give a 5-year notice before it could severe its exclusive power purchase agreement with TVA.
The Siemens study concluded that Memphis solicit requests for proposal from power suppliers for electricity in 2025 and beyond to test the market and potentially get cheaper and cleaner power than what TVA has provided for the 421,000 customers of MLGW.
Four earlier studies commissioned by environmental and rival energy suppliers estimated Memphis could save anywhere from $100 million to $450 million a year by splitting with TVA and building its own generation and buying power on the grid.
Although TVA power rates are below the U.S. average, Memphis is among the cities with America's greatest "energy burden" with residents paying a disproportionate amount of their monthly income to their utility bills. Because of a combination of high energy prices, and high rates of poverty, utility bills claim up to 25% of some Memphis residents' income.
HIGH ENERGY BURDENS
The Siemens study said Memphis could save money by developing its own transmission and generation capacity, which could cost $8 billion to construct. Gary Vicinus, an energy consultant for Siemens who oversaw an integrated resource plan conducted for MLGW, said splitting with TVA might limit some of the reliability and redundancy provided for power delivery by TVA.
"The question really becomes, although TVA is slightly higher on reliability, how much do you need to spend for additional reliability?" he asked during a June 4 public hearing on the study.
Vicinus and MISO officials said reliability would still fall within the minimum requirements set by the North American Electric Reliability Corp.
New power sources, according to the Siemens study, could be less than what MLGW pays to TVA, which has relatively high fixed costs with more than $22 billion of debt and a workforce of over 10,000 employees and contractors across its 7-state footprint.
But Lyash said TVA's 33,727 megawatts of generating capacity and its 87-year history make TVA more reliable and ensures there are power reserves so that in the event of a plant outage Memphis is not forced to go out into the spot market and buy more expensive power during peak demand periods. TVA also contends it can be more cost-competitive than having MLGW try to build its own power plants for the first time or rely on other power suppliers that may not be able to match TVA's pledge to keep rates constant for the next decade.
LESSONS FROM THE PAST
TVA Chief Financial Officer John Thomas noted that more than a decade ago, Paducah and Princeton, Kentucky projected they could cut their power rates by 30% by leaving TVA and buying into a large new coal-fired power plant. But when the costs of building the new coal plant skyrocketed, electricity rates for Paducah and Princeton ended up rising anywhere from 13 to 31% above TVA's rates in adjoining Kentucky counties served by TVA.
"The projected savings on paper doesn't always materialize," Lyash said.
TVA said MLGW could still generate up to 5% of its own power under the flexible contracts TVA is now offering MLGW, which Lyash estimates could be used to save $55 million below what Siemens projected in annual costs for MLGW. Lyash contends the $8 billion investment for new generation and transmission MLGW would have to spend if it leaves TVA should be recovered in 20 years, not amortized over 30 years as the Siemens study suggested. That alone would add $150 million of annual costs to what Siemens projects, negating any of the original savings projections.
"Overall, we believe TVA remains the best value for Memphis when everything is considered," said Buddy Eller, corporate communications manager for TVA.
The MLGW board and the Memphis City Council are expected to decide this summer whether to proceed with formally asking for requests for proposals for future power from other utilities or to stick with TVA.
Contact Dave Flessner at email@example.com or at 757-6340