To acquire set pricing, we must secure dedicated physical generation assets. With physical assets, the longer we commit, the lower the price. LPEA evaluated a variety of terms ranging from 10 years to 30 years, and it was determined that 20 years provided a nice compromise between low-cost power and flexibility. The key to managing a longer-term contract, such as the 20 years we are considering, is to have a contract that offers the ability to change assets with predefined early termination pricing schedules. This will give us the ability to consider alternatives if the pricing is substantially lower.
Crossover will take all the risk on the piece lock. LPEA wants to provide its members with stable rates that are not susceptible to the market's volatile price swings. Crossover is able to manage this risk by owning the generation assets that will provide the majority of LPEA's power needs.
Under Article III, Section 2 of LPEA's Articles of Incorporation, "Except as limited elsewhere in this certificate or in the bylaws of the corporation, the business and affairs of the corporation shall be vested in and managed and controlled by a Board of Directors." Likewise, Article III, Section 1 of LPEA's Bylaws, "The business and affairs of the cooperative shall be managed by a Board of Directors, which shall exercise all of the powers of the cooperative except such as are by law or by the certificate of incorporation of the corporation or by these bylaws conferred upon or reserved to the members." Furthermore, according to LPEA Policy 102(II)(A)(1)(4), the Board of Directors is responsible for approving wholesale power contracts. Therefore, the authority to approve this is vested in the Board of Directors. As a cooperative member, you elect your director to represent you.
The partial buy-out cost and the full buy-out cost have different calculations behind them because they are slightly different. With a partial buy-out, LPEA is still using and paying for transmission service from Tri-State, and therefore, Tri-State's transmission system would not sit unused as it potentially would with a full buy-out. The other difference is that with a partial buy-out, Tri-State releases capacity in a controlled manner as they retire fossil-fueled generation facilities. By coordinating their generation retirement with LPEA bringing on new generation, their generation will be fully used and not left sitting idle before it is ready to retire. These factors result in a proportionately lower buy-out payment for a partial exit than a full exit.
The partial contract option would give LPEA the ability to self-supply a fixed 71-megawatt block of power. Tri-State would serve the remainder of the load. Tri-State plans to have additional partial contract offerings in the future as they retire more fossil-fueled generation. When this occurs, LPEA would have another opportunity to request additional partial supply provisions up to 50% of our load at that time.
Crossover's resource portfolio is still being finalized, and Crossover anticipates having more details to share with LPEA members as discussions progress. Crossover has substantial experience developing and deploying energy storage projects, including some of today's largest utility-scale battery storage resources. Local and behind-the-meter resource options for LPEA members are possible and are still being evaluated.
LPEA currently has a signed memorandum of understanding with Tri-State that specifies a partial buy-out cost as agreed upon between Tri-State and LPEA. This is the buy-out cost we used in our savings calculations. LPEA cannot release the buy-out cost until the legal proceedings at the Federal Energy Regulatory Commission are complete. It is only at this point that the buy-out cost calculation becomes official and public.
LPEA is currently looking at a 20-year financing period because it provides immediate and substantial savings to our members. Financing over a shorter term is also being evaluated. Although this would pay off the debt sooner, it would significantly reduce the near-term annual savings. Once the power purchase agreements are finalized, we can determine what financing term provides the optimal benefit to our members.
Crossover committed to the pricing in their proposal, understanding that LPEA will not begin to take power until 2023 or early 2024. That said, Crossover is not contractually obligated to the pricing until the Power Purchase Agreement is signed. LPEA and Crossover are working expeditiously to finalize the terms of the agreement.
There are several reasons why what happened in Texas will be unlikely to happen here. In February 2021, Texas experienced record cold temperatures, for which its infrastructure was not prepared. Texas did not have freeze protection on its natural gas infrastructure, resulting in a large portion of their natural gas generation dropping offline. Colorado has freeze protection. Another major contributing factor is Texas's independent electric grid, whereas Colorado is part of the Western Interconnected grid, including 10 states and western Canada. This provides a more extensive support network to protect against an isolated regional event.
Every region must have the right balance of dispatchable generation resources to cover when some intermittent generation resources are unavailable. Examples of dispatchable generation resources include batteries, hydro, natural gas, and coal-fired power. Every time generation resources are added or retired intensive regional system planning studies are performed to ensure reliable power is available.
Crossover works with best-in-class, well-capitalized partners with deep experience working in multiple energy markets and managing the variability of many types of resources to ensure reliable delivery to its customers. Events like those experienced this past winter can result in substantial losses, which is why it is crucial to partner with experienced and well-capitalized partners who can truly stand behind their long-term obligations. The generation assets Crossover will use to serve LPEA will be designed and outfitted with equipment (such as a cold weather package rated to -40 degrees Celsius for wind projects) to ensure reliable operations during extreme weather conditions, especially cold weather events which are much more common in Colorado than in Texas.
As a managed bidding process in which qualified bidders were invited to submit proposals, LPEA offered confidentiality to all bidders. This is the industry standard as it helps ensure that pricing and other trade secrets remain confidential in a highly competitive industry. We also get better bids, and we wanted to create the best process possible for our members. All LPEA board members had an opportunity to review the confidential RFP document.
Crossover's generation mix is still being finalized and is dependent on other opportunities. Crossover is considering with other utilities across the state. However, Crossover has multiple development partners that can deliver sizeable utility-scale wind and solar generation projects in the western region of Colorado. Crossover's base case uses approximately 85 MW of wind capacity, 130 MW of solar capacity, and various other generation sources to firm the obligations for the LPEA agreement.
Crossover is also in discussions with LPEA about rooftop solar and other additions to the mix. These project capacities are under evaluation and are subject to adjustments. This generation mix will result in almost 75% renewable energy being directly delivered to LPEA's members. It's also important to note that Crossover has extensive experience in various other generation technologies, including battery storage. They have contracted and procured close to 3,000 GWh of batteries in the past three years, which will benefit LPEA due to their deep understanding of the costs and benefits this type of solution brings to the generation mix.
Tri-State's goal and LPEA's goal have different reference years. Tri-State's goal is to reduce carbon emissions by 80% relative to 2005 levels by the year 2030. LPEA's goal is to reduce carbon emissions by 50% relative to 2018 levels by the year 2030.
2005 carbon emission rate: 1,894 lb/MWh
2030 carbon emission goal: 379 lb/MWh
2018 carbon emission rate: 1,570 lb/MWh
2030 carbon emission goal: 785 lb/MWh
Crossover's proposed 2023 carbon emission rate: less than 307 lb/MWh
Rooftop solar is not limited in areas because of line or substation capacity. However, the production from a rooftop solar may sometimes be limited if there is no load in the immediate area to use the generation. LPEA currently limits rooftop solar to 150% of the household usage to align generation with the load in the area and provide most of those in the area an opportunity to install solar of their own. Since there is no contractual limitation regarding this, there is nothing for the new contract to fix.
LPEA will have a provision in its new contract to have the ability to own up to 20 MW of generation directly. Additional local generation beyond the 20 MW could be installed if owned by Crossover. Several local projects are under consideration, and there are many factors to consider, such as transmission constraints, pricing, benefits to local economies, and generation technology use.
The exact locations of Crossover's resource portfolio are still being finalized, and LPEA anticipates having more details to share with members as discussions progress. Crossover works with best-in-class project developers who have proven experience building generation projects in Colorado. They focus on siting projects as close to LPEA's service territories as possible while balancing overall project costs to ensure the solution is the most effective solution beneficial to members and the local community.
Crossover proposes constructing a portfolio of new regional generation resources that will serve LPEA's members. The exact percentage of capacity from these resources used to serve LPEA is still being finalized. Crossover and KKR are highly active and experienced investors in the renewable energy infrastructure space globally. The generation portfolio for LPEA would represent less than 1% of total renewable generation investments globally.
Crossover Energy Partners is comprised of a team of industry experts located across the United States who work directly with utilities, municipalities, cooperatives, and large corporations on customized solutions that include the construction of local and behind-the-meter generation resources. Crossover works exclusively with KKR funds to deliver investments in renewable generation, energy storage, e-mobility, and hydrogen, tailored for the Clean Energy Transition. As an industry expert, Crossover assists the KKR Infrastructure team by bringing the expertise and management needed for the origination, development, financing, construction, and long-term operation of clean energy projects. Crossover's exclusive relationship with KKR gives them the unrivaled ability to execute and stand behind the commitments they make to their customers.
Crossover and KKR do own and operate power generation facilities. Crossover proposes to construct a portfolio of new generation resources that will be used to meet its obligations to LPEA's members. This focus on delivery from physical generation assets owned by Crossover, rather than relying on market purchases, provides increased assurance that they can meet their long-term obligations. Crossover's team has successfully developed multiple GWs of clean energy and storage projects across the U.S., and KKR currently has significant investments in various renewable energy entities that operate multiple generation facilities across the country.
There are currently three Tri-State members pursuing a partial requirements contract arrangement. The Tri-State board has approved the policy to allow partial requirements, and Tri-State has affirmed the megawatt allocation to all three members. The other two Tri-State members are at or near the 50% limit as well, but there are many factors to evaluate when considering if the partial requirement is the right decision for the cooperative. No Tri-State members have a signed service contract, although LPEA has a signed MOU outlining most of the critical terms. Once an agreed-upon version of the service contract is ready, FERC will ultimately provide the approval.
We are currently working with Tri-State, other cooperatives, and the Federal Energy Regulatory Commission (FERC) to reach an agreement and approval. Once we receive approval from FERC on the buy-down payment methodology, we can ask the Board to decide if LPEA will pursue a partial requirements contract with Tri-State and Crossover.
Each year, the majority of LPEA members experience one power outage or less. That means we keep the lights on in your home or business 99.998% of the time. To achieve this, we closely monitor power outage frequency and duration and address problem areas with system upgrades or additional maintenance.
But maintenance on LPEA’s transmission and distribution network is only half of the reliability equation. The other half is power supply because before we can deliver you electricity, it must be generated. As LPEA explores new power supply options to deliver you affordable, low-carbon power into the future, there is one thing we will never sacrifice: reliability.
You depend on electricity every hour of every day, and LPEA’s future power supply must support that. Renewable resources will play a large role in LPEA’s future power supply mix, but in the near-term other dispatchable generation will also be needed. Dispatchable generation typically uses a fuel, like natural gas, that can be turned on and off as needed to meet your electricity needs.
To maximize the use of renewables in LPEA’s future power supply – without sacrificing reliability – we are currently implementing a Distributed Energy Resource Management system. Through this system, devices like electric vehicle chargers, programmable thermostats, and water heaters can be managed to align their energy consumption with times of plentiful renewable generation without inconveniencing you, our members.
In the future, LPEA will receive some of our power from local generation resources connected directly to our system, but LPEA will also receive power from the Bulk Electric System to ensure the diversification and redundancy needed for reliable power delivery. This is necessary to avoid situations, like the one that occurred in California last summer, where demand for electricity exceeded the generation that was available at the time.
In short, through careful planning and resource diversity, you will continue to receive the same reliability LPEA is known for, regardless of future power supply selection.
There are three main reasons that LPEA is exploring an exit from Tri-State (1) we have a right to explore all options that may benefit our members (2) high rates and (3) lack of local control.
I. Right to Explore Opportunities
LPEA has the right to explore an exit from our contract with Tri-State, which currently runs through the end of 2050. Tri-State is owned by 42 rural electric cooperatives and was formed on the principles that it would a) benefit its members and b) allow for its members to withdraw on equitable terms and conditions.
In July of 2019, LPEA asked Tri-State to provide a fair and equitable exit charge. The LPEA Board of Directors wanted to explore multiple options (Resolution 2019-10), which included (1) staying with Tri-State and working to increase contract flexibility (2) fully exiting the contract (3) or finding a middle option.
II. Right to Affordability
The main way for LPEA to limit more rate increases is to explore options for cheaper energy, which makes up most of our expenditures. According to Standard and Poor’s, which downgraded Tri-State’s credit rating last November, Tri-State’s rates are 20% higher than average. Between 2000-2016, Tri-State raised its rates 12 times, doubling the price LPEA was paying for power over that period. Tri-State’s administrative expenses also increased 73% between 2017 and 2019.
These cost increases are not indicative of all power sources. As just one example, Holy Cross Energy – a comparable cooperative in northwest Colorado that sources its own energy – spends 44% less on their energy than we do. What’s more, Tri-State estimates its rates will increase an additional 50% by 2050, even while energy costs are trending downwards. With more than 3 billion dollars in long-term debt, it will be difficult for Tri-State to do anything but raise rates for many years to come.
LPEA’s initial, conservative calculations for pursuing other energy options estimate hundreds of millions of dollars in cost savings over the life of LPEA’s existing contract with Tri-State.
III. Right to Local Control
Two of the board’s initial concerns with Tri-State which led them to want to explore other options were their coal-heavy energy portfolio, and the limitation that only allowed LPEA to generate 5% of our power from local renewable sources. To their credit, they are working to fix these issues, but their solutions are still far from ideal.
Tri-State is working to clean up its energy portfolio, due largely to member pressure and to independent analysis like that of the Rocky Mountain Institute, which found in a 2018 report that Tri-State could save its members 600 million by closing coal plants and boosting renewables. According to that report, Tri-State’s commitment to its existing coal plants contributed to rates increasing more than 5 times the national average between 2007-2016.
Tri-State is also pursuing options to allow its members to supply more of their own power, but there are limitations. If all of Tri-State’s members were to use the self-supply option, LPEA would only be able to provide renewables to 10% of our load, and we want to do much more than that.
LPEA has an almost 30-year history with Tri-State. We appreciate this partnership and the valuable service they have provided to LPEA and our members for decades. We are asking them to remain a good partner by allowing us to examine all energy options and do what is best for our local communities – especially in light of the new economy in which we live.
For a full timeline of LPEA's engagement with Tri-State around this issue, CLICK HERE
Our legal costs to pursue a potential exit from Tri-State are as follows:
2021(to date): $17,321
These expenditures represent a small fraction of LPEA’s total annual budget. LPEA’s initial estimates show that we could save hundreds of millions of dollars over the life of our contract with Tri-State by exiting early. That is why the board believes the costs being incurred for legal fees to pursue an exit charge are worth the initial investment.
LPEA spends roughly $72 million each year sourcing power. This is roughly 64% of our total annual budget. Even a modest 2% decrease in power costs returns an annual savings of $1.44 million. That would repay the legal costs spent to achieve it quickly.
These costs would not have been necessary if Tri-State had supplied an exit charge when initially requested in July of 2019. LPEA has the right to explore an exit from our contract with Tri-State, which currently runs through the end of 2050. Tri-State is owned by 42 rural electric cooperatives and was formed on the principles that it would a) benefit its members and b) allow for its members to withdraw on equitable terms and conditions determined by its Board of Directors.
LPEA regularly evaluates our rate structure by performing Cost of Service analyses. These assess the costs incurred by LPEA and evaluate how much revenue must be generated from electric sales to members to cover these costs and provide a margin to finance the maintenance and operation of our electrical infrastructure. This ‘revenue requirement’ determines our electric rates and that requirement will decrease if power costs are substantially reduced.
Transmission services would still need to be purchased from either Tri-State or WAPA, as they are now. These costs have been considered when evaluating the economics of alternative power supply options.
Yes and no. If the solar production fed into the grid is later consumed by the producing member, then no. But, if over a one-year period the member has generated more electricity than they used, then that excess amount of electricity generated above and beyond what they used does count towards the 5%.