Northern New Mexico is the testing ground for a new kind of utility, one about to make its way into rural Colorado and overturn a decades-old system of providing power.
“Conventional utilities are burdened with assets and inefficiencies,” said Chris Riley, president of Guzman Energy. “We are using market forces to reconstruct the grid.”
The startup, with offices in Denver and Florida, markets itself as an “asset-light” alternative that can provide electric cooperatives and municipalities certainty on prices. Once electricity rates are set in a long-term contract, they won’t adjust every quarter or year, as is now the case.
Through purchase agreements and investments in solar and wind projects, Guzman can meet rising demand from customers for more power from renewable resources.
That in turn requires monitoring, balancing and trading power to keep customers adequately supplied on overcast and windless days, something the firm said it can do better than competitors using advanced analytical tools developed by its parent, Guzman & Co.
Although it is still early in the company’s life, Guzman has provided power with smaller error rates than the providers it replaced, said Lance Titus, the company’s head of trading.
And the kicker — Guzman Energy claims to offer all of the above at a substantial cost savings, flipping on its head the argument that renewable energy is a premium product that can only be offered at a higher cost.
The city of Aztec, located 36 miles south of Durango, was the first to sign on with Guzman Energy in January. As part of the deal, Guzman financed a $2 million, 1-megawatt solar farm within city limits that it will hand over to Aztec in 2023.
Under a seven-year agreement that launched July 1, Aztec residents and businesses are expected to save 20 percent on their electric bills from what the Public Service Company of New Mexico was charging, Riley said.
Kit Carson Electric Cooperative, which serves Taos and the surrounding area, including the Angel Fire Resort, made the switch in July.
“We wanted more renewable energy resources both local and in the portfolio. We wanted more flexibility and shorter contracts. Guzman brings that to the table,” the electric co-op’s CEO Luis Reyes Jr. said.
Kit Carson had to pay a $37 million break-up fee to exit the remaining 24 years on a 40-year contract it had with the Tri-State Generation and Transmission Association, which is based in Westminster.
Even after absorbing that charge, the cooperative’s 30,000 customers are expected to save $50 million to $70 million over the next 10 years, he said.
“I don’t know if this type of company would work in any other era. The era we are living in is one of massive dislocation,” said Leo Guzman, chairman and CEO of Guzman & Co., an investment bank and institutional brokerage based in Coral Gables, Fla.
Guzman, the first Hispanic member of the New York Stock Exchange, has developed analytical systems over the years to profit from inefficiencies in the equity and bond markets. Energy markets, undergoing a huge transformation, offer the latest area where he sees big opportunities.
When energy was scarce, utilities had a strong incentive to invest huge sums in coal and nuclear plants to lock in supply. But two big changes, unlikely to reverse any time soon, have upset the equation faster than anyone anticipated, he said.
Advances in drilling technologies have unleashed large amounts of natural gas in the country once considered inaccessible. That in turn has pushed down prices enough to make gas a much cleaner and more cost-efficient alternative to coal.
The second seismic shift has come in technological advancements that have made solar and wind power generation increasingly competitive with traditional sources of power. Renewable sources are more variable, but having gas turbines that can quickly and cheaply fill the gap has changed the equation.
Investors are willing to fund renewable projects, but need long-term commitments for the power generated. Customers in many parts of the country want more renewable sources, including the ability to generate their own power, but traditional utilities have resisted.
Guzman is working to bridge that gap, Riley said. Because the cost of wind and solar farms consist of up-front capital costs and predictable maintenance charges, the projects lend themselves well to long-term, fixed-price contracts.
“Stuff is getting cheaper. You can’t hold back the tide of renewable energy. The dam is about to break,” Riley said.
As soon as a customer inks a deal, Guzman Energy goes out and locks in futures contracts to secure the energy it needs. That ties up capital, but it allows the company to fulfill the chief mission of a power utility — to guarantee a reliable supply.
Minute by minute, 24 hours a day, Guzman Energy traders in Denver are buying and selling power to make sure customers have an adequate supply. Without the overhead of other utilities, Guzman traders can go to where the best deals are available.
When a power provider is asset-heavy in an energy-abundant market, it creates a misalignment of interests, Riley said. Utilities will want to protect their power generation investments, even if it means passing on lower-cost alternatives and not operating as efficiently as possible.
If a coal plant is generating too much power given demand at a certain part of the day, its owner may decide to dump the surplus onto the market at a big discount rather than shutting down a boiler, Titus said. To the degree a utility can pass costs on to its customers, the less incentive it will have to operate as efficiently as possible.
That risk shifting includes long-term contracts that can run 40 years or more and annual price adjustments. Give customers a viable, more flexible and lower cost alternative and one by one they will leave, Guzman Energy executives argue.
Riley describes what he sees as a utility death spiral coming. As more customers leave, incumbent electric utilities will have to spread their legacy across the smaller number of customers who remain, pushing up what they pay for power and forcing more departures.
“Being asset-light in a soft market may offer short-term savings, but history has shown markets can change quickly and dramatically,” counters Lee Boughey, senior manager of corporate communications for Tri-State.
Owning generation assets helps offset significant swings in the marketand ensures long-term stability. Tri-State also owns the transmission lines to get power to its customers, offering it another advantage, he said.
And what happens if after the 10-year contract expires and prices are much higher? Who will step in if a model based on power trading doesn’t work any more?
At the heart of the debate is where energy prices can continue to be less volatile even as the sources of energy become more variable, and whether the future of U.S. power markets is about abundance or scarcity.
Guzman Energy has started small, focusing on small municipal utilities and rural electric cooperatives who may feel they are getting the short end of the stick. But the model can scale, even to the point of handle the task of supplying power to the city of Boulder if asked, said Jeffrey Heit, a managing director at the firm.
Boulder has been looking for alternative models that will allow it to provide its residents more renewable sourced energy than Xcel Energy, its current provider, has been willing to offer.
The more power contracts Guzman Energy wins, the better deals it can make on purchase agreements. The more people the firm will employ in Denver. The company already claimed the office next to its location on the seventh floor of 1125 17th St., where 15 people now work.
Reyes recalled colleagues at other cooperatives warning him that switching was too risky, that Kit Carson wouldn’t be able to pull it off. Going first is never easy, he said, but then noted how telephone providers failed to give their customers options or find a way to lower their costs. That didn’t end well for them.
“Something had to change, and we hope this facilitates that change,” he said. “The model we are creating with Guzman is the model of the future.”
Story courtesy of the Denver Post