Nov. 5—Enchant Energy Corp. is adamantly plodding forward with plans to convert the coal-fired San Juan Generating Station near Farmington into the world's largest carbon-capture facility, but it's facing huge — and potentially insurmountable — hurdles to make its vision a reality.

To begin with, it's questionable whether the company will even gain control of the plant, which Public Service Company of New Mexico and three other utility co-owners shut down on Sept. 30.

The City of Farmington, which owns a 5% stake in the facility, wants to exercise its right to acquire the plant for free now that the other companies have abandoned it to then transfer the generating station to Enchant Energy to install carbon capture technology. But the departing co-owners demand that Farmington and Enchant first provide financial guarantees to protect them against future liabilities, creating a fundamental sticking point that led to the collapse of negotiations over the summer and plant closure in September, despite nearly four years of talks.

Now, the parties are locked in arbitration, a process that could last well into 2023, with no guarantee that Farmington and Enchant will prevail. And in the meantime, the other co-owners are working to finalize plans to demolish the facility.

Even if Farmington and Enchant do win control of San Juan, they still need to obtain a series of state and federal permits to run the facility through public processes that could take 12-15 months or more, with significant opposition from environmental organizations and other groups. And then, assuming they win the permits, plant reconstruction with carbon-capture would take about three years, according to Enchant, setting the project's start date back to at least 2027, or five years beyond the company's original plan for a fully functioning carbon-capture facility to be up and running this year.

In the interim, Enchant wants to run San Juan without carbon capture to generate needed revenue, simply venting the carbon into the air. But new emission controls that take effect in January under the state's Energy Transition Act may well prevent that, aggravating Enchant's financial stability, since it's faced significant difficulty to date in raising equity to finance its plant-conversion project.

The company expects to obtain public funding to move forward, applying for guaranteed government loans and grants through new federal financing for carbon capture projects under last year's bipartisan Infrastructure Investment Law and the new Inflation Reduction Act approved this year. But the company will face stiff competition for those funds from energy developers in other states. And it will have to prove it can successfully capture 95% or more of San Juan's carbon emissions and permanently store the captured CO2 underground to qualify for funding, something environmental groups and others doubt the company can achieve.

Despite the challenges, Enchant CEO Cindy Crane remains upbeat.

"We're staying the course," Crane told the Journal. "We're ready to move forward as soon as we have a clear path on ownership transfer of the plant. Our plans remain the same — they haven't changed."

Ownership transfer uncertain

For now, however, the plant's future remains in limbo while Farmington and the plant's departing co-owners are locked in arbitration proceedings over terms for ownership transfer. That process could take anywhere from three months to a year, said city attorney Jennifer Breakell.

The city filed for "emergency arbitration" with the American Arbitration Association in early October, seeking a stay on any efforts by PNM and the other co-owners to dismantle the plant while mediation is underway. But the arbitrator overseeing that emergency petition rejected the city's request in late October.

That means preliminary auctions to sell off tools and equipment at the plant, which the departing utilities initiated after shutdown in September, can continue, along with efforts to finalize plans for plant demolition, which the co-owners must provide to San Juan County within 90 days after plant closure, or by Dec. 31, under a county order approved last year.

It's unclear what will happen if the mediation process itself drags on into January and beyond. But current equipment auctions won't affect basic plant infrastructure, Breakell said.

"We filed an emergency motion to stop the sale of tools and equipment, but the arbitrator ruled against us on that," Breakell told the Journal. "It's disappointing, but we can recover from that and replace what's sold."

Still, Farmington faces a tough fight in arbitration, because all four current co-owners — including PNM, Tucson Electric Power, Los Alamos County and Utah Associated Municipal Power Systems — must all sign off on ownership transfer to Farmington, along with four other previous co-owning utilities that departed from San Juan in 2017.

That's because all nine original plant participants, including Farmington, are responsible for plant decommissioning, and for reclamation at the nearby San Juan Coal Mine that supplied fuel for the facility since the early 1970s, said PNM spokesman Ray Sandoval.

"There are additional ownership agreements that would be impacted and need amending if the plant continued to operate," Sandoval told the Journal. "That is why when we first started negotiations more than four years ago, all parties — including Farmington — agreed to include all current and past owners in those negotiations."

All co-owners want guarantees from Farmington that protect them from additional, future liabilities, something they say neither Farmington nor Enchant have provided.

"PNM continues to work closely with the other owners to ensure there is no additional liability taken on for customers, nor authorize a transfer with no financial assurances by the other party," Sandoval said. "We cannot put our customers in a position of liability without doing our due diligence."

The city says the other co-owners haven't negotiated in "good faith." And Enchant says it's made substantial concessions in negotiations, but the other parties have requested "unreasonable and unachievable" terms.

"Enchant Energy made significant progress on reaching agreements on almost all the terms the owners were seeking — above and beyond any transfer terms they're entitled to under the transfer agreement with the city," Crane said.

Details remain confidential. But PNM says Enchant has failed to address the "fundamental threshold issues" requested by the full ownership group.

In any case, it's Farmington — not Enchant — that must reach a negotiated agreement with the co-owners, despite the parties including Enchant in transfer discussions over the past four years, Sandoval said.

"A transfer of ownership from PNM and the other owners to the City of Farmington is a prerequisite to Enchant, or its contractor, undertaking any activities at the plant," Sandoval said. "No such ownership transfer has occurred. The fundamental threshold issues for a transfer of ownership have not been addressed by Farmington, much less resolved."

Enchant — waiting to exhale

Meanwhile, Enchant's plans for San Juan remain stalled pending the outcome of arbitration.

The company, for example, already negotiated a contract with NAES Corp. — one of the nation's largest power plant operators — to run San Juan, with an initial agreement for NAES to begin planning and preliminary work at the plant over the summer. But those preparations are now frozen.

"We asked them (NAES) to go on pause while the city pursues the legal process for ownership transfer," Crane said.

Enchant did submit the final version of its long-awaited, front-end engineering and design, or FEED, study to the U.S. Department of Energy in late September, which outlines the details for its planned conversion of San Juan to carbon capture. The DOE awarded a $7.5 million grant to Enchant in 2019 for that study, which the company expected to finish in 2020, but the coronavirus pandemic slowed everything down, according to Crane.

The DOE must yet release the document for public review. But Crane said it provides the most current cost estimates for converting San Juan, plus updated plant efficiency designs to allow the facility to achieve a 95% carbon-capture rate once fully operational, which is a requirement to qualify for federal funding.

The company now projects $1.6 billion to convert the plant, up from Enchant's previous estimate of $1.3 billion, which Crane said reflects today's record inflation rates.

And to pay for it, Enchant will apply for nearly $1 billion in low-interest loans from the DOE and the U.S. Department of Agriculture's Rural Utilities Service, Crane said. Then, to cover most of the remaining costs, the company will seek funding through the DOE's new grant programs for carbon capture and sequestration efforts. That includes $2.5 billion in competitive awards for demonstration projects at fossil fuel plants and industrial facilities around the U.S. that the DOE announced over the summer.

With the FEED study in hand, Enchant now expects to negotiate final contracts with project partners. That includes the carbon-capture technology to be supplied by Mitsubishi Heavy Industries America, and an engineering, procurement and construction contract that Kiewit Power Constructors Co. and Sargent & Lundy would jointly manage.

But all of that depends first on the outcome of arbitration for ownership transfer. And, even if Farmington and Enchant manage to gain control of San Juan, the project will face major hurdles going forward to achieve its goals.

Broad skepticism and opposition

Local and national environmental organizations, which have opposed Farmington and Enchant's plans from the start, believe the project will never get off the ground given the challenges ahead.

That includes lengthy state and federal permitting through public processes where Enchant will face united opposition from environmentalists, doubts about whether the company can ever achieve the 95% carbon-capture rate needed to qualify for federal funding. It also includes scarce investor interest to date to provide private equity for the project, especially given the potential for cost overruns that could greatly elevate total capital needed well beyond Enchant's $1.6 billion projected estimate.

In addition, even if Enchant successfully navigates the varied permitting needed to operate the plant with carbon capture, construction to convert the facility couldn't begin until all permits are in hand. And in the interim, the company wants to simply run San Juan as a traditional coal-based, carbon-emitting generating station.

That would put it on a direct collision course with New Mexico's new emissions regulations under the state's Energy Transition Act. The ETA restricts carbon venting to 1,100 pounds of CO2 per megawatt-hour of electricity produced at coal plants starting Jan. 1, or half the amount San Juan's two operating units would emit unless new pollution controls are installed.

The state Environmental Improvement Board reaffirmed those limits in late October in statutes that will take effect next year.

It's still unclear how the state Environment Department will monitor and impose those restrictions under the new statutes, meaning San Juan could, potentially, run for a short period with higher emission levels before ED cracks down. But it would be a race against time for Enchant, since installation of carbon-capture technology wouldn't begin until after it receives needed permits — likely well into 2023 or beyond. And even then it would take at least three years before the technology is fully installed and operational.

The company plans to seek a short-term "variance" under the state's Air Quality Control Act to run the plant with open emissions until carbon capture is installed, Crane told the Journal.

But like all the permitting Enchant needs, that's a lengthy public process that will be stacked with opposition from environmentalists.

"The criteria to meet the conditions for a variance are quite strict in the statute and limited to specific circumstances," ED Air Quality Bureau Chief Liz Kuehn told the Journal. "There would be public hearings with the burden of proof on the petitioner to show it can meet those strict specifications and criteria."

Federal funding

Project opponents also question whether Enchant can win needed federal funding, something the company only began exploring last year after originally insisting it would rely wholly on private backing to finance the San Juan project.

Enchant will face stiff competition from energy developers in other states seeking federal grants, said David Schlissel, director of resource planning analysis at the Insitute for Energy Economics and Financial Analysis, or IEEFA, a national think tank that favors renewable energy.

The DOE will carefully scrutinize all funding applications, especially for carbon-capture on coal plants, after the Government Accountability Office released a report last December recommending that Congress actively monitor and report on DOE demonstration projects to provide greater oversight and accountability. That's because a GAO audit found that, although the DOE provided $1.1 billion in funding for 11 carbon capture and sequestration projects since 2009, only three actually got built, including two at industrial facilities and only one at a coal plant — Petra Nova in Texas.

The DOE invested nearly $700 million in eight other coal projects that never reached fruition, according to the GAO. And Petra Nova itself — which received $195 million from the DOE — also closed in 2020 because of poor economics in the pandemic-induced downturn. In fact, NRG Energy Inc. sold off its 50% ownership in Petra Nova in late September for pennies on the dollar to its project partner, JX Nippon Oil & Gas Exploration Corp., earning just $3.6 million on the sale, despite Petra Nova's original $1 billion price tag to construct it.

The new Inflation Reduction Act does include a substantial increase in the federal subsidy program known as 45Q, raising government payments for every ton of carbon captured and permanently injected into underground storage spaces, increasing from $50 per ton previously to $85 now. That could significantly improve the economics for Enchant's San Juan project.

But now, the DOE is only earmarking new grants for two potential coal projects across the country, with the remaining federal funding going to natural gas and industrial carbon capture demonstration projects. And then, DOE is likely to favor newer coal plants with more modern, efficient infrastructure, compared with the aging San Juan facility, which is 50 years old, Schlissel said.

"The DOE may not even decide on which projects to fund until two or three years from now," Schlissel told the Journal. "And all DOE (demonstration project) grants will require 50% matching funds that Enchant would have to raise from private sources."

In addition, awardees will have to demonstrate a 95% carbon-capture rate based on a "life cycle" analysis that includes CO2 emissions not just from power generation, but from mining and transportation of coal to the power plant, and when transporting and burying the carbon at storage sites.

A new IEEFA report released in August studied emissions from the nearby San Juan Coal Mine that previously supplied the San Juan plant and concluded that, even if Enchant managed to capture 95% of emissions at the generating station, the life cycle emissions rate would reduce total CO2 capture to just 72%. IEEFA and others, however, question whether Enchant can even reach a 90% capture rate, meaning total life cycle emissions could end up much lower.

Crane said Enchant will use a life-cycle analysis to calculate its carbon capture rate, including emissions from coal mining and transportation, although that won't be based on San Juan's emissions record, because Westmoreland Coal Co. permanently closed the mine in September shortly before the generating station shut down.

"We will be required to do a life-cycle analysis on our application for DOE demonstration funds, and we will build that into our calculations as we look for alternative coal supply options," Crane said. "But we can't analyze that just looking at the San Juan mine, because emissions depend on what the coal source ends up being."

The company is now discussing new coal sources with alternative suppliers, Crane said.

Other concerns

But the San Juan mine closure raises additional questions among Enchant opponents, who say it erodes the alleged benefits of carbon capture touted by Farmington and Enchant, while further undermining the project's economics.

From the start, Farmington has supported keeping the power plant open with carbon capture to sustain hundreds of jobs at the mine and generating facility, and to maintain local tax revenue from those operations. Until a few years ago, the plant and mine combined employed about 1,600 people in high-paying jobs.

But if Enchant ends up sourcing its coal from an out-of-state supplier, it means much fewer jobs will be offered through the carbon-capture project.

In addition, Enchant has previously said the mine-to-mouth operation of having a coal mine right next to the power plant significantly lowers project costs and increases efficiencies. Those benefits are eliminated by the mine closure, although Crane said Enchant can absorb the additional costs.

"Alternative coal supplies are built into our economic model," she said. "We don't see it as prohibitive."

Opponents also question whether Enchant can actually find significant customers for the electricity it produces at San Juan, either during the interim period before carbon capture is installed, or after the technology is up and running, since much lower cost renewable generation is rapidly emerging to supply regional markets.

Crane said Enchant already has customers lined up to buy power in both the "pre-decarbonization" and "post-decarbonization" periods, but declined to name them due to non-disclosure agreements.

But that just raises more skepticism among environmental opponents, said Mike Eisenfeld, energy and climate program manager with the San Juan Citizens Alliance.

"Crane's statements are always peppered with 'non-disclosures' and 'significant negotiations,'" Eisenfeld told the Journal. "Farmington has been taken to the cleaners. The city should just cut its losses and pull out, because Enchant Energy's positions and proposals just aren't credible."

Pat O'Connell of Western Resource Advocates said his organization has been skeptical about the project from the start, given all the complexities and risks involved.

"There's just too much stacked against it," O'Connell told the Journal. "I never believed the project would get across the finish line, and I have yet to hear anything that changes that belief."