It’s a billion-dollar boondoggle.
Former Goldman Sachs partner Mark Green refers to it as the “Austin biomass disaster.” No matter what you call it, it spelled trouble for Austin taxpayers.
The city of Austin spent $460 million in April 2019 to purchase a biomass energy plant. Less than a decade ago, the city spent $128 million to have the Nacogdoches Generating Facility built, saying it needed another power source since solar and wind were not always reliable. Ratepayers footed the bill for the largest biomass plant in the country.
However, at the same time, prices for natural gas declined sharply, largely due to new means of extracting it from the earth. Without the need for energy from the new plant, it was idled almost the entire time, although it was fully staffed in case it was deployed.
The cost for that? At least $54 million annually for eight years.
Finally, Austin decided to end its 20-year contract with Southern Power, a subsidiary of Southern Company which had purchased the plant, and buy it back. It turned the plant over to Austin Energy, the city’s electric utility provider.
So just add up the costs: $128 million to build the plant. At least $432 million to staff it, even thought except for a few months, it was unused. And $460 million to buy it back.
That totals $1.2 billion for a plant that was not used for most the time.
Green said this was a mistake from the start.
“The whole reason for building it was the price of natural gas was far more expensive as a fuel than burning wood,” he told Texas Business Coalition. “If you look at any natural gas chart price chart you can see that the plant became uneconomic almost from the start date. I do not think the plant was environmentally friendly. I only say this from reading articles about why biomass has never caught on.”
Green said Austin appears to have been poorly advised in the deal.
“The prospectus for the 2019 bond issue is full of facts. The bond issue was for a little less than $500,000,000 and was done to buy the operator, Southern Company, out of the operating agreement which included a take or pay contract,” he said. “Austin Energy was on the hook to make payments of around $60,000,000 a year to Southern Company whether or not the plant produced any energy or not. Southern Company is a very large publicly owned utility based in Atlanta. According to the prospectus for the bonds, the Southern Company was represented by Barclays, a global investment bank and by Baker Botts a major law firm in negotiating the buy out.
“Austin Energy did not disclose if they even had a financial advisor but did say they were represented by a national law firm but did not disclose the name,” Green said. “I suspect the City of Austin was poorly represented and probably just paid Southern Company a discounted present value of the take or pay annual payments. If that is what happened, Austin Energy and the City of Austin probably left a couple of hundred million dollars on the table. In any event, Austin Energy and the City of Austin were clearly out-negotiated.”
Austin will feel more financial pain, he noted.
“Under the repayment terms of the bond, Austin is on the hook to pay $43,000,000 a year until the end of 2032 and gets nothing in return — no energy, no other service from Southern Companies and is stuck with a white elephant non-operating plant in Nacogdoches,” Green said.
And it might get even worse, since Austin Energy must maintain, insure and generally take care of this “stranded asset,” he said.
Green said Nacogdoches expected a stream of taxes from this plant and built new schools and now is in economic stress.
“Nacogdoches may very well sue Austin Energy and Austin — they should,” he said. “I would expect them to win big in a state court. Including the upfront investment of $128,000,000 that Austin made in this plant, plus the take-or-pay payments made before the buyout of the contract of the almost $500,000,000, Austin has pissed away over $1,000,000,000.”
Green started and ran Goldman Sachs’ global Financial institutions business worldwide, with offices in New York, London and Tokyo. He also developed and worked with some of Goldman's largest clients including General Electric and AIG. Since leaving Wall Street, he has owned and been chairman of several companies.
Green said Austin has created an economic disaster with its foray in biomass.
“It gets worse, Austin Energy issued a revenue bond to raise the money,” he said. “That means that all of the revenue of Austin Energy is dedicated to pay off the 2019 bonds. There have to be limitations on any cash Austin Energy can send to its parent (the City of Austin) until the bonds are paid off.
Green noted that Austin and it extended service area are adding population. Given the limited access to the cash flow of its utility business, there is a very question: Will Austin Energy be able to meet the necessary capital expenditures to provide electricity and gas to a growing population base?