Advocates warn APS natural gas build-out could expose ratepayers to global price shocks

A joint report by the Sierra Club and Synapse Energy Economics says APS could be locking customers into higher and less predictable rates as it seeks to nearly double natural gas supplies on its system, mostly to serve data centers.

Since 2023, APS has added several new planned natural gas plants, representing 4.6 gigawatts of new supply by 2030, the report says. That’s enough energy to power roughly 3 million homes.

Sandy Bahr, president of the Sierra Club’s Grand Canyon chapter, says it’s a clear departure from the renewable energy goals the utility once had.

“Several years ago, it actually appeared that we had turned a corner. That the regulators were supportive of a clean energy transition, as it was again cheaper, and utilities like APS had announced some voluntary goals,” Bahr said.

Last year, she says, APS repealed its voluntary 2030 and 2050 clean energy commitments. She worries it is tied to a sudden rise in load growth among a single customer class.

In a statement to KJZZ, an APS spokesperson said Arizona is seeing significant population and energy demand growth that no single resource can meet. APS has told KJZZ it has committed 4 gigawatts of new power to data centers.

By increasing its reliance on natural gas, the Sierra Club report warns APS is exposing ratepayers to higher price volatility. The authors used examples from Winter Storm Uri in 2021 and the Russian invasion of Ukraine — both of which temporarily sent natural gas prices soaring — to demonstrate this risk.

In a worse case scenario, they say APS gas expenditures could exceed $431 million, which would increase average residential bills by $9 more a month.

In a statement to KJZZ, an APS spokesperson said the utility closely evaluates uncertainties and market risks when determining which resources offer the most reliable and affordable generation.

Rather than relying on natural gas, the Sierra Club says APS could look at using longer-duration batteries, energy efficiency measures like demand response or virtual power plants, to manage growth and satisfy peak demands on the system.

But APS says natural gas continues to be critical to maintaining reliability because it helps meet demand when solar and wind aren’t available. “As customer demand, technology performance, resource costs, and federal incentives evolve over time, the mix of resources that best serves customers may evolve as well,” wrote an APS spokesperson.

The Sierra Club says data center customers have promised to pay for new natural gas plants, but gas pipelines and fuel costs are borne by all. Though, they warn data center customers tend to enter 15-year contracts, while it typically takes 40 years to pay off a new plant.

APS says this is inaccurate. In a statement to KJZZ, an APS spokesperson said the utility has proposed new cost allocation methods which directly assign the costs associated with large customers, including fuel and fuel transportation, to large customers. This proposal still needs approval from the Arizona Corporation Commission.

Speaking during a briefing, Elspeth McGarvey, a principal associate for Synapse and author of the report, said APS currently has a power supply adjustment clause that allows them to recover 100% of their fuel purchase costs from ratepayers

“As such, APS is lacking incentive to manage fuel cost risk,” said McGarvey.

To provide that incentive, the authors say Arizona could adopt a fuel-cost sharing mechanism, as nine other states in the U.S. have. This basically means that utilities are expected to bear at least some of the increase in fuel prices themselves, rather than putting it all onto the rate base.

“Requiring utilities to share a portion of fuel risk provides incentive for the utility to take steps like reducing reliance on fuel-dependent power plants, and improving operating efficiencies of fuel-dependent power plants, and managing fuel procurements more actively,” McGarvey said.

The authors said about 5% of ratepayers’ bills today go toward purchasing fuel for natural gas plants. They say every cent matters, as APS is requesting a 14% increase on residential rates, the third increase APS has sought in five years.