As the Great Recession sunk its teeth into the U.S., bursting Las Vegas’ housing bubble along the way, MGM Resorts looked into building a large solar array on one of their multiple properties along the Strip.
The company explored seven different partners for the project, including the state power utility, NV Energy. But the utility couldn’t provide the adaptability the casino company desired, according to MGM Resorts Chief Sustainability Officer Cindy Ortega. There was disagreement over control and cost of the equipment, and once installed the solar array would be permanent.
“They couldn’t make it flexible,” Ortega says. “They said we couldn’t take it down, and they wouldn’t take it down, no matter the price we paid them in the future.” MGM Resorts found a different partner, and after five years of planning and 18 months of construction, they inaugurated their array at Mandalay Bay in 2013.
Three years later, the casino company—which operates 10 properties on the Strip—has once again decided it would like more flexibility and control over its own power supply. MGM Resorts is leaving NV Energy, paying nearly $87 million as an exit fee for the right to purchase its electricity elsewhere. They’re joined by Wynn Resorts, which operates the Wynn and Encore and will pay approximately $17 million to exit. The casino companies are placing their bets on investments in renewable energy and purchasing their electricity on the open market via a partnered broker.
The casino’s moves highlight a growing predicament for power companies. While corporations are motivated to “go green,” their push to be more energy efficient leaves the utility with less revenue to maintain the grid and can lead to rate increases. This can cause what energy market observers call the “death spiral.”
“If people are consuming less electricity, revenue for the company is going down, so they raise rates on others. That forces more of them to defect.” says Bill Ellard, an energy consultant and chair of economics for the American Solar Energy Society.
“Soon, they won’t have enough money to keep gear, power lines, transmission stations working,” Ellard adds. “We have an old, ancient grid. A lot of power companies are just duct-taping and band-aiding things. Now monopolies like NV Energy are competing with free market innovation, and innovation is not their mantra. You don’t have to innovate when you’re a monopoly.”
Meanwhile, corporations that have the wherewithal to move forward without the utility are doing so. This year, MGM expanded the solar array at Mandalay Bay Resort and Casino, making it one of the largest rooftop systems in the country. The 8.3 megawatt array can power the equivalent of 1,340 single-family homes, and can handle up to 25 percent of Mandalay Bay’s energy needs when fully active during the day.
Stability vs. Sustainability
NV Energy, the state-regulated energy monopoly, has to serve a diverse group of energy users and makes plans on how to meet demand years in advance.
Confronted with increased use of solar power as the systems become more affordable, the company has moved to stabilize revenue. Earlier this year, NV Energy decreased the amount it pays residential owners of solar arrays for excess electricity they send into the grid, causing a public outcry. Eventually existing solar users were grandfathered into the original rate.
“The utilities are not negative on solar, they are negative on you controlling your own electricity,” Ellard says.
The casino companies, which host numerous conventions each year, see sustainability as a selling point, and energy savings as a boon to their bottom line.
“Sustainability has become a real factor in where companies do business,” Ortega says. “Companies committed to the environment want to do business with like minded companies. The solar array was one of the tangible initiatives we undertook to be leaders in the area.”
At the big casinos, small efficiencies can lead to huge savings. MGM has reduced its energy consumption by 11 percent through various initiatives, such as replacing 1.3 million old light bulbs with LED versions, saving $10 million per year on its power bill.
“Casinos are incredibly energy intensive and run 24/7, so they’re an ideal customer,” says Frank Felder, director of the Center for Energy, Economic & Environmental Policy at Rutgers University. “Power has to be a large part of their operating expenses, so even a small savings on electricity makes a big difference. That’s what is underlying the trend.”
Indeed, MGM found that despite the hefty exit fee, the numbers added up to an exit.
“If we elect to, this allows us to secure electricity in fixed prices for a longer period of time than the utility allowed,” Ortega says. “It also allows us to be creative around the procurement of renewable energy.”
A Political Negotiation
Because of the high stakes for everyone involved, the exit process—controlled by the Nevada State Public Utilities Commission—became contentious. Under Nevada law, the companies can decide to purchase their electricity elsewhere, but must first pay an exit fee to stave off rate hikes for the remaining customers. While MGM and Wynn will buy their electricity from a brokerage, they still need to use NV Energy’s transmission lines and other equipment, and will remain customers of the utility in that regard.
NV Energy, which did not return requests for comment, argues that it has to make investments in equipment and energy resources based on what it predicts demand will be over time. If a large customer leaves, the utility is still stuck with the additional infrastructure.
“I doubt there is a standard way to calculate the exit fee. It’s really a political negotiation for the large customers,” Felder says. “They are looking at the investment the utility made expecting that company to be a customer. Otherwise the utility is left hanging and recovers that from the ratepayers. But determining how much that cost to customers is contains so many degrees of freedom.”
Wynn and MGM originally petitioned the PUC in May 2015, along with the Sands Corporation, which operates two resorts on the Strip. The Sands eventually decided to stay with NV Energy after seeing the exit fee.
For MGM Resorts, which represents nearly 5 percent of the power NV Energy sells, the exit fee was pegged at approximately $87 million. Wynn, which accounts for just less than 1 percent of electricity sold, will pay about $17 million.
Both the Wynn and MGM Resorts complained the exit fee was too high. NV Energy is owned by Nebraska-based Berkshire Hathaway Energy. Wynn Resorts argued the PUC was protecting the profits of an out-of-state company and not the utility’s customers. While MGM Resorts eventually decided to accept the PUC’s decision, Wynn took the issue to court, alleging the PUC “simply made up rules” to frustrate attempts to leave the service.
The lawsuit was eventually tabled, and Wynn has indicated it will pay the exit fee. Despite not yet having a solar array for its properties, the corporation decided leaving was the best business move.
More Could Defect
With MGM and Wynn leaving NV Energy, other companies are looking into exiting as well.
Switch, a large data storage company, previously applied to leave NV Energy with plans to contract for a large solar array. The PUC denied the application, and Switch was eventually convinced to partner with NV Energy on the solar array.
Now, Switch says NV Energy engaged in deceptive practices and wants a Nevada court to rescind the settlement and allow Switch to exit. The lawsuit contends Switch “suffered monetary damages in excess of $30 million, has been required to pay [NV Energy] increased costs for renewable energy and has been deprived of its statutory and constitutional rights.”
The City of Las Vegas has set the ambitious goal of powering all municipal buildings and many other public areas with 100 percent renewable energy by 2017. It too must get PUC approval for its plan though, and the commission has mandated the city purchase the bulk of its electricity from one of NV Energy’s solar facilities.
Adding to the instability for NV Energy, there is an initiative on the November ballot to deregulate the energy market, allowing residential customers to shop around and also sell the electricity they produce themselves.
“I think we’ll see a lot more companies exit the utility market in the coming years,” Ellard says. “What if they lost 10 customers of that size? They could lose 20 percent of revenue in a couple years, and they’d have a hard time paying their bills.”
The next war, Ellard adds, will be over exit fees. “Tesla, Google, Apple or some other company will invent smart storage solutions, maybe even onsite power generation,” he says. “It will start with industrial customers who will leave the grid, and generating your own electricity will become more and more popular.”