MGM Resorts International created a stir late last month when it provided notice to the Nevada Public Utilities Commission that it would exit the grid and begin sourcing its own power in order to meet ambitious clean energy targets. The transaction involves a one-time $86.9M payment to offset Nevada Power’s “stranded costs” resulting from the decision (see Utility Dive’s story for more). But what does this decision say about MGM’s expectations for the clean energy future?
While I have no inside knowledge of MGM’s forecast, a little back-of-the-envelope math provides some interesting insights. According to NV Energy’s FERC filings, their annual power revenue is a bit over $2.3 billion. As reported in the Utility Dive story, MGM accounts for 4.86% of NV Energy sales, or approximately $112.5 million annually – which means that MGM is willingly paying a penalty of almost their entire annual electricity budget to exit the grid!
But of course, MGM must be looking at the present value of their expected electricity costs with NV Energy versus what they expect to be able to do on their own. A quick search turned up MGM’s current weighted average cost of capital, 8.61%, which means that they expect to be able to save at least an average of $4.2 million a year (or 3.75%) on their energy needs on their own.
This cursory analysis makes a lot of assumptions. For instance, MGM could be expecting no savings short-term, but higher savings down the road. Or vice-versa. The blunt instrument of the perpetuity formula provides no insight there. But what is clear is that MGM not only believes that they can accelerate their adoption of carbon-free electricity, but that they can save a significant amount of money in doing so – despite the substantial grid exit penalty.
While I’m sure NV Energy is doing some soul-searching right now, this should serve as a clarion call to utility executives across the country that the winds of change are no longer a gentle breeze, but rather a derecho stirring up cleaner and cheaper alternatives to their service.