TXU TXU's 590-MW Sandow station will add a coal-fired unit by 2009.

In a reversal of business strategy that environmentalists hail as a huge victory, Dallas-based electric utility TXU Corp. suspended contracts to build eight 850-MW pulverized coal-fired powerplants and committed to explore non-carbon-emitting alternatives under terms of a $45-billion buyout by Kohlberg Kravis Roberts & Co. and Texas Pacific Group. Analysts say the move may foreshadow more difficulties for other coal-plant developers.

TXU will cancel the eight Texas projects, designed to use Powder River Basin coal, once its acquisition is completed. Construction had not begun on the eight units, the company says. Under the agreement, TXU will not apply for permits to build additional pulverized-coal-fired generation. Instead, the company will support a mandatory cap on carbon dioxide and market-based controls on greenhouse-gas emissions.

Only last year TXU inked contracts with Babcock & Wilcox Co., Barberton, Ohio, and Bechtel Corp., San Francisco, as part of a $10-billion program to boost its coal-fired capacity by 9,100 MW. TXU also set its sights on building 14,000 MW more outside the state. Bechtel was preparing a reference design for eight Texas locations and B&W was to supply the supercritical boilers and selective catalytic reduction systems for the units. “There will likely be some breakage costs on these contracts,” says Tom Kleckner, TXU spokesman. He declines to specify them.

Three Texas units still will proceed. Under an engineering, procurement and construction contract Bechtel is working on an $890-million, 581-MW, lignite-fueled fluidized-bed unit at the Sandow Steam Station, Rockdale. Fluor Corp., Irving, Texas, has an EPC contract for two 817-MW units for the new Oak Grove Station in Robertson County, expected to cost $2.3 billion. TXU expects litigation over Sandow to soon be resolved favorably and the Texas Commission on Environmental Quality to approve the Oak Grove units by midyear.

Environmental Defense and the Natural Resources Defense Council were involved in the negotiations and endorsed the merger, which they estimate would avoid 56 million tons of CO2 emissions per year. With sentiment for federal legislation growing, the decision by TXU’s buyers to reach out to the environmental groups is a “conclusion by the business community that it cannot ignore global warming and come up with a sound business strategy,” says Dave Hawkins, NRDC Climate Center director.

Financial analysts say the TXU event indicates a trend throughout the utility industry. “Lessons learned from TXU will have national implications,” says Eric Kane, Innovest Strategic Value Advisors, New York City. “Industry peers will face similar challenges as they move forward with expansion strategies that rely on new powerplants that utilize outdated, highly polluting pulverized-coal technology.”

As part of the buyout, TXU plans to increase its purchases of wind power to more than 1,500 MW and promote solar power with rebates. The merger would organize TXU’s wholesale power, development and construction businesses in a new company, Luminant Energy Co. TXU did not acknowledge plans to build any nuclear units to meet rising demand, and Hawkins says the option of new nuclear plants was “not part of conversations” NRDC had with the buyers.

Across the country, more than 100 pulverized-coal-fired units are on the drawing board, says Peter Altman, coal campaign director for the National Environmental Trust. Still, “We can expect other companies to reevaluate their plans and take precautions and engage stakeholders and investors,” Kane says.

The merger is subject to approval by TXU shareholders and state and federal regulators. TXU and its prospective buyers expect the sale to close later this year.