TVA's Paradise Fossil Plant is located near Drakesboro,Ky.

As TVA stokes its power plants with less coal, the federal utility is looking at generating more power from natural gas and building co-generation plants with local manufacturers.

TVA directors Thursday authorized the utility staff to negotiate a partnership with an unnamed manufacturer in the Tennessee Valley to build a $157 million co-generation steam plant. TVA President Bill Johnson also said the utility should soon decide whether it will replace its 55-year Allen Steam Plant in Memphis with a natural gas plant or other power source.

The power shift by America's biggest government utility comes three years after a settlement was reached with the U.S. Environmental Protection Agency for TVA to either shut down or install costly scrubbers on 18 of its oldest and dirtiest coal-fired units.

Since then, TVA has shut down its John Sevier plant in Northeast Tennessee and all but one unit at its Widows Creek Plant in northwest Alabama. TVA is planning to close more coal units at its Colbert plant in Alabama, the Johnsonville plant in Tennessee and the Paradise plant in Kentucky. TVA is studying the future of its Allen coal plant in Memphis and its Shawnee coal plant in Kentucky.

Allen, which operates three coal-fired units and 20 combustion turbines, must be either cleaned up or shut down by the end of 2018. The Memphis plant generates 702 megawatts of power, or enough to supply the power needs of a city the size of Chattanooga.

"We are evaluating internally various options -- scrubbing Allen, converting it to gas or other alternatives," Johnson said following the TVA's quarterly board meeting held Thursday in Memphis. "The public comment process will start in July and sometime this year a decision will be made. We are working diligently on this."

TVA Chairman Bill Sansom said board members toured Allen this week "to get a sense of the age and condition of the plant."

Johnson said installing scrubbers at Allen to cut sulfur dioxide emissions would likely cost several hundred million dollars. TVA is spending $1 billion to replace part of the Paradise Fossil Plant in Kentucky with a new natural gas combined cycle plant.

Johnson said TVA has land adjacent to its current Allen Steam Plant to build a new gas-fired plant. TVA officials said some type of generation will likely be needed to serve Memphis and West Tennessee, although other options are available, including a proposal from Clean Line Energy to import wind energy from Texas and Oklahoma.

TVA directors also voted Thursday to allow Johnson to negotiate with a local manufacturer about the terms of a co-generation power plant that could share steam and heat to generate power. TVA has similar co-generation facilities with Weyerhauser in Columbus, Miss., where electricity is produced from pulp and paper wastes and steam. At other facilities, TVA sells the excess heat generated from its own power plants to help local industry.

TVA Director Marilyn Brown, an ardent supporter of co-generation, said studies indicate the Tennessee Valley could capture up to a gigawatt of power from co-generation facilities across TVA's 7-state region.

TVA is positioned to invest in such technology because it is no longer bumping up against its debt ceiling, TVA Finance Chairman Peter Mahurin said. TVA's statutory debt is below $24 billion and on the decline and Mahurin said he is confident TVA can internally finance its expansions without worrying about exceeding its $30 billion debt cap set by Congress.

"This (co-generation project) is a perfect example of how our improved financial condition has put us in a condition to take the steps to do this," he said. "Because this involves business sensitive costs of manufacturing, confidentiality is needed during the negotiations period."

TVA officials declined to discuss the details of the proposed partnership, but Sansom said a similar proposal was rejected a few years ago because of concerns about TVA's high debt.

TVA is trimming its staff and operating budget because of a slowdown in power demand. TVA's move to new energy generation and conservation drew both praise and criticism from its customers during Thursday's board meeting.

Michael Watson, president of the Duck River power coop in Middle Tennessee, said his coop paid TVA an average 7.5 cents per kilowatthour of power purchased in calendar 2012. That was 13 percent above the national average for all power coops and placed TVA's wholesale power rates in the highest quartile for prices, according to a study of 2012 rates by the National Rural Utilities Cooperative Finance Corp.

Watson said a disproportionate share of 20,000 customers of Duck River live below the poverty level. "Higher energy costs hurt them the most," he said.

Watson said TVA President Bill Johnson "is on the direct track" to cut TVA annual operating and maintenance expenses by $500 million by 2015.

But Watson said he is worried that TVA may be closing too many coal-fired power plants to met future power demands. Watson said he worries that TVA's decision to shutter so many coal plants could prove costly for TVA, both in pushing up costs and in hurting TVA reliability.

Watson noted that winter temperatures in October 1985 pushed the temperature in Nashville to 17 degrees below zero.

"With all of the pending plant closings, will TVA be able to meet that demand in the future?" he asked.

But during a public listening session, environmental leaders praised TVA for shuttering old coal plants and urged TVA to do even more.

Jonathan Levenshus, the Tennessee campaign chairman of the Sierra Club's "Beyond Coal Campaign," said TVA is meeting its power demands with overall rates below the U.S. average by replacing coal with more renewable sources of power generation and through conservation and efficiency. Levenshus claims that coal could be completely phased out of TVA's power mix within the next 16 years. Already with future planned coal plant closings, TVA should be able to cut its carbon emissions by 40 percent by 2030.

"TVA is leading in this effort," said Stephen Smith, executive director of the Southern Alliance for Clean Energy. "TVA has proven that it can be done."

Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340.