Thursday, May 28, 2015

Kemper Plant Costs Mount

President Obama directed the EPA to create national CO2 emissions standards for new and existing power plants with the goal of requiring power plants to cut their CO2 emissions by 30% from 2005 levels or 18% from 2013 levels. In response, EPA proposed regulation for the existing power plants requiring reduction in power usage, and in the overall CO2 emitted by power plants. Though these regulation will reduce overall CO2 emissions of all the nations on earth by less than 1% and are not going to change the impact of CO2 on the climate, these regulations are expected to be implemented by executive order.

The approach the EPA is taking is to allocate to each state a CO2 limit, and require new coal-fired electrical generation turbines to meet a limit of 1,100 pounds of CO2 per megawatt-hour. Existing coal –fired electrical generation turbines emit about 2,080-2,180 pounds of CO2 per megawatt-hour of power produced. EPA was expected to propose CO2 limitations for existing power plants after demonstration of the commercial use of a kind of carbons capture and sequestration (CCS) technology called Transport Integrated Gasification (TRIG™) technology at a newly built power plant in Kemper County, Mississippi, but the plant has been plagued by delays and cost overruns. This TRIG technology was developed by Southern Company (the parent of Mississippi Power) and KBR in conjunction with the Department of Energy (DOE).

TRIG is a coal-gasification method designed to be cleaner (capturing 65% of CO2), cheaper and to work with lower rank coals like the Mississippi Lignite. However, the construction of this new technology plant has been besieged with problems and cost and timing overruns as details such as pipe thickness and metallurgy were miscalculated in the initial design. Originally, the project was estimated to cost $2.4 billion to build the 582,000 kilowatts plant that translated to $4,123 per kilowatt (before DOE grants and tax credits). Now, however, the Kemper plant is projected to be delayed another year until 2016 and to cost $6.2 billion or $10,653 per kilowatt, and the technology has not even been demonstrated to work on an industrial scale, yet.
From Kemper Plant Website

The Mississippi Public Service Commission (the state utility regulators) initially set a cap of $2.88 billion on costs that could be recaptured in the rate base in Mississippi and planned a series of rate increases of 24% in the cost of electricity over a number of years. Southern Company (and its shareholders) have already taken around $2 billion in charges to earnings, reducing the value of the company and its stock. Now it’s looking increasingly likely that the shareholders will pay for the rest of the shortfall and unlikely that another utility company will risk shareholder money on a similar project.

In February, the Mississippi Supreme Court found that the more than 18% electric rate increase previously implement as part of the planned 24% rate increase to cover the allowed costs of the Kemper plant was not justified and should be refunded. This decision nullified the Public Service Commission’s rate model that would have increased the rates 24% over the next few years in a controlled fashion. When that plan was nullified Southern Company notified the stat that it may have to increase rates 41% and set off a political storm in Mississippi where Public Utility Commissioners are elected. In April, the State Supreme Court agreed to rehear the case. It is anticipated that the Public Utility Commission rate model or a modified version will be reinstated.

Under the Public Service Commission’s model Southern Company, can only recover up to $3.8 billion for the Kemper costs through customer rates and the sale of securitized bonds. Customers began paying higher utility rates in 2013 with a further increase in 2014 for their power to Southern Company after the Kemper plant was allowed into the cost base after a lengthy regulatory battle. The EPA has described carbon capture and sequestration as an available technology that will increase the capital cost of every new coal plant built in the United States by only 35%, but the cost overruns at Kemper have almost tripled the cost of the plant and brought the cost of building a coal fired electrical turbine to about ten times the cost of a gas fired turbine.

Regulating CO2 emissions from power plants are all part of the President’s Climate Action Plan that addresses climate change using executive authorities. The EPA is the lead regulator of the plan to cut carbon pollution. Power plants are the largest concentrated source of emissions in the United States, accounting for roughly one-third of all domestic greenhouse gas emissions. The Energy Information Agency (EIA) most recent preliminary data through March 2015 show coal has generated 39% or more of the nation's electricity each month since November 2012, with natural gas fueling about 27% of generation during the same period. In 2012 natural gas had accounted for a larger share of power generation than in 2013, but fuel costs and power demand during the recent harsh winters increased the power generated by coal fired power plants.

Though the plant will be an economic and public relation disaster for Southern Company and its operating subsidiary, the Kemper plant will not be abandoned; it will be completed and will be operated. Southern Company and its shareholders (and possibly bond holders) will probably have to write off an the additional cost overruns, but the Kemper plant once it’s completed and running will have operational cost advantages. The plant is adjacent to a new coal mine with over 4 billion tons of lignite and near to old Mississippi oil fields. Lignite coal after drying out for three days is fine for the type of plant Southern is building and can supply the plant for centuries. The old oil fields offer an opportunity to sell the CO2 for enhanced oil recovery. Kemper’s pressurized and liquefied carbon dioxide will be used to enhance oil recovery and is estimated to increase oil production by 2 million barrels a year. Liquefied CO2 is valued at around $40 a ton right now and Kemper is projected to capture about 3-3.5 million tons a year.

The Kemper plant when it is finally completed will have a base coal-fired capacity of 524,000 kilowatts and natural gas capacity 58,000 kilowatts. The plant will capture 65% of total CO2 emissions resulting in 3-3.5 million tons per year of captured CO2 and reducing the CO2 emissions per megawatt to under 800 pounds if the plant performs as designed. The Kemper plant will also have fewer particulate, sulfur dioxide and mercury emissions than traditional pulverized coal plants making it the cleanest coal plant ever built.

The utility rate payers and shareholders will both share in the high cost of this project. It will probably fall to the company and its shareholders to write off an additional $1,400,000,000 or more in cost overruns (so far). Southern Mississippi Electric Cooperative has pulled out of their agreement to buy a portion of the plant due to delays as allowed under their contract. The cooperative stated that the cost of participation in the project have increased to the point that rate increase necessary for the cooperative members would be untenable. You and I threw in a little bit, too. Southern Company received a $270 million grant from the Department of Energy for the project and $133 million in investment tax credits approved by the Internal Revenue Service. Although by missing its projected deadline it will loses some of the tax benefits.
from Kemper Website

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