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Will Coal's Business Crisis Sink Rogers City Plant?

Widespread cost overruns, falling gas prices, slowing demand pose threats

December 8, 2011 | By Jim Dulzo
and Frank Zaski
Great Lakes Bulletin News Service

Megan Rice/Sierra Club
  Consumers Energy’s cancellation of plans to build a new coal plant in its Karn Weadock complex is another example of the failing economics of such projects.

Although two national environmental groups are now in state court trying to stop a proposed Rogers City coal plant, it may be economics, not state and federal laws, that kills the project. 

The two groups—Sierra Club and the National Resources Defense Council—have petitioned the Ingham County Circuit Court to cancel the state’s permit for Wolverine Power Supply Cooperative’s proposed 600-MW coal-fired plant.

But last week another Michigan utility, Consumers Energy, which received a state permit for building its own new coal plant near Bay City two years ago, cancelled the project, citing supply, demand, and cost issues. The utility joined a long list of others, many in the Midwest, that have seen their business cases for building new coal plants collapse.

Consumers not only killed its proposed 830-MW plant. It also said it would close seven other, old plants by 2015. Company officials blamed the marketplace: energy demand is growing very slowly, while falling natural gas prices make less-polluting, gas-fired generation cheaper than new coal.

"It would have been great if we could have built the $2 billion-plus coal plant in Bay County, but the market conditions right now tell us that doesn't make sense," David Mengebier, a company vice president, told The Saginaw News. "It's much less economically attractive."

The same economics that forced Consumers’ hand are affecting energy companies across the Midwest—and even closed a brand-new coal plant in North Dakota last week, before it sold its first kilowatt. Wolverine’s critics have long warned that the same kind of thing could happen to the Rogers City plant because, they say, its demand projections are unrealistic.

While coal critics acknowledge that the recession is slowing energy demand, they also point to another cause: Big companies, small businesses, and thrifty homeowners are becoming more efficient.

That trend continued this year, and will likely increase, due to efficiency mandates in dozens of states, American Recovery and Reconstruction Act investments in home efficiency, and a new, self-financing efficiency program for businesses and government announced last week by President Barack Obama and former President Bill Clinton.

Also challenging the business of new coal power is the soaring cost of plant construction and operation. Recent cost overruns at many new plants suggest that Wolverine’s original, 2006, price tag of slightly over $1 billion for its Rogers City project is too low.

Coal power’s regulatory costs are growing, too, due to the U.S. Environmental Protection Agency’s steady tightening of coal plant air pollution rules for greenhouse gases, “cross-state” emissions, particulate emissions and, on Dec. 16, mercury and other air toxics. The Sierra/NRDC litigation points to some of these rule changes and argues that Wolverine’s air permit does not properly meet them.

A hint about whether these developments are affecting Wolverine officials’ thinking emerged on Oct. 28, during the annual membership meeting of Presque Isle Electric & Gas Co-op. PIE&G is a partial Wolverine owner and contracted to buy its power.

According to several members who attended the meeting, Wolverine President Eric Baker and PIE&G President Brian Burns said that if estimates for the Rogers City plant reach $2.5 billion, as some critics predict; or if it would boost average monthly residential bills by $76, as state regulators predict, they would kill it.

A steady stream of cost overruns at recently or almost-completed Midwestern coal plants, as well as the steadily rising cost of coal itself, suggest that Wolverine officials may be forced to keep their promise.

Over Budget
The starkest example yet of new coal’s bleak business landscape surfaced last month, 85 miles west of Fargo, N.D.

That’s where Great River Energy, the state’s second-largest utility, mothballed its brand-new, 99-MW, Spiritwood Station coal plant. GRE, which, like Wolverine, is owned by a consortium of co-ops, spent $437 million on the plant—a 58 percent increase over the original, $277 million estimate.

The higher cost, combined with falling energy demand, reduced energy prices, and cancellation of a steam-purchase contract sunk the project. GRE will pay $30 million a year for plant maintenance and financing, and hopes to start the facility in 2013 if it can build an ethanol plant nearby to buy Spiritwood’s steam.

An even larger cost overrun occurred in Marissa, Ill., where Peabody Energy Corporation, one of the world’s largest coal companies, is leading the construction of the 1,600-MW Prairie State Energy Campus.

The proposed plant’s price was $2 billion in 2001. By last month, according to The Chicago Tribune, the estimated cost had risen to $5 billion—a 150 percent increase.

Officials blamed the latest price spike on tightening environmental regulations. Whatever the cause, customers of the eight public utilities that signed 28-year contracts with Peabody will pay significantly higher monthly electric bills.

In Edwardsport, Ind., Duke Energy’s proposed 630-MW plant, which uses advanced, much cleaner coal-gasification technology, is also enduring a serious cost overrun. Over four years, according to indystar.com, the project’s price tag rose from $1.87 billion to $2.98 billion—a 59 percent increase.

The plant should be completed next year, and Duke has already asked for a rate increase to cover its costs. The Indiana Office of Utility Consumer Counselor is recommending that state regulators deny the request.

And Kansas City Power & Light’s new, 850-MW Iatan 2 coal plant, which began operating late last year, cost almost twice its original $1 billion estimate, according to an analyst hired by utility regulators to evaluate the project. The Seattle Times reported in that KCP&L’s next rate increase would complete the doubling of its customers’ bills over a four-year period.

Michigan has not escaped the high cost of coal. Wisconsin Energy’s new Oak Creek plant now powers thousands of Upper Peninsula homes. It came in 8.7 percent over budget, and initial rate increases are already squeezing thousands of Michigan customers. If WE gets all the rate increases it wants, customers’ bills will rise by an average total of $17 a month.

Pricier Coal, Cheaper Gas
Both new and old coal plants face another challenge to their bottom lines: the price of coal is rising, while the price of natural gas is falling.

Nationally, the price spike in coal is a significant one; in Michigan, however, it borders on ruinous.

According to the federal Energy Information Administration, the average national price for delivered coal increased by 54 percent between March 2005 and March 2011—triple the inflation rate. 

Michigan’s numbers are even more daunting; in those same six years, the state’s average price of delivered coal increased by 84 percent.

Both spikes are largely due to oil-dependent transportation costs, but those costs hit Michigan unusually hard. That is because coal bound for Michigan takes a circuitous route—by train and often freighter from Western states, around and across Lakes Michigan and Superior.

The cost trend accelerated over the last year: Between July 2010 and July 2011, while the price of coal delivered to other Midwestern states rose between 4 and 18 percent, in Michigan it rose by 43 percent.

Another factor—a 20 percent fall in worker productivity in American coalfields—threatens all coal plants, not just Michigan’s. The decline is putting additional upward pressure on coal prices.

Meanwhile, natural gas-fired power plants are becoming more attractive investments. Gas plants are cheaper to build than coal plants, and the price of natural gas is falling, due largely to the controversial extraction process known as “fracking.”

The EPA is now working on the federal government’s first-ever fracking regulations, which escaped rulemaking during the Bush administration. Some executives in the natural gas industry, eager to cash in on the gigantic new supply that the advanced technology could unlock, claim their industry is ready to cooperate and eliminate fracking’s potential—and demonstrated—ability to seriously harm water supplies.

Growing Efficiency, not Demand
Meanwhile, ongoing developments in the state, federal, and private arenas indicate that, even as the country works its way out of the current recession, the growth in energy demand will continue to slow.

Twenty-nine states, including Michigan, now have either mandatory or voluntary energy efficiency goals for their power companies.

Developments in California, the nation’s longtime efficiency policy leader, demonstrate how much energy-saving mandates can accomplish. Per capita energy use in the state is practically unchanged from the mid-1970s, when it launched its efficiency policies, while, nationally, per capita demand has almost doubled.

Similar efforts are now spreading out across the country. President Barack Obama’s American Recovery and Reconstruction Act is investing $11 billion in home efficiency measures, including weatherization and Energy Star appliances.

Last week, Mr. Obama and former President Bill Clinton announced a public-private initiative that aims to cut energy use by the federal government and 60 major corporations, large municipalities, universities, and other institutions by 20 percent, by 2020. The program will employ “Energy Saving Performance Contracts,” which use the savings from lower energy bills to pay for improvements in federal and privately owned buildings.

Last week’s report from the Michigan Public Service Commission about utility-drive efficiency programs in the state indicate that the efficiency is starting to work well here.

According to a Dec. 1 commission release, “…overall, 2010 EO (utility energy optimization) program savings achieved for electric utilities was 148 percent of the target.”

"The energy efficiency programs offered by Michigan's electric and natural gas utilities are exceeding expectations," noted MPSC Chairman John D. Quackenbush.

The release adds that efficiency requirements for the state’s utilities are “…designed to delay the need for construction of new electric generating facilities and thereby protect consumers from incurring the costs of such construction.”

Jim Dulzo is the Michigan Land Use Institute’s senior editor; he reports regularly on clean energy developments in the state. Reach him at jimdulzo@mlui.org. Frank Zaski is a former member of Michigan’s 21st-Century Energy Plan Energy Efficiency Work Group, the Michigan Climate Action Committee, and the Midwest Governor's Association Renewable Energy Advisory Group.

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