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As Coal’s Cost Soars, Lansing Warms to Clean Energy

Big utilities want to tie green mandates, incentives to reducing customer choice

February 29, 2008 | By Keith Schneider
Great Lakes Bulletin News Service

  Their soaring cost, and protests against the effects of techniques like mountaintop removal in West Virginia, are pushing big investors away from investing in new coal plants.

LANSING – Last September, as state lawmakers and Governor Jennifer M. Granholm grudgingly agreed to tax increases and program cuts to balance the state budget, Consumers Energy submitted a study to the Michigan Public Service Commission meant to justify construction of a big, new, coal-fired power plant near Bay City.

But the study seems to be having the opposite effect, because it found that the cost of the proposed 800-megawatt, coal-fired generating station—one of seven new plants proposed over the past year by various energy companies for Michigan—had more than doubled since its previous estimate, made last May. The report says the new plant will cost well over $2 billion, or more than $3,000 per kilowatt. And that was without the cost of the stringent federal and state carbon pollution controls that are anticipated as one response to global warming and climate change.

That study, and others like it, are helping to convince state lawmakers, regulators, and Wall Street lenders that such plants, far from helping to secure Michigan's power needs in the 21st century, could instead turn out to be an economic calamity for the state’s ratepayers.

The abrupt increase in Consumer’s projected costs reflects a much larger trend affecting the entire American utility industry, one that prompted Wall Street lenders to issue a nationwide warning earlier this month about financing new plants. Now the price rise and the warning are influencing what Michigan lawmakers and interest groups here believe is the biggest legislative debate of 2008: Whether Republicans and Democrats can agree on new state policy to encourage development of cleaner, more competitively priced sources of electricity.

All of a sudden, say lawmakers and energy specialists, alternative sources of energy look like a better economic bet for Michigan, a state that is urgently seeking new ways to employ its people and rebuild its badly damaged manufacturing sector for the emerging 21st-century economy.

The quickening debate, which began in earnest early last year, is still fraught with substantive complexities of supply and demand. It also has stirred the familiar ideological struggles over government mandates, regulation, free markets, whether global warming is for real—and the push by the state’s largest utilities to eliminate "customer choice"—the ability for ratepayers to buy their electricity elsewhere if the cost of power from new coal plants turns out to be as high as many are now predicting.

But lawmakers of both parties say that, sticking points aside, new data about the costs of coal and other sources of energy have made the Legislature more comfortable with alternatives. Some lawmakers now say that passing a comprehensive energy package is possible this year, perhaps by June—although Governor Granholm recently urged lawmakers to finish their work by the end of March or risk having an unnamed international company that she says wants to build five windmill factories in Michigan take their project elsewhere.

"There is some real momentum," for moving forward, said state Representative Howard Walker, a Republican from Traverse City. "It looks like the House wants to support renewable and cleaner energy. The process is led by the speaker of the House and the chairman of the House Energy and Technology Committee. And the Senate has been working on it too; they’re holding hearings."

Renewable Interest
That is a development that two other important players who are often at odds—the Michigan Environmental Council and the Michigan Chamber of Commerce—also say they want to see.

"I am confident that we are going to see a real good effort by the Legislature to try and encourage new options, including energy efficiency and renewable energy," said Douglas Roberts Jr., the director of environmental and energy policy at the Michigan Chamber of Commerce. "People recognize it's needed for Michigan to compete with other states that are already doing this. And there is a sense here that the Legislature needs to show voters they can work together to solve this state's important problems."

On February 18, Democratic House Speaker Andy Dillon, of Wayne County, tried to do that. He brought together four lawmakers and 20 representatives of key interest groups for more than 10 hours of negotiations on the four major provisions of a comprehensive energy proposal—mandates for more renewable energy, restrictions on customer choice, incentives for utilities to encourage energy efficiency, and requirements that utilities justify their proposals for new power plants.

The most important proposal would require Michigan to generate 10 percent of its power from renewable sources of energy by 2015, said participants. The state generates a little more than 3 percent of its energy from renewable sources today, most of it from hydropower dams.

Such a "renewable portfolio standard," which more than 20 other states have passed, is the core of Governor Granholm's new economic development strategy. She and others assert that the standard would open a market for wind and solar energy that could prompt a new manufacturing and service sector boom generating thousands of new jobs in the state. Michigan has more than enough wind along the Great Lakes shoreline and inland, says a study by the Land Policy Institute at Michigan State University, to power 1,500 to 3,000 new windmills, and generate 3,000 megawatts of power—enough to power as many as 900,000 households when they are all operating.

"I don't think anybody is going to focus on us until we get serious about getting our renewable portfolio standard," Governor Granholm told the Lansing State Journal editorial board in early February. "How do we say as a state we are really in the game if we aren't even committed to using a percentage of our energy or our fuel from renewable resources?"

But detractors, including some environmentally minded residents, worry about the effects of so many new windmills on birds, scenic views, and the quality of rural life. Business groups worry that local debates over siting the new mills will be arduous and drive up costs. Republican lawmakers, meanwhile, don't like the idea of government intruding in the market.

Several officials in the Granholm administration said in interviews that they are sensitive to the grassroots anxiety, and are launching public education initiatives to reduce it. But they also noted that utilities and wind developers have already leased over 100,000 acres of land in Michigan, most of it pasture and crop land, to build new windmills in the state. That means that farmers and other large landowners will be important allies in rural townships to coax officials to grant operating permits.

Less Consumer Protection, but More Efficiency
Another key provision, requested by large utilities, would change Michigan's eight-year-old law that gave businesses, and manufacturers the opportunity to look for lower prices. Consumers Energy, conscious of just how expensive its proposed coal plant is becoming, is one of several large utilities that want to force most residents living within their own service areas to buy their power.

The provision is drawing opposition from some Republican lawmakers wedded to the idea of a free market and from progressive Democrats interested in consumer protection. Mr. Roberts, of the Chamber of Commerce, explained that those at Speaker Dillon's meeting talked about giving just 10 percent of customers the choice to seek lower electricity rates outside of their service districts.

The two other major provisions of Speaker Dillon’s package would promote energy efficiency and require large utilities to submit planning documents to the state that thoroughly explain and justify why any new coal-powered plant should be built. Neither provision, as yet, is as controversial as the first two, but neither bodes well for proposals to build new coal plants in Michigan.

The requirement for utilities to prepare "integrated resource plans," initially proposed by the Michigan Environmental Council and now embraced by the Granholm administration, is already becoming a prerequisite of many financial companies, which are becoming more wary about loaning money to build increasingly expensive new coal plants.

"Before the recent run-up in construction costs, wind-generated electricity was already cost-competitive with electricity produced in a brand-new coal-powered generating plant," said Tom Stanton, coordinator of the MPSC's Michigan Renewable Energy Program. "Because of growing concerns regarding air pollution and global climate change, Michigan could soon see the day, if it hasn’t already, when it just won't be practical to build a big new coal-fired plant here."

Who Needs It?
Indeed, the energy market in Michigan is changing quickly, according to the MPSC. A year ago, at the request of Governor Granholm, the commission’s then-chairman, J. Peter Lark, delivered Michigan’s 21st Century Electric Energy Plan, which said energy demand would continue to rise at about 1.2 percent a year.

The report also noted that Michigan's 20 big coal-powered generating stations were among the nation's oldest and needed to be replaced, and that at least one new coal plant was necessary. Utilities and cooperatives that have proposed seven new coal-powered plants for the state over the last year have used that report to justify their plans.

But the report and Michigan’s "coal rush" have drawn sharp criticism from citizen groups who say the plants are unneeded, would increase global warming, and push up energy prices because they are so expensive.

The critics seem to be having some effect in Lansing: At the direction of Orjiakor Isiogu, the new chairman of the MPSC, Mr. Stanton and other commission staff members are updating their agency’s demand estimate.

Meanwhile, the Edison Foundation, a Washington-based research group, recently assessed the state's declining population and shrinking manufacturing sector. The foundation predicted that electricity demand in Michigan would not grow at all over the next few years.

Electricity demand, said Mr. Stanton, may well decline during this decade, as it did in the 1970s and 1980s as recession and new energy conservation and efficiency measures took hold. The new forecasts of falling electricity demand forecasts are buttressed by those from several other Michigan utilities, which in various filings with the MPSC have predicted that the state's economic growth would retreat to well under 1 percent annually this year, a third of the rate of growth as recently as 2005.

Keith Schneider, a nationally known writer and producer, is the director of communications at the Apollo Alliance, a national coalition of labor, green, and business groups, based in San Francisco, that advocates new policies to advance the clean energy economy. Keith founded the Michigan Land Use Institute in 1995 and served as executive director and in other senior positions until September 2007. Reach him at keith@mlui.org, and read his blog, Mode Shift.

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