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Study: Rogers City Plant Flunks “Prudent and Feasible” Test

Firm says Wolverine ignores financial risks, efficiency, and cleaner sources

July 21, 2009 | By Glenn Puit
Great Lakes Bulletin News Service

  Many energy experts say that renewable energy sources, high-efficiency appliances, and energy conservation would eliminate the need for new coal plants.
Data submitted to the state by Wolverine Power Cooperative concerning its proposed Rogers City coal plant is deeply flawed, according to a national firm that consults on energy, economic, and environmental topics.

The firm, Synapse Energy Economics Inc., issued a detailed critique of the numbers in the massive, 500-page Electric Generation Alternatives Analysis Wolverine submitted to state regulators in June. Synapse says that Wolverine badly underestimated the cost of building and operating its proposed coal plant and significantly overestimated the cost of using more wind energy, energy efficiency, and natural gas to meet its customers’ needs.

Synapse, which sent its critique to the state as a public comment on Wolverine’s alternatives analysis, concludes that the coal plant would be a very risky investment for the co-op and its members.

Wolverine provided its analysis to the Michigan Department of Environmental Quality in response to Michigan Governor Jennifer M. Granholm’s order in February that utilities proposing new coal plants must prove that they need the new electricity and that burning coal is the most “prudent and feasible” way to provide it.

The governor invoked a new state law and the federal Clean Air Act to require the analysis. She said she did it because the state needed to look more closely at Michigan’s coal rush—a push to build as many as eight new coal plants in the state at a time of steadily declining energy demand.

Ms. Granholm said at the time that new state renewable energy and energy efficiency mandates and her administration’s own regulatory moves—meant to create tens of thousands of new, green manufacturing jobs in the state—would cut electricity demand substantially in coming years. That she asserted, meant that the state should consider the proposed plants from both an economic and an environmental point of view.

Both Wolverine and Consumers Energy, the other Michigan utility that is currently pursuing a permit for a new coal plant, filed their responses to the governor’s order, and an MDEQ letter requesting them, in early June. Synapse’s 41-page comment on the Wolverine proposal—commissioned by a number of national citizen organizations that oppose Michigan’s coal rush, including the Sierra Club, Clean Water Action, and the Environmental Law and Policy Center—uses the company’s and the state’s own statistics to argue that the Rogers City plant makes neither economic nor environmental sense.

“If there are less polluting feasible and prudent alternatives, the proposed project cannot move forward,” wrote Faith Bugel, a senior attorney for ELPC, in a letter to the state that accompanied the Synapse report. The letter, which was written on behalf of 12 national, statewide, and local citizen groups, including the Michigan Land Use Institute, asserts that there are better alternatives and urges MDEQ to deny the utility the state “Permit to Install” that it applied for early last year.

MDEQ, which said it will make a final decision on Wolverine’s requested permit before the end of 2009, is accepting written public comments until Aug. 17 on whether the plant is needed and meets the “prudent and feasible” requirement in state and federal law.

Risky Business
According to its own estimate, Wolverine has so far spent $20 million of its members’ money on planning, promoting, and applying for permits for the coal plant. However, the power supply cooperative, which is owned by and distributes electricity to four retail co-ops in northern Lower Michigan, routinely declines to speak to the Great Lakes Bulletin News Service about its controversial project.

The utility often publicly claims it needs the coal plant because growing demand for electricity will make it difficult to sign long-term power supply contracts with generating companies that currently send Wolverine electricity that the firm then distributes to its retail co-ops. Wolverine also argues that the best way to produce electricity in northern Michigan is by burning coal, because it is the cheapest energy source and makes the most sense financially.

Yet when Synapse studied Wolverine’s analysis, it said it found significant flaws in those arguments. The Massachusetts-based firm—which services federal, state, and local governments; private and public energy companies; law firms; consumers groups; and environmental organizations—said that Wolverine low-balled construction costs and failed to fully investigate the actual costs of renewables, particularly wind power.

Synapse also said that Wolverine is engaging in a “risky strategy” for its ratepayers by betting there will be enough demand for the energy it generates from its coal plant.

“From what we have seen...it appears that Wolverine’s planning practices are poor or imprudent, and do not reflect typical industry practices,” Synapse reported. “This increases the risks for Wolverines’ members and their customers.”

Under state law, Wolverine’s customers—essentially the members of the four retail co-ops that it serves—are responsible for paying for the proposed plant, initially estimated to cost $1.3 billion, whether or not it can sell enough electricity to balance the books.

Synapse warned that Wolverine should take note of the lessons learned by Vermont Electric Cooperative in the 1970s. VEC borrowed heavily to invest in a number of proposed power plants to secure more base-load energy—electricity generated by continuously operating power plants—than the cooperative actually needed.

“VEC planned to use some of that capacity from these facilities to make off-system sales to other cooperatives and to private utilities in the Northeast,” Synapse said. “However, the costs to build the plants rose significantly and the projected loads did not materialize. As a result, VEC entered bankruptcy in the mid-1990s.”

Synapse said that Wolverine also used a low construction cost estimate for its proposed plant, which biased its cost analyses in favor of coal. Wolverine, it said, provided construction cost numbers that simply don’t match the estimates for other coal plants that use circulating fluidized bed (CFB) boilers.

“Wolverine’s estimated cost for the proposed Rogers City project is significantly lower than the costs of other recently proposed CFB plants,” Synapse said. “Wolverine has claimed that there are a number of site-specific factors that would reduce the construction costs of its proposed CFB, but these claims are simply not credible.

“The main factor that has led to escalating coal plant construction costs are the world competition for power plant design and construction resources,” the report continues. “It is unreasonable to expect that Wolverine, a relatively inexperienced power plant builder, will be able to avoid cost increases that have affected more experienced power plant builders and operators like Dominion, Duke Power, Alliant Energy, and Consumers Energy.”

Synapse also criticized Wolverine’s “least-cost planning analyses” for only considering natural gas and coal. The utility’s modeling did not reflect use of wind or solar, aggressive energy efficiency measures, or purchases of energy from the state’s existing natural gas-fired plants, which Synapse said are idle much of the time.

“Unfortunately, Wolverine relies on spreadsheet analyses instead of the state-of-the-art capacity expansion and production simulation models used for resource planning by the overwhelming majority of other utilities,” Synapse wrote.

Synapse also said that a huge flaw in Wolverine’s analysis was its failure to adequately estimate what additional costs burning coal will impose when the federal government begins regulating carbon emissions, most likely through a so-called “cap and trade” program. Synapse says that Wolverine failed to include a cost for CO2 emissions in most of its financial analyses and cost comparisons with renewables.

“Before it is granted an air permit for Rogers City, a plant that may emit more than 4.5 million tons of CO2 each year for an expected 60-year operating life, Wolverine should be required to produce a plan demonstrating how it will meet the overall emissions levels that will be consistent with the national caps being considered by the federal government,” Synapse wrote.

Repeated Warnings
Wolverine unveiled its plan for a Rogers City coal plant in May 2006, well before the national economic collapse, but at a time when Michigan’s economy was clearly in trouble.

Since then, the company has drawn sharp criticism for insisting that electricity demand will continue to rise in Michigan. In contrast, Michigan’s two largest utilities--DTE Energy and Consumers Energy--now estimate that demand in their markets will decline at least through the middle of the next decade. Meanwhile, new renewable energy standards, efficiency mandates, and weatherization programs that Michigan is now activating promise to reduce that demand even further.

News reports from other parts of the country also indicate that utilities are running into sharp cost increases for their proposed new coal plants, challenging the assertion that new coal power is the cheapest, most cost-efficient approach to meeting energy demand.

Examples are legion: Duke Energy Carolina’s Cliffside coal plant project saw its costs increase by 80 percent between the summer of 2006 and June 2007. The projected construction costs of Wisconsin Power & Light’s now-cancelled Nelson Dewey 3 coal plant increased by 47 percent between February 2006 and September 2008. The estimated cost of AM-Ohio’s proposed Meigs County Coal Plant nearly tripled in the three years between October 2005 and 2008. Here in Michigan, cost estimates for the proposed Consumers Energy Karn-Weadock coal plant have increased by 32 percent.

In all, 100 of the approximately 150 new coal-fired power plants that were on drawing boards across the country several years ago have been cancelled, largely due to the burgeoning financial problems the proposals faced.

But, as the Synapse report points out, Wolverine argues that it can keep a lid on costs in a way that still make a coal plant more financially favorable than wind power. Renewable energy advocates sharply disagree, saying that wind, solar, other renewables, energy efficiency, and a general move toward so-called “smart grids” and “distributed generation” make plans for a coal plant in Rogers City obsolete.

Meanwhile, financial experts nationwide are reaching a parallel conclusion: Coal plant construction is a bad investment.

Leslie Lowe, who works for the Interfaith Center on Corporate Responsibility, said she is advising its investors to stay away from coal plants.

“We would say decidedly 'no,'” Lowe told the news service. “Coal is the most polluting fuel...and we know, as we move forward, many coal companies will be forced to internalize the costs of carbon, which is going to have a price.”

Ms. Bugel, of the Environmental Law and Policy Center, encouraged citizens to send written comments to the MDEQ about the Wolverine plant. She emphasized that Wolverine’s report “underestimates the costs of coal, overestimates the cost of natural gas, and underestimates the availability of energy efficiency, renewables, and natural gas to meet demand.”

Glenn Puit, a veteran investigative reporter, is a policy specialist at the Michigan Land Use Institute. Reach him at glenn@mlui.org.

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