Report: New Kansas Coal Plants Will Lock In Decades of Rising Electricity Prices

Kansas has become the ground zero of the fight over the future of coal in America, and a new report being released today by a leading global financial research firm drives a stake through the heart of the strongest argument proponents of coal-fired expansion there have: that coal is cheap.

The groundbreaking report says coal is not the cheapest source of power for Kansas -- or anywhere else, quite likely -- if you account for coming federal regulation of carbon emissions.

Projected to cost $3.6 billion, the two coal plants proposed for Holcomb, Kansas have been touted by its builders, Sunflower Electric Power, to provide the promise of cheap electricity for the state's next generation of citizens. But the independent financial analysis -- surprisingly, the first of its kind -- says otherwise: the new coal plants would be a bad investment that will saddle ratepayers in Kansas with increasing prices they won't be able to control.

The report comes from Innovest Strategic Value Advisors -- a firm that raised the red flag on Bear Stearns last July when the big banks were blinded by the Bear's $150 stock price. Not that anyone listened to Innovest then. Maybe this time, in Kansas, they will.

The game-changer in the analysis is factoring in a modest price for carbon emissions:

Given that Sunflower is a consumer-owned, nonprofit corporation the burden of future carbon costs will be placed entirely on the company’s ratepayers. Assuming carbon prices between $21 and $48, the Holcomb expansion could cost Sunflower ratepayers between $22.4 million and $51.36 million annually.

Furthermore, this report demonstrates that under federal legislation that relies on 100% auctioning of emissions allowances, natural gas generation becomes more economical at a carbon price of $13.20. In general, this analysis indicates that Sunflower has failed to account for likely regulatory scenarios, and will therefore expose its ratepayers to the significant financial exposure associated with a strategic focus on developing new coal capacity.

According to EPA estimates, the leading climate legislation now in Congress -- the Climate Security Act of Senators Lieberman and Warner -- is expected to push the price of carbon well past the switching price of $13.20/ton -- to $22/ton by 2015.

That's only a year or two after the new Kansas coal plants would open for business. That would put them inside a financial hole that only gets deeper with time, as carbon is expected to reach $46/ton by 2030 under the legislation.

The report is sure to strengthen the hand of Kansas Governor Kathleen Sibelius, who has opposed the coal plant expansion, and also to impact other coal plant battles nationally. It starkly illustrates the new financial realities impacting coal-fired power everywhere.

Innovest Strategic Value Advisors are leading global experts of all things related to carbon risk. The firm has been the research arm of the Carbon Disclosure Project (CDP), which represents investors with $57 trillion in assets and collects greenhouse gas emissions data from 3000 of the world's largest companies. Innovest has also developed analytical tools and models for evaluating the carbon risk of companies -- intelligence it sells globally for a growing roster of clients.

Innovest concludes that the profile for Sunflower's proposed expansion ought to be cause for concern. At the top of the list of reasons is carbon price:

...significant risks will accompany Sunflower's decision to expand its coal capacity.

The company’s decision to own 150 MW of new coal capacity will increase Sunflower’s annual CO2 emissions by over 1.07 million ton. Depending on the structure of future legislation and the associated price of carbon, the resulting financial impact on Sunflower’s ratepayers could be significant.

Although Sunflower will receive a $25 million management fee from Tri-State, it is unlikely that this will be enough to insulate ratepayers from the costs associated with its increased carbon emissions.....

Using the current price of carbon under the European Union Emissions Trading Scheme (EU ETS) of $33 per tonne, Sunflower would be forced to increase its rates by approximately 3 cents per kWh.

At the same time, by focusing on coal, Sunflower is turning a blind eye to more cost-effective alternatives:

The company’s strategic focus on new coal capacity indicates a failure to capitalize on the long-term financial benefits associated with renewable energy.

Finney County, the site of the proposed expansion, and western Kansas in general have among the nation’s most abundant wind resources with a Wind Power Class rating of between 4 and 5.

Meanwhile, the cost of wind energy continues to decline as technological advancements continue to increase efficiency. This has resulted in an 80% decrease in the price of wind energy from approximately 30 cents/kWh to 5 cents/kWh over the last 20 years.

Furthermore, the increased likelihood of federal legislation on climate change and the extension of the federal Production Tax Credit for alternative energy, the competitive balance will continue to shift away from traditional fossil-fuel fired power generation.

Additionally, Innovest identifies other risks, including stakeholder and regulatory opposition to new coal capacity.

Of particular concern for Sunflower is a March, 2008 decision by the Rural Utility Service not to fund new coal plants in 2008 and 2009. The Rural Utility Service, which has provided more than $1.3 billion in low-cost financing to rural electric cooperatives for new power plant construction, expressed concern over pending litigation and concern that new coal power plants were undermining efforts to address climate change.

This moratorium on financing will affect at least six proposed coal plants in Montana, Kentucky, Illinois, Arkansas, Texas, and Missouri. Although Sunflower was not seeking financing from the Rural Utility Service for the Holcomb expansion, the company does need the agency’s approval to seek outside funding.

Rising construction costs could also put Sunflower -- and its ratepayers -- further into the red than anticipated.

In Nevada, the cost of Sierra Pacific Resource’s proposed 1,500 MW Ely Energy Center has increased by more than 30% from $3.8 billion to $5 billion since it was first announced in 2006.

In 2007, Duke Energy’s proposal to build two 800 MW coal-fired generating units was reduced to one unit as a result of the North Carolina Utilities Commission’s concern over the need for new capacity in light of rising construction costs and available alternatives.

These two cases exemplify a national trend that has resulted from rapid increases in the cost of material inputs throughout the last several years.

But if not coal for baseload power, what? Innovest's analysis provides a financially better alternative: gas.

At a carbon price of around $13.20, CCGT (natural gas) is able to provide base-load power at an equivalent cost to coal in the scenario where carbon permits are 100% auctioned.

And the higher the price of carbon, the smarter the investment in gas gets:

For gas on the other hand, the cost advantage rises continuously for higher carbon prices, reaching higher levels as the carbon price rises. For a $50/tonne carbon price, gas is $13.41/MWh cheaper than coal, and for a $100/tonne carbon price gas is $31.64/MWh cheaper.

So what's the bottom line? Here's Innovest's conclusion:

An analysis of the regulatory environment and the economics of developing new coal capacity under likely regulatory scenarios suggests that the risks outweigh the potential benefits and create significant financial exposure for Sunflower and its ratepayers.

• ‹ previous
• up
• next ›