COST MAKES COAL A BAD BET FOR POWER COMPANY STOCKHOLDERS

The Financial Risks to Old Dominion Electric Cooperative’s Consumer-Members of Building and Operating the Proposed Cypress Creek Power Station
David Schlissel and Lucy Johnston, April 22, 2009 (Synapse Energy Economics)

SUMMARY
The Financial Risks to Old Dominion Electric Cooperative’s Consumer-Members of Building and Operating the Proposed Cypress Creek Power Station from Synapse Energy Economics, Inc. concluded that construction of the proposed Cypress Creek Power Station coal-fired power plant would not be a good investment for the consumer-members of Old Dominion Electric Cooperative (ODEC) due to a variety of risks.

The risks:
(1) Coal plant construction costs are expected to rise unpredictably and construction times are expected to be delayed by regulation and controversy.
(2) Financing for coal plants is not expected to be readily available due to the cost of construction and long delays in obtaining returns.
(3) Federal, regional and state actions are expected to on greenhouse gas (GhG)-emissions from power plants.
(4) Compliance with GhG regulation and purchase of permits to emit are expected to add costs to coal-burning.
(5) There is doubt about the technical viability of the Cypress Creek Power Station’s pulverized coal post-combustion carbon capture and sequestration (CCS) technology.

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(6) Due to the cost of pulverized coal post-combustion CCS technology, it is not expected to be economically viable if and when it is technically achievable.
(7) It is not certain demand increases will be big enough to justify the Cypress Creek Power Station.
(8) A federal Renewable Electricity Standard (RES) proposed by the Obama administration, requiring U.S. utilities to obtain 10% of their power from New Energy sources by 2012 and 25% by 2025, is expected to curtail demand for power generated by coal.
(9) Recent studies suggest economically recoverable coal supplies may be significantly more limited than thought. That would drive the price of coal-generated electricity up.
(10) The Obama administration may make the use of coal more expensive by making restrictions on current criteria pollutants (examples: NOx, SO2, mercury) more stringent.

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COMMENTARY
The study estimated the cost of the Cypress Creek Power Station at $6 billion or more. Given the difficulty of obtaining such financing and the high cost of capital, the study recommended postponing construction and awaiting clarity on financing circumstances going forward.

The study makes 10 findings based on the risks it identified.

Finding 1: The Cooperative proposes to commit to a very expensive and capital-intensive project at a time of significant economic and financial uncertainty.

Finding 2: Uncertainty over construction costs and the costs of compliance with future emissions reduction requirements have led to 80+ coal plants being cancelled, delayed or rejected by state regulatory commissions.

Finding 3: The construction cost of Cypress Creek Power Station is estimated at more than $6 billion.

Finding 4: Federal policy requiring sharp GhG reductions is coming soon. It will seriously impact the cost of coal-generated electricity.

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Finding 5: The 1,500 megawatt Cypress Creek Power Station will, by ODEC’s estimate, generate far more GhGs than any present pulverized coal CCS trial technology has the capacity to handle.

Finding 6: The cost to ODEC consumer-members of permanently sequestering emissions from the Cypress Creek Power Station will be prohibitive to develop and insure and sequestration is by no means proven safe.

Finding 7: If the Cypress Creek Power Station is the best investment for its consumer-members, ODEC has not demonstrated it.

Finding 8: The costs for Cypress Creek will burden ODEC consumer-members for at least 45 years.

Finding 9: The need for Cypress Creek, in terms of projected demand, does not come until 2030 or later.

Finding 10: There are better energy-generating investments for ODEC consumer-members.

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QUOTES
- From the study: “The current economic recession represents a near term challenge for utilities, and exacerbates risks that ODEC and other electric utilities face. In fact, according to the Wall Street rating agency Standard and Poor’s, the ‘worst economic slump since World War II’ will present significant challenges to U.S. electric cooperatives and public power utilities just as ‘prospects for regulation of greenhouse gas emissions have never been higher and capital needs abound.’ Standard & Poor’s also believes that ‘the worst of the [economic] downturn is still ahead’ and that ‘the downturn is likely to be relatively prolonged, and recovery should be sluggish.’”
- From the study: “At the same time that the economic recession strains utilities like ODEC, the financial crisis and ongoing credit crunch create uncertainty as to their ability to raise needed capital and to determine what the costs of borrowing will be for the capital they need in order to undertake proposed projects. Standard & Poor’s has warned that ‘The financial market turmoil poses a challenge for public power utilities in the midst of large-scale capital projects that have no other source of funds, and could face construction delays, and higher borrowing costs whether they obtain short- or long-term financing.’”

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- From the study: “The Obama Administration indicated in its recently released federal budget that it would seek to establish a cap-and-trade system to reduce greenhouse gas emissions to 14 percent below 2005 levels by 2020 and to 83 percent below 2005 levels by 2050. Purchasing emissions allowances through such a cap-and-trade system will increase the cost of running power plants that emit CO2; due to the high carbon content of coal, those plants that are coal-fired will be particularly affected…The Administration’s proposal is one of several. There are two likely avenues for federal regulation of greenhouse gases. Congress could pass legislation, or the U.S. Environmental Protection Agency could adopt regulations to limit greenhouse gas emissions. Both paths are currently under active consideration…Leaders in both the House and Senate are pursuing plans for aggressive legislative action on climate change during this session. To date, the most substantive legislative proposals have focused on establishing a cap on carbon emissions and allowing affected emitters to trade emission allowances; however, another option would be to establish a tax on greenhouse gas emissions. Legislative proposals in the 111th Congress include an emissions cap with aggressive reduction targets. Proposals announced by Representatives Markey and Waxman, and Representative Van Hollen have included greenhouse gas reduction targets for 2050 of 83% and 85%, respectively, below 2005 emission levels…”