NEW REPORTS SHOW COAL IS A BAD BET FOR INVESTORS

Financial Experts Raise Red Flags on New Coal Projects; Clean Energy, Not Coal Best Investment for the South
Virginia Cramer, Ben Moore and Cathryn McCue, April 29, 2008 (Sierra Club, Coastal Conservation League and Southern Environmental Law Center)

SUMMARY
The authors of a series of recent reports on the economics of several proposed coal plants gathered to summarize their findings. There is a striking unanimity to the studies’ findings. The 2 unavoidable facts about new coal plants are (1) new coal plants are serious financial risks for utilities and their ratepayers, and (2) the risks will only grow greater in the coming carbon-constrained world.

The reports: (1) Old Dominion Electric Cooperative’s Hampton Roads Power Plant; (2) Santee Cooper’s Pee Dee Power Plant, South Carolina; (3) East Kentucky Power Cooperative’s Smith Power Plant, Kentucky; (4) Dominion Resources’ Wise County Power Plant, Virginia; (5) Entergy’s Little Gypsy Power Plant, Louisiana

From the report on the Wise County plant. (click to enlarge)

The inevitable conclusion is well summarized in the report on the Pee Dee Power Plant: Analyses of coal plant projects should at the very least consider (1) Actual 2008 peak load and energy sales forecasts and up-to-date economic projections; (2) Anticpated higher construction costs; (3) More and higher greenhouse gas emissions costs; (4) More accurate and up-to-date cost assessment of the potential for demand reduction from energy efficiency; (5) The impacts of state and/or national Renewable Electricity Standards, the resultant increase in the supply of New Energy and the concommitantly diminshing need for coal.

The reports came from a growing database of hard numbers, including financial reports from the states of Virginia, South Carolina, Kentucky and Louisiana where the proposed coal plants would be built.

From the report on the Wise County plant. (click to enlarge)

The reports include careful, forward-thinking assessments of the likeliest impacts on the price of burning coal from coming greenhouse gas emission (GhG) regulation.

The numbers in the reports show the clear benefits of spending on New Energy and Energy Efficiency over the benefits of spending for new coal plants, benefits that go from the state economies to the electricity consumers.

The reports uniformly conclude that improved efficiencies will reduce electricity demand while state and national requirements to build New Energy will provide sources preferable to new coal.

From the report on the Wise County plant. (click to enlarge)

COMMENTARY
The reports are especially important because they focus on proposed projects in the U.S. Southeast, where entrenched coal and utility industry powers have led a resistance to New Energy and to policies like a national Renewable Electricity Standard (RES). The conclusion in each report is that the clear economic advantage goes to building New Energy and improving Energy Efficiency to reduce demand over building coal-fired power plants.

Major findings from the report on the Santee Cooper Pee Dee Power Plant in South Carolina: (1) Santee Cooper presently generates 80% of its power with coal and building one or both of the proposed Pee Dee River coal-fired units assures the company and its ratepayers will remain largely coal-dependent for decades; (2) To proceed with the Pee Dee River plant plans is to undertake a very expensive expansion at a time of great economic and financial uncertainty; (3) Federal regulation and required cuts of GhGs is coming and Santee Cooper’s plans include little room for meeting GhG-reduction requirements.

From the report on the Wise County plant. (click to enlarge)

Key findings from the report on the East Kentucky Power Cooperative’s Smith Power Plant in Kentucky:
(1) The direction of capital markets and national energy policy are contrary to the East Kentucky Power Cooperative (EKPC) plan to build new coal plants. 95 proposed U.S. coal plants have been abandoned in the past two years due to rapidly rising construction costs, coming GhG costs, increasing fuel costs and decreased electricity demand. In 2008, the Rural Utility Service (RUS) of the federal government put a moratorium on low cost loans for coal plants. EKPC’s proposed Smith #1 plant will cost approximately $766 million to build, 78% more than a similar EKPC plant cost in 2005.
(2) EKPC is in a weak financial position and proceeding with the Smith project will weaken it further.
(3) EKPC’s financial statements and accounting practices warrant review and even their financial advisor has questioned the Cooperative’s financial statements. A consultant said EKPC overstated revenues by almost $30 million in its 2007 Annual Report.
(4) EKPC’s estimates of the cost of power from the Smith #1 plant are low.
(5) EKPC has acknowledged a recent drop in demand for electricity.
(6) Canceling the Smith #1 plant will avoid an additional 5% price increase to ratepayers, necessary to cover the costs of construction and maintenance, that would be on top of a 57% increase in the cost of electricity between 2002 and 2007 and another 7% increase approved March 31.

Key recommendations:
(1) EKPC should abandon the Smith #1 plant, cut its losses, and
move forward with less risky and less capital intensive investments in Energy Efficiency, New Energy, and natural gas generation;
(2) EKPC should protect itself and consumers by requesting a rating from national credit agencies;
(4) EKPC and the Kentucky Public Service Commission should undertake a top to bottom review to identify weaknesses in the board of directors, how best to obtain financing, what to do about new emissions regulations, and how to best provide affordable energy services to Kentuckians.

From the report on the Wise County plant. (click to enlarge)

The report on the Dominion Resources Wise County Power Plant in Virginia was previously reviewed and summarized by NewEnergyNews. (SeeCOST MAKES COAL A BAD BET)

It reiterates the points in the other reports. Investing in new generating capacity is the traditional way to meet electricity needs. The new way is to use Energy Efficiency programs to reduce demand and to build New Energy.

Evaluation of new coal plants must consider economic impacts on the customers, on the state GDP and on employment from (1) outlays for construction and operation
of the plant and (2) changes in electricity rates. It must compare the economic impacts of coal with the economic impact of using Energy Efficiency and New Energy.

In each analysis, the Energy Efficiency/New Energy alternative would be the
less costly choice for ratepayers and more beneficial to the state’s economy even before the cost of GhGs from federal climate change regulation is included. Once emissions costs are instituted, coal-generated electricity will drive electricity prices up.

In Virginia, the average household would on average pay $40 - $47 per year more while the Energy Efficiency/New Energy plan would save the same household $30 - $50 per year.

As the Virginia analysis points out, there are also human health impacts from using coal. A new plant there is estimated to add 2-to-5 additional premature deaths per year and a significant occurrence of non-fatal health impacts that add up to ~$16-to-$52 million per year.

The report on the Entergy Little Gypsy Power Plant in Louisiana raised 3 key research questions: (1) What are the likely costs per kW-h from new pollution sources? (2) What are the likely costs of reducing harmful air pollutants using maximum control technology? (3) At higher costs, what are the New Energy sources that will meet future electricity demand at a lower cost per kW-h?

2 crucial findings: (1) Even at the historically high natural-gas prices of early 2008, combined-cycle natural gas plants beat coal; and (2) The cost of building “clean” coal far exceeds solar, wind and geothermal.

The Louisiana report points out that it is “an empty exercise” to compare New Energy costs to coal costs without including the future costs of reducing emissions and if those costs are included, coal is revealed to be a bad bet.

Example: An MIT study projected a coal plant cost for GhGs of $105.3 million per year or $1.8 billion over the 40-year life of a plant. At the level of emissions projected by the coal industry, that cost would be $2.5 billion. A recent EIA evaluation came to a similar conclusion.

From the report on the Wise County plant. (click to enlarge)

QUOTES
- David Schlissel, Senior Consultant, Synapse Energy Economics: “Our analyses have shown that uncertainty about future coal plant construction costs and the costs of complying with impending federal regulation of plant carbon dioxide emissions represent significant risks for utilities and their customers…In particular, the federal government is likely to mandate significant reductions in carbon dioxide emissions. The costs of complying with this expected federal action are likely to increase the cost of generating power at new coal-fired plants by tens to hundreds of millions of dollars each year, making coal an even more expensive option than energy efficiency and renewable resources.”
- Michael Fisher, Vice President /Principal Associate, Abt Associates: “Investments in energy efficiency are considerably less expensive and more beneficial to the Virginia economy than building a new coal-fired power plant to meet Virginia’s energy needs...The relative economic gains to Virginia from energy efficiency investments are substantial, with Gross State Product increasing by nearly a billion dollars annually and employment increasing by over 5,000 new jobs…”
- Ben Moore, Energy & Climate Program Director, South Carolina Coastal Conservation League: “The analysis shows that if the proposed coal plant is built, our state-owned utility, Santee Cooper, won’t meet its mission to provide low-cost electricity. Instead South Carolinians can expect higher rates. If our state is going to remain competitive in a carbon-constrained economy, we can’t afford another coal plant.”
- Elizabeth Crowe, Kentucky Environmental Foundation: "More and more people from all walks of life, all over the South, are realizing that clean energy makes good fiscal sense…[E]nergy efficiency saves people money. The health and environmental benefits of clean energy are a bonus."

From the report on the Wise County plant. (click to enlarge)

- Tom Sanzillo, Senior Associate, TR Rose Associates: “In our analysis of East Kentucky Power Cooperative we found the proposed Smith coal plant was not originally approved on the basis of the demand for electricity, but rather for business needs. Since then energy demand has slowed considerably and the need for the plant is even less. Now, with changes in federal policies, the plant serves no purpose at all. In baseball, three strikes means you’re out. The Smith coal plant would be a highly polluting, expensive, and unnecessary burden on Kentucky ratepayers…”
- Tom Cormons, Appalachian Voices: “These studies from across the region demonstrate that, even if you don’t factor in the issues of mountaintop removal coal-mining, climate change, and toxic pollution, and you look only at the economics, investing in efficiency and renewables instead of more coal is the clear choice…”
- Mark Kresowik, Corporate Accountability Representative, Sierra Club: “It is clear that the South is not an exception…Coal plants are simply a poor investment, no matter where in the country you are building them. We need to be investing wisely, especially in these economic times, and that means looking at energy efficiency and renewable energy projects that can create jobs and help fight global warming, without the drawbacks of coal.”