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Regulators Caught In Cross Fire: Damned If You Do, Damned If You Don’t

Posted by Fereidoon P. Sioshansi on the August 18th, 2008

From the August 2008 issue of EEnergy Informer.

With rising concerns about global climate change, state regulators must increasingly decide how much is not too much for low-carbon generation options.

Conventional coal, traditionally the main fuel source for electricity generation in US, and many other countries, has come under attack in recent years for being carbon-rich . Yet utilities must build additional supply-side resources to keep up with the rising demand. The question asked in many utility boardrooms today is, if not conventional coal, then what? On the other side of the argument are state regulators whose main job is to protect consumers from higher rates and unsound investments by utilities they regulate.

Utilities can, of course, focus on reducing demand growth through conservation and peak load management – often the cheapest option available. While both are cost-effective, the former, if successful, leads to lower kWhs, as intended. But lower sales revenue is not without implications. Utilities, whose costs are mostly fixed – except for fuel – typically have to raise their average rates to make up for the loss in revenues. The lost revenue implications of energy conservation are, of course, a well-known phenomenon. Most regulators allow utilities to recover lost revenues through higher rates. Conservation advocates point out that so long as consumers pay lower bills, who cares if their average rates are slightly higher.

Turning to supply-side options, utilities can focus on more renewables, more nuclear, natural gas, clean coal technology – including carbon sequestration and storage (CSS) – or a combination of these. Compared to conventional coal with no CSS, these alternatives are carbon-free or carbon-light, but all carry a price premium. State regulators must increasingly decide between a carbon-free or carbon-light option that carries a cost premium as opposed to a less expensive but carbonrich alternative. And countless decisions like these have to be made over the next few years while the debate about global climate change is being sorted out in political circles.

In mid-July 08, Duke Energy Corp. got the green light to proceed with a 630 MW plant with a lofty $2.35 billion price tag. The plant, which uses advanced coal-gasification technology, is scheduled to go online near Edwardsport, Indiana in 2012. Touted as the first full-scale project of its kind, it will produce power with far fewer emissions than conventional coal-fired plants. During the ground-breaking ceremonies, Jim Rogers, CEO of Duke told Gov. Mitch Daniels “With this plant we’re taking a giant leap for our country.”

The plant’s original cost was pegged around $1.3-1.6 billion, but was revised upward to $2.35 billion. Angeline Protogere, a Duke spokeswoman indicated that the cost of the project will result in an 18% rate increase to be phased in between now and 2013. Supporting the project, Governor Daniels said the plant will be worth its high cost because its pollution-removal technologies will open more of southwestern Indiana’s coal deposits for use as fuel.

Ironically, a week earlier, the New York Power Authority (NYPA) and NRG Energy Inc. pulled the plug on a $1.5 billion coal-gasification project in western New York saying it would not produce affordable electricity.

In early 2007 NRG received a conditional nod from NYPA to build the 680 MW IGCC plant at its existing Huntley site in Tonawanda, N.Y. The project was scheduled to go into commercial operation in 2013. The state gave conditional approval to the $1.5 billion project and was in discussions with NRG to find ways to bring down costs. NYPA spokeswoman Christine Pritchard told the Associated Press those efforts did not result in enough of a cost reduction to continue with the project. NYPA officials say the electricity produced by the plant would be too expensive because of the as-yet-unproven integrated gasification combines cycle (IGCC) technology on such a scale.

At issue was the fact that the IGCC plant’s expected cost is about 20% more than a conventional pulverized coal plant. “The financial and environmental risk associated with this large-scale commercial power plant is simply too great,” NYPA concluded in a report released in July 08.

The NRG project is not the only one that got scrapped because of cost and/or perceived technology risks. Virginia utility regulators in April 08 disallowed a similar proposed project because it would be too expensive. The US Department of Energy (DOE) did the same in January 08 when it canceled the highly-touted $1.8 billion FutureGen project in Illinois because the project’s costs had nearly doubled since inception.

In the last 2 years, US utilities have canceled or put on hold a number of advanced coal projects in CT, FL, WY and OK, to name a few. Duke appears to be among a few that got away with its advanced coal project in Indiana. And even in this case, the project’s costs have risen 20%.

Nor is the problem limited to advanced coal plants with higher price tags. Some 30 license applications to build new nuclear reactors are pending before the Nuclear Regulatory Commission (NRC). But assuming that NRC grants a license, the applicants must face skeptical financiers and equally skeptical state regulators who must ultimately decide if the massive front-loaded investments are a good deal for the ratepayers.

It is not a trivial issue. When US utilities started to revisit the nuclear option a few years ago, the expectation was that new reactors would cost $1-2 billion a piece. Those figures have risen to $5-7 billion just in the last couple of years. The regulators must balance the high upfront cost of nuclear power, which has extremely low operating and fuel costs, against alternatives that may be less costly to build but more expensive to operate – such as natural gas. The implicit cost of carbon is an added complexity few regulators currently know how to handle.

In July, in what can be interpreted as a strong endorsement of nuclear energy, Florida Public Service Commission in a surprising unanimous vote approved the construction of a 2-reactor $17 billion nuclear plant proposed by Progress Energy allowing the utility to start charging customers as early as January 2009 for a plant that is not expected to produce any juice until 2016. In March 08, Progress estimated that residential customers would see an increase of about $9 a month, but the final figure has not been approved yet.

If all goes according to the plan, the plant will be among the first nuclear power projects brought online in the US in more than 30 years. The project would utilize 2 Westinghouse AP1000 reactors at a cost of $14 billion plus $3 billion to build nearly 200 miles of transmission lines to connect it to the grid. The first reactor is schedule to become operational in 2016, the second in 2017. The operator has yet to apply for an NRC license and pass various environmental hurdles.

According to Jeff Lyash, CEO of Progress, “Carbon-free nuclear power is a strategic asset in our statewide effort to become energy-independent, to reduce our reliance on more volatile-priced fossil fuels, and to provide a balanced approach to meet the challenges of growth and climate change.”

Plant’s critics say it would be too costly even if the company’s latest cost estimate can be believed. “This project has a long ways to go, and there’s a lot of money at stake,” according to Bill Newton, Executive Director of the Florida Consumer Action Network, adding, “We think it’s a big mistake to raise people’s power bills for something that may never be needed.”

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