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Buyer Beware: Midwest Utilities Experience Coal Plant Sticker Shock; Will New Nuclear Do the Same for the South?

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Don’t you hate it when you’re quoted a price for a new car over the phone or online, but when you get to the dealership they inform you the price is actually hundreds (or even thousands) of dollars more than they said it would be? Imagine how you’d feel if the price was millions or even billions of dollars more.

That’s how 234 municipalities and electric cooperatives in the Midwest are starting to feel as they find out about the true cost of the coal-fired Prairie State Energy Campus in Washington County, Illinois, which is reportedly more than $3 billion over budget.

Prairie State Coal Plant: A $5 billion money pit

Source: Tim Vizer/Belleville News-Democrat/MCT

Costs soar at Prairie State Coal Plant; Image: Tim Vizer/Belleville News-Democrat/MCT

In 2004, Prairie State was marketed by Peabody Energy, the nation’s largest coal company, as a cheap source of power.

The 1600 MW project, which comprises two units, was originally scheduled to come online in mid-2012 and cost $1.8 billion. Based on that estimate, entities representing municipalities and electric cooperatives in eight states — Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, Virginia, and West Virginia — lined up to sign long-term power purchase agreements with the project’s developers.

Unit 1 began operating earlier this summer while unit 2 may not be finished until sometime next year. Meanwhile, the total cost of the project has soared to almost $5 billion and these utilities — and their customers — are on the hook to pay it.

A new report by the Institute for Energy Economics and Financial Analysis (IEEFA), “The Prairie State Coal Plant: The Reality vs. the Promise,” finds that the $3 billion increase in the estimated cost of the project could result in a 40 to 100 percent increase in the price of power compared to initial projections. This would mean higher electric bills for 2.5 million electricity customers in eight states. The biggest loser could be American Municipal Power, Inc. (AMP), headquartered in Ohio, which bought a significant share of Peabody’s interest in the plant on behalf of its members in 2007, along with other utilities in the region.

Many of the contracts Peabody Energy signed with AMP and other utilities were “take-or-pay” contracts. What that essentially means is that they agreed to take a certain amount of power and pay for it over the life of the plant. The bad news is that many of these contracts were structured so that virtually all construction cost overruns can simply be passed through, no matter how egregious. To make matters worse, even if the plant doesn’t get finished these utilities will STILL have to pay for it.

Is Vogtle the next Prairie State?

Unfortunately, Midwestern utilities may not be the only ones to wake up with a case of buyer’s remorse. As I noted in an earlier blog, the current crop of new nuclear reactors under construction in the Southeast are all well over budget and behind schedule. This should surprise no one given the industry’s long history of cost overruns, cancellations, and delays.

The Vogtle 3&4 nuclear project in Georgia — a (now) $15 billion project supported by multiple utilities with long-term take-or-pay contracts — is showing schedule delays and cost overruns similar to Prairie State. Earlier this summer, Southern Company, whose Georgia Power subsidiary owns almost half of the plant, revealed that the project was $950 million over budget. But despite warnings of cost overruns and delays, the Georgia Public Service Commission (PSC) recently decided to approve and pass onto Georgia Power’s customers all costs incurred by the utility through December 2011. That decision came just over a year after PSC staff withdrew a proposal to link any increases in the reactors’ budget to Georgia Power’s profits after it was loudly trashed by the utility.

Similar to AMP’s arrangement with Prairie State, the Municipal Electric Authority of Georgia (MEAG Power) owns about 23 percent of Vogtle. Fitch Ratings gave the debt MEAG issued to finance Vogtle high ratings because it is supported by take-or-pay contracts covering the life of the plant. In particular, Fitch awarded so-called Project M bonds an A+ rating that “reflects the contracts and credit fundamentals of MEAG Power and the power sales contracts with its 29 Project M participating member systems (through 2058) [emphasis added].” In other words, MEAG and its member systems are on the hook to pay for Vogtle, regardless of cost, for the next 46 years.

It’s not too late to keep some utility customers from paying for bad management decisions

When you get a price from a car dealership that doesn’t line up with its online offer, you can always walk out or negotiate a better price. By contrast, the utilities that signed long-term take-or-pay purchase agreements with Prairie State can’t simply walk out. Their contracts obligate them to buy power from the plant for decades regardless of cost and these costs will be passed onto their customers. They can take it to court, but that’s a long and painful process and the outcome is uncertain. In the meantime, these utilities will pass these costs onto their customers. The question is not whether their rates will rise, but rather how much.

MEAG and the many utilities that signed long-term take-or-pay contracts for power from Vogtle 3&4 could also be facing sticker shock in the not-too-distant future, and most likely they will not be able to walk away. However, there is still time for Georgia regulators to protect Georgia Power customers by demanding that the utility bear (at least some of) the risks of cost overruns at the plant. The PSC should act now to prevent this entirely predictable travesty from playing out to its logical conclusion. Otherwise, Georgia Power customers could be stuck with high electricity bills for decades to come.

Caveat emptor.

Posted in: Energy, Fossil Fuels Tags: , , , , , , , , , , , , , ,

About the author: Ellen Vancko is an expert on federal and state policies governing electricity markets, reliability, transmission systems, energy conservation, demand management, smart grid, and the integration of renewable energy into the electrical system. She holds a master of science degree in energy management and policy from the University of Pennsylvania.

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  • Karen

    Test

  • Gerald

    Still, coal and nuclear absorb these cost over-runs along with bludgeoning regulations but still keep progressing. Imagine how impractical and infeasible the solar industry must really be for a small potatoes deal like Solyndra to go bust and have to throw in the towel even with all the big grant money and skewed regulations greasing the skids for them. An old truism still holds sway: “nothing succeeds like success”. Funny, it doesn’t mention anything about the meek inheriting or impractical foolishness prevailing.

    • http://www.ucsusa.org/news/experts/ellen-vancko.html Ellen Vancko

      The disaster at Fukushima underscored the need for strict regulations that require nuclear plants to be built and operated safely. Unfortunately, those regulations are not being fully enforced in the United States by the Nuclear Regulator Commission as they should be. And given that burning coal is a leading cause of smog, acid rain, global warming, and mercury pollution, I am thankful that there are regulations in place to keep these pollutants in check. The real problem with the economics of both coal and nuclear power is that many of the companies that built those plants did not have to absorb their cost overruns or the economic impacts of their harmful externalities. Rather, utility ratepayers, taxpayers, public health and our environment have paid the price. The UCS report “Nuclear Power: Still Not Viable Without Subsidies” shows that historic subsidies – both direct and indirect – to that industry may have exceeded the value of the power it produced. In order to understand the very real cost advantages of energy efficiency and renewable energy to our society, economy and environment, the true costs and risks of coal and nuclear technologies must be fully reflected in the cost of the power they produce.

      • Matt

        Your UCS report claims “Nuclear Power: Still Not Viable Without Subsidies”.

        How terribly ironic the solar industry is not viable WITH subsidies. There’s a subliminal message to dreamers lodged somewhere in there, don’t you think?

  • gregg watson

    Unfortunately bad management isn’t the only issue costing the end user. Stiff regulations imposed by those with good intentions but little knowledge of power generation also have a hand in the sharp spikesseen or to be seen our electric bills.Coal is an abundant rescource but it is being regulated into extinction. The megawatts to be pulled from the grid in the next few years are going to have a very big impact on our economy. Where do we think the electricity comes from that charges our little electric cars?
    Gregg

    • http://www.ucsusa.org/news/experts/ellen-vancko.html Ellen Vancko

      Thankfully, new clean air standards imposed on the power generation sector will go a long way to eliminate harmful emissions that pollute the air we breathe and the water we drink. As a result, public health and environmental quality will improve and global warming emissions will be reduced. Even before these new standards went into place, the low price of abundant natural gas was the biggest threat to nuclear and coal-fired generation in the near-to-mid-term. Furthermore, numerous studies, including one UCS commissioned from Synapse Energy Economics, Inc. called “Big Risks, Better Alternatives,” demonstrate that utilities in Georgia, Florida and elsewhere can meet their energy needs at much less cost and risk if they invest in cost-effective energy efficiency, renewables and natural gas. Unfortunately, many companies would rather invest in large, capital-intensive generation projects where profits are higher, especially if they can shift the financing, market and construction risks to others, which clearly has happened at Prairie State and Vogtle. When completed, I expect that both of these plants will have a significant negative impact on the ecomomies of the communities that will be forced to pay for them for decades to come.

      • Matt

        Refreshing to see you embracing natural gas energy. Perhaps the practicality of the live situation is seeping through to you at UCS?

      • Willis

        Natural gas, huh? Does UCS endorse hydrofracking, then? Can we get an official policy paper from you on that? There are a lot of people in the Northeastern U.S. who need convincing.

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