An Imprudent Decision

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By Charles Grayson | Bigger Pie Forum | November 19, 2013 (modified February 22, 2016)

Kemper:  A political decision in 2006, an imprudent 2010 PSC decision based on guesses by Southern/MPC, extremely slow acknowledgement of actual plant costs, an extremely imprudent 2012 new PSC certification of Kemper followed by rapid, massive adjustments to plant costs once major legislative and regulatory approvals in hand.

Although the Mississippi Public Service Commission (PSC) officially approved a certificate for Mississippi Power Company (MPC) to build the Kemper lignite project on June 3, 2010, the construction process actually began a month earlier.  Moreover, in 2008 two years before MPC received the plant approval, it started the process of purchases and optioning of land, environmental permitting, receipt of a Federal grant, tax credit awards and equipment orders.  Even earlier on December 13, 2006 , Governor Haley Barbour and MPC announced the intention for MPC to build Kemper, fully 3 ½ years before the PSC approved Kemper and 3 years before PSC’s November 9, 2009 Certificate of Convenience and Necessity  for new generating capacity.    Kemper was a political decision in 2006 which legislative and regulatory processes have simply confirmed from 2009 all the way to the present, a mistake driven by a Federal grant tied to lignite gasification.   (Footnotes 1, 2, 3 and 4)

  • Engineering only 15-20% complete when construction began in 2010

Recent MPC statements confirm engineering for the experimental, first of a kind Kemper plant was only 15-20% completed when construction began in 2010 and is the main reason 2010 cost projections were $2 billion low (currently $4 billion low).  MPC and Southern Company had limited project knowledge when presenting data and filing testimony with PSC stressing confidence in the capital costs.  Their natural gas price projections were 35-80% above U.S. Energy Information Administration (EIA) forecasts of that period (even more out of line now).   MPC presented assumptive guesses to PSC in 2009-2010 rather than factual ones.  Southern’s natural gas price projections appeared to many then and have since proved to be wildly high and, along with the grossly understated plant costs, proved decisive in the selection of Kemper lignite over a natural gas fired plant.  The earlier political decision was supported by inaccurate and wrong Southern assumptions resulting in an erroneous economic comparison of alternatives and to an imprudent decision by PSC.  A prudent outcome does not result from prudent expenditures toward an imprudent goal.

  • Gasifier costs given PSC half (now a third) actual, corrections delayed even with warning signs

By late 2009-early 2010, before official PSC approval of Kemper, Duke Energy was 2 years into construction of an Indiana coal gasifier and generating plant and experiencing repeated, large cost overruns.  First quarter, 2010, MPC petitioned PSC to increase the cap on Kemper by $800 million while insisting they were not raising the budgeted cost and would not spend it (we won’t inhale).  Two and three years later, May, 7, 2012 and April 23, 2013, MPC announced cost increases totaling $900 million.  Those increases were announced immediately after a favorable court delayed regulatory decision, special bond legislation and a secretly negotiated Agreement with the Mississippi Public Utility Staff.  Given public alarm over Duke Energy’s gasifier problems throughout 2009-2011, it seems impossible MPC was clueless gasifier costs they gave PSC in 2009-2012 were only half actual costs.  Were MPC’s requested $800 M cap increase in 2010 (we won’t inhale) and the $900M actual increases of 2012-early 2013 a mere coincident?  (Exhibits A and B Timelines of events related to cost increase announcements)

  • Kemper economic evaluations were rigged since DOE grant required gasification. Low capital costs and very high natural gas prices used in sham

Had MPC used natural gas price projections in line with 2009-2010 U.S. Energy Information Administration (EIA), accepted the Kemper site for either lignite or natural gas self built plant alternative or used knowledge based capital costs, the Kemper Lignite gasification option would have been decidedly worse than a self built NGCC option.  An Independent Evaluator reported 600 scenarios comparing natural gas alternatives for additional MPC power.  Kemper was best in only 47% of them and none in the cases with natural gas prices in 2014 at $7/MMBTU or lower.  When very high natural gas scenarios are removed, Kemper won only 24% of the scenarios and many marginally. (Footnote 4, 5)

The 2010 Kemper project approval (Certification) was reversed by the courts.  April 24, 2012 PSC issued its Final Ordered on Remand of a new certification of the Kemper lignite gasification alternative on the same or similar assumptions of 2010.  Those assumptions appeared especially naïve in 2012 when MPC announced 2 weeks later a major cost increase after 2 ½ years of stable cost projections.    The outlook for natural gas prices by 2012 made the approval without a new review puzzling. (Footnote 6 and 7)

  • What now?

It was clear before construction began in 2010 but is abundantly clear now that Kemper was the wrong option.  The 2013 EIA 25 year projections of natural gas prices, even if significantly low, mean the Kemper lignite plant can never meet MPC’s commitment in the PSC approval process which was the cheaper power alternative on a net present value basis over the plant life.  With large cost saving from a NGCC (gas) vs IGCC (lignite) in the first 15 years, the life time NPV cost savings for the natural gas alternative are assured even if in Kemper’s last 25 years natural gas prices average 50% higher than Southern’s highest gas price assumptions used to justify lignite gasification.   We calculate levelized power costs for Kemper at $0.14/KWH versus $0.05-0.07/KWH for a new NGCC, even when allowing for natural gas prices to rise sharply in the late years.

Price volatility of natural gas, so often used by MPC to justify Kemper, is a red herring.  The average price of a fuel over longer periods coupled with capital related costs determine relative economics.  Gasoline prices which cycle wildly between $1 and $2/gallon may have high volatility but are still preferable to stable $4/gallon gasoline.

  • Syn gas from lignite at $17/MMBTU the fuel actually burned for power at Kemper

Natural gas can be used instead.   Allocating capital and operating costs to syn gas as fuel allows a direct comparison of syn gas versus natural gas.  The costs of the generating unit will be essentially the same for either fuel.  We estimate the levelized cost of syn gas at $17/MMBTU.  The 2013 (and 2015) EIA outlook is for natural gas prices to reach about $8/MMBTU in 2040.

  • MPC says PSC should hold customers responsible for their mistakes

The mistakes resulted from MPC’s own cost and performance guesses for experimental technology.   Their wildly off the mark natural gas price projections, out of line with other natural gas price projections of 2009-2010 and 2012, compounded the mistake.   Given the skew of net present value analysis to early year differences, the whole process smacked of hubris. (Exhibits C and D showing break even natural gas prices required in late years had EIA projection been used)

In Southern’s Q3, 2013 Results call with analyst, Tom Fanning, CEO said, “Well, because they may not have the advantages of a natural gas industry that’s been created through fracking and so if they don’t, places like China, Indonesia, Australia, Poland et al may have near-term uses for this kind of [TRIG] technology.”  I guess Southern did not get the memo that the US, of which Mississippi is part, does have advantages of fracking and abundant natural gas.

Definitions:  IGCC=Integrated gasification and combined cycle; NGCC=Natural gas combined cycle

Levelized costs=Method used by utilities to compare life time costs of different plants

_______________________________________________________________________________

Footnote 1.  2006-UN-0581, November 7, 2006.  MPC filing, Study of Need and Necessity for Capacity.

Footnote 2.  Clarion Ledger,  December 13, 2006, page 1, Utility Weighs $1.8B Plant.

Footnote 3.  Testimony, assumptions and economic analysis of MPC self built alternatives of the period December, 2009-June, 2010.

Footnote 4.  Report of the Independent Evaluator, Docket 2009-UA-14, filed January 26, 2010.

Footnote 5.  EIA Natural Gas Price Projections of 2009, 2010 and 2013.

Footnote 6.  Economic  Analysis and assumptions for April 24, 2012 Final Order on Remand of PSC for Certificate of Public Convenience and Necessity.

Footnote 7.  MPC May 7, 2012 announcement of a Kemper plant cost increase.

Exhibit A.  A Condensed Timeline of events surrounding the Kemper cost projections presented to PSC.

Exhibit B. A more detailed timeline of events surrounding the Kemper cost projections presented to PSC.

Exhibit C. & D. Assume EIA natural gas price projections for years 2015-2034 and then calculate what natural gas prices would be required years 2035-2054 for Kemper to breakeven for customers vs having built the NGCC plant  in MPC’s comparisons to the PSC in 2010 or 2012.

A scenario from MPC’s 2009-2010 economic analysis in which Kemper and MPC’s self built natural gas plant comparison were breakeven on a net present value (NPV) basis is used as the baseline.   Their natural gas prices for breakeven scenarios are the red breakeven line of the Exhibits.  MPC has filed separately natural gas price projections required for Kemper and a the self built natural gas plant to breakeven which are almost identical to the red line of the Exhibits.    The red breakeven lines in the Exhibits, therefore, embed MPC’s assumptions of all costs for both their proposed Kemper project and their self built natural gas plant at Plant Sweatt.  Accepting their assumptions of future lignite costs, variations in the comparative economics of the plant alternatives are determined by the year to year changes of natural gas prices from that baseline.

Exhibit C assumes 2013 EIA natural gas price projections for 2015-2034 and then calculates what natural gas prices would be required in the last 20 years, 2035-2054, for the Kemper lignite plant to achieve life time NPV breakeven with the NGCC.

Exhibit D is similar to Exhibit C except an average of 2009 and 20010 EIA natural gas price projections are used for the first 20 years.  Both EIA projections were available before the 2010 PSC approval.

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