Kemper County Kilowatts? Think Again!

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Ashby M. Foote, III |  2 May 2012

Three years after it was first proposed, Mississippi Power’s (MP) Kemper County Coal Gasification Plant continues to produce more controversy than kilowatts.  What makes this plant worth close inspection is the $2.4 billion price tag hanging over the heads of southeast Mississippi ratepayers.  While MP contemplates this expensive new power plant based on low grade coal, the power industry as a whole is migrating in the opposite direction – from coal to cheaper and cleaner natural gas.  In the past seven years natural gas’ share of U.S. power generation has risen from 19% to its current 25%.  But the most troubling aspect of this story is the internal projections used by MP to solicit approval by the Public Service Commission (PSC) and MP’s desire to keep supporting documents confidential.

The context for this story begins in 1879, a year that found America on the cusp of transformative change.  The transformer in chief was Thomas Edison and the transformation he ignited was the electrification of America. Edison was the Steve Jobs of his era and, like Jobs, he was part visionary, part systems thinker and part promoter.  On December 31, 1879, Edison introduced his incandescent light bulb and he used the occasion to make the rather outlandish but prescient claim, “We will make electricity so cheap that only the rich will burn candles.”  In a world focused on scarcity, Edison was focused instead on the coming abundance – electricity – and the economic discontinuity it would bring.  Edison proved right and 132 years later cheap electricity continues to be a key driver of economic growth and improving living standards.  Electricity producers now face a new economic discontinuity that is shaking up their highly regulated world.

Economic discontinuity was a favorite term of author and business management guru Peter Drucker.  Drucker’s postulate: a tenfold increase in the productivity of any technology creates economic discontinuity.  The logic is simple – a tenfold improvement in productivity creates new abundances and, with them, tipping points where the economics of the status quo are overturned as new abundances are exploited to address other scarcities – in the process creating vibrant new sources of economic growth.  For instance, cheap electricity spawned the appliance industry.  Two recent examples are transistor densities and fiber optics.  The abundances they created have turbo-charged the digital economy for 30 years and created massive wealth along the way.  Economic discontinuities are disruptive, but good – think of them as progress at warp speed.  But where one stands is crucial.  Being on the right side of an economic discontinuity can mean greater prosperity – being on the wrong side can mean economic demise.

The new discontinuity shaking up the power industry is fracking technologies used to drill for natural gas in shale. For the tenfold improvement look no further than the price of natural gas versus gasoline as measured in Btu’s(British thermal unit).  Thanks to the new abundance of ‘shale gas’, a million Btu’s of natural gas now goes for $2.00 while a million Btu’s (8 gallons) of gasoline costs $22.50.  For coal the price differential is not tenfold but other advantages such as lower emissions and lower transportation and handling costs are driving utilities to shift more and more power generation to natural gas.

Officials at MP point to the historical volatility of natural gas as a reason to prefer low grade coal in the ground over currently cheap but Btu rich natural gas.  Two very reliable sources suggest otherwise.  In their 2012 Energy Outlook, the U.S. Energy Information Administration (USEIA) projects that natural gas prices will stay below $5 through 2023.  Daniel Yergin, energy expert and Pulitzer Prize winning author, states in his 2011 book, “The Quest – Energy, Security and the Remaking of the Modern World”, “the arrival of unconventional gas portends low prices and abundant supplies for many decades or even a century or more.”

So why has MP requested confidential status for documents submitted to the PSC?  Probably because ratepayers would be outraged at the too high electric bills they will face over the next 30 years.  The lignite coal gasification plant in Kemper County isn’t competitive with natural-gas-fired facilities today and it wasn’t when first proposed back in 2009.  One MP document obtained through a public records request is telling.  It shows the Kemper Coal plant achieving breakeven status with an alternative natural gas plant, with natural gas priced at $12 in 2014 and trending to $18 by the year 2035.  In other words, if gas is averages less than $12, MP customers will not breakeven, much less realize any of the cost savings promised by the proponents of the Kemper plant.  Such a projection is striking considering natural gas was trading at $4.76 at the date of the projection, January 2009.  As an additional footnote, natural gas has only briefly traded above $12 twice in the past 20 years – for a month in 2008 and for the three months in 2005 at the time of Hurricanes Katrina and Rita.

In March, 2010, MP’s CEO Anthony Topazi, (now COO of MP parent, Southern Company) reconfirmed the narrative of $12 or higher natural gas in an interview with the Mississippi Business Journal (MBJ).  In the interview Topazi states, “By 2020, rates are going up about a third.  That’s approximately how much rates are going up with the gas alternative.  With the Kemper alternative, they’re going to go up a few percentage points higher than that, but still, in the 30s.… Rates are going up about a third regardless of which option is chosen.”   To say that MP and Mr. Topazi’s expectations for natural gas prices were out of the mainstream is an understatement.  At the time of the MBJ interview, the USEIA was projecting flat to lower costs for gas-fired kilowatts through 2020 and 2035.  This year USEIA’s 2012 Outlook for cheap natural-gas-fired electricity is even brighter, “Following the recent rapid decline of natural gas prices, real average delivered electricity prices in the AEO2012 reference case fall from 9.8 cents per kilowatt-hour in 2010 to as low as 9.2 cents per kilowatt-hour in 2019, as natural gas prices remain relatively low.”

So just how wrong were MP’s projections of natural gas prices?  Wrong enough for the persons responsible to be relieved of any forecasting duties and required perhaps instead to write personal notes of apology to the 186,000 ratepayers in southeast Mississippi who now face the prospect of paying an extra $60 a month on their electric bill for the next 30 years.  If you have a business in southeast Mississippi, that works out to $133 million per year that won’t be available to spend at your enterprise.

Cheap electricity is a crucial substitute for sunlight when darkness sets in.  It is high time for some “Louis Brandeis’ sunlight – the best disinfectant” to shine on the PSC.  It could do wonders for cheap electricity in Mississippi. Building a $2.4 billion low grade coal plant in 2012 makes no more sense than building a state of the art candle factory in 1879.  The ratepayers in southeast Mississippi aren’t rich enough to pay for either one.

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