JACKSON — Mississippi Power Co. is building a very expensive experimental plant in Kemper County to gasify lignite (low-grade coal) to produce electricity. Despite its high cost and novel design, supporters say it is justified or prudent because it uses lignite for fuel, not natural gas. This fuel diversification, they argue, protects against high gas prices and shortages. Does this make sense?
No. Here’s why.
Kemper requires natural gas.
The Kemper plant cannot run without natural gas. It uses natural gas for start-up, turbine optimization, steam generation, by-product recovery and other operations. It burns about 30 percent as much natural gas for the same amount of electricity sold as the simpler, cheaper, proved natural-gas-fired combined-cycle turbine generator in widespread use. So it does not protect against gas shortages.
OK, supporters say, forget about shortages. If Kemper uses 70 percent less gas, won’t its electricity be cheaper if the price of gas rises and lignite doesn’t? Won’t customers be better off then? Answers: only if the price of gas is high enough and Kemper’s other costs are low enough. Both are so unlikely that Mississippi Power’s dream or scheme looks surreal. But it’s a real nightmare for customers.
Kemper’s other costs depend on how much of its construction cost customers pay if the plant operates reliably and efficiently, and if it recovers and sells by-products at a profit. These other costs are all unknown. Yet Mississippi Power wants customers to pay for them anyway over seven years — starting now with 20 percent higher rates. Seems absurd, doesn’t it? That’s because it is.
Imagine you go to your neighborhood restaurant and prices are up 20 percent. You ask: “What’s up?” Manager says: “It’s our new Lignite Farms loyalty deal. Pay more for seven years (not sure how much, haven’t decided yet) and less for the next 30.” You say: “So your prices will be lower after seven years?” He says: “No, truth is they will be higher. But they could still be a bargain if other restaurants are even higher.” You politely say: “No thanks. Your deal is absurd. You think I’m stupid?” And you go to a restaurant down the street.
Now imagine you live in a town where the Restaurant Commission permits only one restaurant which has just been remodeled. Prices are up 20 percent. You ask: “What’s up?” Manager says: “Lignite Farms loyalty deal.” You ask: “How much more do I pay the first seven years?” Answer: “Don’t worry ’bout it ’cause you got no choice anyway.” You ask: “How do I know your prices will ever be a bargain?” He says: “Trust me.” You ask: “Suppose I do, but am not around if they ever are a bargain?” He says: “Not my problem.”
You say: “Deal’s not fair. I’m going to the Fairness Police.” He says: “Be my guest. I’m tight with the Fairness Police. That’s why I spent so much remodeling. They are OK with the deal.” You think: “We need fair Fairness Police.” Now back to the real world.
The energy world changed in 2008. Other utilities noticed. Kemper’s supporters didn’t or decided it didn’t matter in their dream world. It was the beginning of the American shale boom and a new era of abundant energy. U.S. oil and gas production quietly took off. The disruptive technology was horizontal drilling and fracking. Henry Hub natural gas prices peaked at a little under $9 per million BTUs on average for 2008 and began to fall.
The price was down to a little over $4 in 2010 when Mississippi Power and its Southern Co. parent reviewed the Kemper project that had begun in 2006. Although the world had changed, they doubled down on a 40-year bet on expensive energy and experimental technology to gasify lignite. It was a bad bet then. It looks terrible now. So they plan to lay most of it off on misinformed and uninformed suckers — Mississippi Power’s retail customers.
Gas prices fell further in 2012 to a little over $3 and recovered to just under $4, where it has been trading this year. In its annual Energy Outlook 2013, the U.S. Energy Information Administration forecasts gas prices for electric power rising to a max of only a little more than $8 in 2011 dollars in 2040. Great for the economy if they are right.
Bad for Kemper, however. It needs high gas prices to look good by comparison. How much higher? Let’s run the numbers projected on the first seven years.
Kemper’s construction cost is a big piece of its cost of electricity. It was supposed to cost $1.8 billion when first proposed in 2006. The latest projection is $3.8 billion, excluding $800 million of write-offs and grants. No one knows the final cost. No one will know until the project has been completed, started up and run routinely. The public service commissioners decide how much of the cost customers will pay — how much is prudent.
Public Service Commission Chairman Leonard Bentz has said they should pay “only” $2.4 billion for plant cost. We have used his $2.4 billion in our projections, although it’s not clear his plant cost includes all project costs he intends for customers to pay. And it is not officially “prudent” yet.
Electricity cost also depends on how the plant starts up and how reliably and efficiently it operates. Mississippi Power has projected a smooth start-up and gradual ramp up over seven years to routine reliable operations. This seems naive given the experimental design and the plant’s complexity. It also seems optimistic considering start-up problems at the similar but simpler Duke Edwardsport, Ind., coal gasification plant and erratic operating history of Southern Co.’s even simpler Red Hills lignite-fired generating plant at Ackerman.
So we have tweaked Mississippi Power’s assumptions and adjusted their numbers to reflect these concerns.
Kemper’s by-product revenues are highly speculative. By-product sulfuric acid, aqua ammonia, and carbon dioxide revenues are supposed to offset most of the operating costs. Mississippi Power revised its projections and almost doubled these revenues. This is puzzling since it has never produced or sold any of them. Did the numbers need to look better? Sulfuric acid and aqua ammonia are basic commodities with low unit prices, high transportation costs and limited markets. Customers are not exactly waiting in line. So we have also tweaked Mississippi Power’s by-product revenues.
We have projected Kemper’s electricity cost based on these assumptions. We have also projected electricity cost from a new natural- gas-fired combined-cycle generating plant running on $4 gas that could have been built at the Kemper site for about $800 million. The difference between Kemper’s cost of electricity and the cost from this plant is the extra cost to retail customers.
The extra cost for the first seven years is $1.8 billion, or $9,700 for each of the 186,000 retail customers in Mississippi Power’s monopoly service area. The average customer will pay about $1,400 more for electricity every year. This is more than the discretionary income of many households. (The extra cost does not include Kemper’s future cost and rate increases after seven years.)
There is no way to justify this extra cost or for customers to be made whole after seven years of higher prices. Natural gas prices would have to average over $15 through 2040 for Kemper’s electricity to be cheap enough for retail customers to recover their extra payments plus interest at the 7 percent they pay Mississippi Power. This seems highly unlikely in an era of increasingly abundant energy and stable prices.
The Public Service Commissioners should rule that Mississippi Power can operate the Kemper plant if it wants to but can charge no more for its electricity than the cost from a new natural-gas-fired combined-cycle turbine generating plant.
It should be easy to determine this cost since the Southern Co. built three natural-gas-fired plants in Atlanta last year — with more than four times Kemper’s capacity at about half its construction cost.
Under this solution, management would probably shut down Kemper’s experimental gasifier and run its turbines on 100 percent natural gas. The companies would eat the cost of their mistakes (but cut their losses). Customers would pay no more than if the most economical plant had been built in the first place.
If Mississippi Power continued to run the gasifier, it would pay for the experiment and its bet on high gas prices, not its customers.
• Kelley Williams, a Greenwood native, is chairman of Bigger Pie Forum (www.biggerpieforum.org), a Jackson-based research group that encourages economic freedom and discourages cronyism. He is a former chairman of ChemFirst Inc.
