A friend of a friend's father-in-law heard that officials in his city have been receiving this letter to get them to commit to a 50 year contract for power from AMP-Ohio's proposed 960MW Coal-Fired power plant and I thought I should pass it on.

Dear Valued Future Customer: 

Congratulations! Your high credit score qualifies you for a Power Purchase Agreement with AMP-Ohio.

Not sure that your community needs to commit to 50yrs of coal-fired power consumption given the benefits of energy efficiency in reducing power demand or other shorter term power supply options on the market such as combined heat and power or renewables? Let us let the economics persuade you.

By entering into one of our Power Purchase Agreements, you will be eligible to receive reliable coal-fired energy at roughly 6 cents a kilo-watt hour from 2013, which is far lower than any other form of power on the market. We have interpolated our forecasts out to 2050 instead of through 2032 to give you a better idea of the obligation you are taking on as a 50yr partner in this endeavor, but as shown in the graph below, our assumptions allow for a very low cost of power to you the consumer.

Fine Print – These price forecasts are subject to potential cost over-runs of $23bln or more.

In the event that our projections do not hold due to an unexpected rise in the volatility in any of the commodity, carbon, or financial markets, these prices are subject to change.

Risk of Increase of Capital Costs

Given that North American power construction costs have risen 27% in the last 12 months there is a growing risk that our revised plant costs of $2.9bln will have to be increased once again. While it is very difficult to predict what the actual capital costs will be given the strong global demand for cement, steel, and other building materials, it is not unreasonable to assume that costs will rise by at least 30% by the time our 960MW plant is built in 2013. These additional costs will all be borne by you the end user and may amount to a 1 cent per kilowatt-hour average increase in power prices over your 50 year commitment. This figure would be revised up to 1.2 cents per kilowatt-hour if the cost of financing the project increases in line with added capital cost burden.

Risk of Revision of Fuel Costs

Coal is also being swept up in the rising global demand for commodities and has doubled in price since December. While it is very difficult to forecast the cost of coal out 5yrs much less out 50yrs it would be very hard to make believe that this rise in coal prices is going to reverse itself in the very near future. This cost rise is also likely to impact the average cost of power in the amount of roughly 4.8 cents per kilowatt-hour over the 50 year contract period.

Risk of Higher Carbon Prices

With all three candidates for the presidency supporting some form of cap and trade policy that would look to put a price on carbon emissions, it seems likely that a carbon price will be in place once our facility is hopefully completed in 2013. As you can see from our assumptions in the RW Beck analysis we do factor in a cost for carbon in our base case scenario but it is well below our higher risk case mentioned further into the report. In the event carbon prices simply trade in line with the main EPA price scenario, these costs will also need to be covered by you the participants. Using the EPA 10 price scenario, which starts at $19/ton and rises by 4% annually going forward, this would add 5.7 cents per kilowatt-hour to our participants bills. If we use the assumptions for carbon prices from the National Mining Association which begin at $45/ton, these costs would be higher, adding an additional 10.5 cents a kilowatt-hour.

Risk for Load Demand

While we have projected an increased demand for power in the Cleveland area of 906MW between now and 2027, these numbers are not strictly consistent with the Energy Information Administration (EIA) forecasts. The EIA is expecting an increase in demand of just 352MW during this timeframe which does not include the reduced demand from the states mandates regarding renewables. If the 2% demand increase in renewables from 2015 is included the total increased demand would be 345MW, 560MW lower than our demand growth projections. While we do not model lost opportunity costs on the participants part for being locked-in to a higher energy commitment than is required by their community, it should be understood that your costs are not just tied to your ability to pay for your obligation. Your power commitment, under our program, is subject to a 25% increase in fixed power supply provided to you in the event of a delinquency from any one of our other partnership communities. This can result in a significant economic burden that is not included in any of our assumptions. It should also be noted that the rate payers of Cleveland have an escape clause built into their contract as there is door-to-door competition in Cleveland for their energy business from First Energy. If costs rise too high, these participants have an exit strategy that could leave Cleveland Public Power and the rest of our particpants, under a great deal of financial stress.

In sum, the risks presented to our forecasts must be considered before entering into our Power Purchase Agreement and are summarized in the graphs below:

These fairly conservative assumptions translate into cost over-runs in the amount $23bln over the 50yr contract period. In terms of end cost to you the consumer, this would translate into a 5-15 cent increase in $/ kilowatt-hour over time as seen below:

As you can see these risks can raise the cost of electricity above that projected in our base case scenario. While these price increases may make shorter-term contracts for combined heat and power or renewables seem attractive to guarantee your flexibility in the years to come, we encourage you to consider our forecasts as the business as usual case for your community and look forward to your participation in our program.

Regards,
AMP-Ohio