Sunflower Co-op Should Rethink its High Priced Coal Commitment

Sunflower Electric Power Corporation's plan to take possession of 200MW of the 1400MW Holcomb supercritical coal-fired power facility in southwest Kansas comes with significant economic risk that will ultimately be borne by their rate-payers. These risks include higher construction, credit, and fuel costs, regulatory risk of carbon emissions and demand uncertainties that can raise the cost of this facility by billions of dollars over time.

While the full details of the costs involved in building the Holcomb facility have not been disclosed, a study prepared by RW Beck for a new supercritical coal-fired power plant facility in Meigs County, Ohio should offer a very close approximation of the facilities costs.

Using the RW Beck revised feasibility study prepared in October 2008, the cost of constructing a new supercritical power plant is approximately $4,100 per kilowatt including short term interest expenses before the facility comes on line. This means that the original capital cost estimate for the 1,400MW Holcomb's expanded facility should be revised up to $5.75bln from $3.6bln, and Sunflower's capital costs should rise from $514mln to $822mln.

The $300mln increase in capital costs for the Sunflower facility would raise the cost of electricity for Sunflower's members by 1.6 cents per kilowatt hour. The higher capital cost for the facility is also likely to affect the ability of Tri-State to finance this deal in the current environment given the tight credit markets. If the higher capital costs and the weakness of the credit markets result in a 1% increase in financing costs for the facility above business as usual, this would increase rate payer's costs by a total of 2.6 cents per kilowatt hour.

In addition to construction and credit risk, Sunflower is likely to be subject to a great deal of carbon risk from the new facility. With the EPA determining that carbon dioxide is a known pollutant that should be subject to regulation, carbon risk should be included in the economic analysis of this facility as well. While President Obama has called for a cap and trade system on carbon emissions, and Representative Waxman has signaled his intention to pass a cap and trade bill through committee by Memorial Day, the regulatory risk would appear to warrant a closer study of legislative proposals that seeks to address the issue of carbon emissions.

While new legislative proposals such as the Dingell-Boucher bill reference coal issues, a new joint agreement signed by some of the nation's largest carbon emitters like Duke Energy as well as environmental groups like NRDC offers specific recommendations with reference to coal-fired power plant regulation and transition assistance. The USCAP Blueprint for Legislative Action suggests to Congress a plan that would create a cap and trade system for carbon dioxide that would require any new coal-fired generating facilities, that has not been permitted by January 1st 2009, to pay the full cost of their carbon emissions starting in 2012. The document also includes performance-based subsidies to develop and deploy carbon capture and storage (CCS) technology to scale as a way to mitigate the impacts of new regulation on power providers. 

Under this proposal, while the Sunflower plant would be eligible to participate in the incentive program for CCS, it would not be grandfathered in any way with respect to its carbon emissions as the Holcomb plant has not yet received its permits. As a result, Sunflower would be subject to pay carbon costs that would begin at $24mln a year for their 200MW portion of one plant and escalate to $172mln by 2050 using EPA carbon cost estimates (see graph below). This would mean that Sunflower's $95mln up front fee and their $25mln annual management fee would be eclipsed by the facilities carbon costs by 2021. In terms of costs per kilowatt hour,  these carbon costs would  translate into an increase of 2 cents per kilowatt hour in the early years, rising to an increase of 14 cents per kilowatt hour by 2050.  

In addition to carbon risk, rising fuel costs may add additional risk to the economics of this facility. While fuel costs have been revised up in the October 2008 RW Beck feasibility study due to growing US exports of coal to Europe, a 20% increase from these numbers would result in a 4 cent per kilowatt hour increase for Sunflower's rate payers as well.

Lastly from a demand perspective, the economic slowdown should require many communities to rethink their need for additional long-lived power assets. A compelling case can be made that energy efficiency programs and scalable alternative power investments offer a better economic alternative to new high cost high risk coal power during uncertain economic times.

In sum, the economics of Sunflower's 200MW investment in the Holcomb facility look fairly unattractive when all the risks are properly accounted for. The table below provides costs estimates for the new 1,400 MW Holcomb facility based on the cost estimates of the AMP-Ohio supercritical coal-fired power plant prepared by RW Beck. These costs should be compared to the costs for this facility under the original cost estimate of $3.6bln for the Holcomb facility which put the cost of power at $64/MW in 2015 and $95/MW in 2030 without carbon costs.