Old Dominion Electric Power Corporation's plan to build a 1,500MW supercritical pulverized coal-fired power facility in Dendron, Virginia comes with significant economic risk that can raise the "expected" cost of this facility by tens of billions of dollars over time. Costs that will need to be borne by its rate paying cooperative partners for the next 45 years due to the wholesale power agreements they have signed onto with Old Dominion in January of this year.

As a bit of background, Old Dominion Electric Cooperative (ODEC) is a transmission and generation cooperative that provides electric power to 11 member electric distribution systems. These members in turn provide the power to nearly 1 million customers in the states of Virginia, Maryland, and Delaware.

Currently, ODEC generates 1,800MW of power from its own facilities and buys an additional 850MW of power in the marketplace on behalf of its member co-ops. In order to meet future load growth demand and reduce the number of power contracts they are currently buying in the marketplace, ODEC is looking to invest $6bln in a new base load power plant in south-west Virginia. This 1,500MW coal-fired power facility, known as the Cypress Creek Power Station, would be financed by a debt issuance secured by 45 year wholesale power contracts from their 11 member co-ops and is expected to come on line by 2014.

ODEC claims that building this coal facility is the most "cost effective and sustainable" long term solution for their members. However, after factoring in potential construction cost over-runs, higher than expected financing costs, fuel price volatility, and carbon costs under a risk case analysis of this project, this does not appear to be the case. In fact it appears that this facility could be subject to tens of billions of dollars of cost over-runs even under very conservative assumptions. 

Since ODEC plans to build a non-capture ready facility, Cypress Creek Power Station is likely to be required to pay the full cost of their annual carbon emissions under a cap and trade bill that would exempt new coal from any transitional assistance provided to the existing industry fleet. These costs alone would be significant for the facility given that Cypress Creek is expected to produce 10 million tons of carbon dioxide a year. In dollar terms this is likely to start at $190mln a year for this facility (assuming a $19/ton price for carbon in 2014), and escalate to $1.2bln a year by 2050 (assuming a $120/ton price for carbon at that time). When this carbon risk is combined with the risk of higher construction, fuel, and financing costs, these additional expenses would increase their consumer's electric bills by as much as 4.5 cents a kilowatt hour by 2015 rising to 17.5 cents per kilowatt hour by 2050. Furthermore, much of these higher costs would be locked in, forcing the cooperative members to absorb the higher cost of power for decades to come due to their wholesale power contracts with ODEC.

In addition, from a demand perspective, while ODEC forecasts  higher demand for their members at the present time, these assumptions may fail to materialize due to a combination of slower economic growth and reduced power demand from their customers. In fact, while power demand has increased roughly 1-2% per year from residential and commercial customers since 1994, according to a recent investment banking research report, actual usage per residential customer has fallen 2-3% and usage per commercial customer has fallen 1-2% during this same time frame. This is mainly attributable to improvements in the energy efficiency of the homes, offices, and appliances and this trend could be accelerated even further under the energy efficiency provisions in the current economic stimulus bill. 

In an S&P report issued this month entitled "Will the Recession Pull the Plug on U.S. Public Power Companies and Electricity Co-ops", S&P sees declining energy sales, increasing payment delinquencies and bad debt expenses, and political pressure to hold down rates as all adding economic challenges to electricity co-ops over the next several years. This is not to say that ODEC will not need additional load based power over the medium term, but as energy sales decline and more utilitites find themselves with excess capacity, a more incremental approach may be warranted given the unknowns with respect power demand going forward.

With respect to coal, S&P expects that as "utilities incur the cost of carbon regulation, generators that rely on coal may well find erosion in the variable cost advantage that they currently enjoy vis-a-vis natural gas generators" which would question ODEC's logic that coal is the most cost effective alternative available to them at the present time.  

While ODEC may say that they are still willing to "stand firm in the face of uncertainty" with respect to the cost of carbon regulation, many other large public power and cooperatives openly disagree with this posture and are avoiding coal investments altogether at the time being. At a recent conference on power demand trends, one of the largest co-op by generation in the country explained how they had done a thorough review of their options for adding additional load based power demand and concluded that they were "tentative to use coal" at the given time due to the high level of regulatory uncertainty surrounding carbon emissions costs. 

In sum, Old Dominion Electric Cooperative's plan to investment $6bln in a supercritical pulverized power plant that will not capture its carbon emissions is neither "cost effective" nor "sustainable" for its member cooperatives when all the risks are properly accounted for. ODEC's members need to step forward and question the logic of "standing firm in the face of uncertainty" and add their voices to the debate over whether building this facility makes any economic sense at all given potential liabilities from carbon regulation and cost over-runs. Tens of billions of dollars of additional costs are at stake, and given it is their nearly 1 million customers that will ultimately be tasked with paying for it over the next 45 years, it is important that members concerns are voiced before additional funds are miss-spent on this project.