Green Blog: A Late Bet on Coal May Not Pay Off

The Prairie State Energy Campus, a vast new coal-fired power plant and mine that is now approaching completion in downstate Illinois is likely to be one of the last of its kind in this country, given that new Environmental Protection Agency regulations bar plants that put out as much carbon dioxide as conventional coal plants. The builders, a consortium of municipal utilities and co-ops across eight states from Missouri to West Virginia, rushed to get it up and running before greenhouse rules could stop it, convinced that coal would be cheaper for the next few decades than alternative sources, like gas or nuclear.

But at least for the near term, the owners will be paying extra for electricity, according to a report produced at the behest of anti-coal groups. When the construction cost rose from the $4 billion estimate to what the opponents put at $4.9 billion, the price of electricity from the project, which includes the capital cost, went above the cost of electricity bought on the open market in the Midwest, according to the report, produced by the Institute for Energy Economics and Financial Analysis, a nonprofit group in Belmont, Mass.

?The Prairie State coal plant is turning out to be the financial and environmental nightmare that many of us feared when the plant was proposed,?? said Sandy Buchanan, executive director of Ohio Citizen Action. Mostly because of the low price of natural gas, a megawatt-hour of electricity in Ohio now wholesales for about $40, but power from the first unit of the plant, which went into service in June, costs about $60, the groups pointed out, and the customers face some additional charges because of a slight delay in getting the generators into service. The second half is due on line late this year.

The details, though, are complicated. While production costs are clearly now above the market average, natural gas is at a record low, at a little over $3 per million B.T.U., and whether the plant remains above market depends on the price over the next 30 years. (In 2007, when the decision was made to build the plant, prices were about double what they are now. )

When the first unit began operation, the consortium building the plant said that the 2007 decision to build ?was based on sound long-term forecasts?? and that the plant?s output ?would be very competitive with other fuels such as nuclear and natural gas over the anticipated 30-plus year life of the facility, which remains the case today, even with some operating delays.?? Natural gas prices will vary but coal prices will remain stable, the consortium said.

While the future price of gas is one of the great uncertainties of the energy economy, one element of the price is the cost of production, which depends in part on continued use of fracking, a technique that some of the groups, including Ohio Citizen Action, oppose.

And the environmental effect is also uncertain. Prairie State?s builders say that adding 1,600 megawatts will accelerate the retirement of older plants, many of them coal. And those plants often lack scrubbers that control sulfur emissions and precipitators that catch the ash, and other controls required on new plants. In addition, modern plants like Prairie State operate more efficiently and produce more electricity per ton of coal, and thus somewhat less carbon dioxide per ton.But Tom Sanzillo, lead author of the report, said in a conference call with reporters that the new capacity would also crowd out wind and solar, which are cleaner, and efficiency, which is cheaper. He said he was not sure what effect it would have in decisions about old coal plants facing low natural gas prices, low demand and high costs for new pollution control equipment.

Raj G. Rao, the chairman of Prairie State and the head of the Indiana Municipal Power Agency, which is a part owner, predicted a different path. In 2007, he said, electricity on the spot market sold in the vicinity of $80 a megawatt-hour, but the price collapsed when industrial demand declined in the financial crisis; it will bounce back when the economy does, he predicted.

The current argument has a touch of irony. The developers sold the project to the public power entities (municipal electric departments, power authorities and co-operatives) in part with the argument that they could reduce their exposure to the vicissitudes of the electricity marketplace by becoming owners rather than buying on the spot market, and by buying the fuel as well as the power plant, in the form of a 30-year coal supply adjacent to the plant.

Vic Svec, a spokesman for Peabody, said that having the users buy shares of the plant in proportion to their power needs was a common approach for projects like this. ?Ultimately, when the scorecard is complete, we firmly believe Prairie State will continue to provide reliable, clean, low-cost electricity for the benefit of millions of customers in multiple states for decades to come,? he said.

But Mr. Sanzillo said the buyers had taken on risk they could not afford. ?This was supposed to be low-cost electricity that put municipalities in a better position, not a worse position,?? he said.

Mr. Rao predicted that gas would increase in price when the United States began exporting.

?Japan is buying liquefied natural gas for $18, and India for $15 or $17. Our $3 gas is not going to stay here,?? he said. ?The average price could cost up to $7 in three to five years.?? And that would make Prairie State?s output look cheap, he said.

Source: http://green.blogs.nytimes.com/2012/08/29/a-late-bet-on-coal-may-not-pay-off/?partner=rss&emc=rss

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