Don t Get Burned: The Risks of Investing in New Coal-Fired Power Plants. 2 nd Annual National Coal Meeting July 14, 2008 David Schlissel

Transcription

1 Don t Get Burned: The Risks of Investing in New Coal-Fired Power Plants 2 nd Annual National Coal Meeting July 14, 2008 David Schlissel

2 Deja Vu All Over Again? Nuclear power plants originally promoted as too cheap to meter But nuclear units became very expensive to build in the 1970s and 1980s: - Construction costs spiraled out of control actual plant costs were double to triple estimated costs - Regulatory uncertainty - Owners experienced severe financial problems - More than one-half of proposed plants eventually cancelled - From 1984 to 1993, more than $17 billion in nuclear investments written off, net of tax effects - Over $7 billion in nuclear construction costs disallowed in the 1990s by regulatory commissions 2

3 Uncertainties and Risks Facing Investments in New Coal Plants Today 1. The likelihood of federally-mandated reductions in greenhouse gas emissions leading to high costs for carbon-emitting resources. 2. State mandated reductions in greenhouse gas emissions and the adoption of policies promoting increased use of energy efficiency and renewable resources. 3. Uncertainties surrounding the technical and economic viability of carbon capture and sequestration for pulverized coal-fired power plants. 4. Skyrocketing plant construction costs and delayed construction schedules as a result of the worldwide competition for power plant design and construction resources, commodities and equipment. 5. More stringent regulation of the current criteria pollutants. 6. Coal price increases and supply disruptions. 3

4 Uncertainties and Risks Facing Investments in New Coal Plants Today All Aboard for a Train Wreck for Consumers, Investors and the Environment 4

5 Federal Regulation of Carbon Dioxide Emissions is a Matter of When, Not If Pew Center on Global Climate Change 5

6 Mid-2008 Synapse CO 2 Price Forecasts Reflect significantly changed circumstances since spring 2006 Low Forecast starts at $10/ton in 2013, in 2007$ increases to $23/ton in 2030, in 2007$ levelized cost over is $15/ton High Forecast - starts at $30/ton in 2013, in 2007$ - increases to $68/ton in 2030, in 2007$ - levelized cost over is $45/ton Mid Forecast starts at $15/ton in 2013, in 2007$ increases to $53/ton in 2030, in 2007$ levelized cost over is $30/ton 6

7 Mid-2008 Synapse CO 2 Price Forecasts $80 $70 $60 $50 $40 $30 $20 High Mid Low 2007$/ton of CO2 $10 $

8 Synapse vs. Results of Modeling of Current GHG Legislative Proposals (annual CO 2 prices) $200 $180 $160 $ $/short ton $120 $100 $80 $60 $40 $20 $ Year 8

9 Synapse vs. Results of Modeling of Current GHG Legislative Proposals Levelized Cost of CO 2 Allowances ( ) $120 $100 $80 $ $/sho hort ton $40 $20 $0 EIA Analysis of S.280 EIA Analysis of S.1766 EIA Analysis of S.2191 EPA Analysis of S.280 EPA Analysis of S.1766 EPA Analysis of S.2191 Clean Air Task Force Analysis ACCF/NAM Analysis of S.2191 CRA Analysis of S.2191 Duke University Analysis of S MIT Analysis 2008 MIT Analysis of S.2191 Synapse 2006 Synapse

10 Ranges of CO 2 Prices Used by Commissions and Utilities in Resource Planning Levelized Cost of CO 2 Allowances ( ) $90 $80 $70 $60 $50 $ $/short ton $30 $20 $10 $0 Avista Idaho Power Nevada Power NorthWestern PacifiCorp PG&E PGE PSCo (Xcel) PSE SCE SDG&E Seattle City Light Sierra Pacific Tri-State Xcel Oregon PUC New Mexico PUC Minnesota PUC California PUC Synapse 2006 Synapse

11 How to Make CO 2 Prices Not Count in Resource Planning 1. Argue that CO 2 prices are too uncertain to use in resource planning thereby assuming that CO 2 costs will be zero throughout year operating lives of proposed generating facilities. 2. Assume CO 2 costs only as sensitivity analyses not in base case studies. 3. Use only a single, low CO 2 price trajectory, not a range of possible CO 2 prices. 4. Assume that new units will be grandfathered, in part or in whole, under federal legislation. 5. Screen out zero- or low-carbon emitting resources prior to running capacity planning model. Therefore, only a few non-carbon emitting resources are made available for the model to select as part of a lowest cost resource portfolio. 6. Create resource portfolios by hand rather than allowing the planning model to select the supply and demand side alternatives for the lowest cost plan. 7. Assume unreasonably high capital costs for non-coal-fired alternatives such as wind and natural gas. 8. Assume unreasonably high natural gas prices. 9. Fail to consider the full achievable energy efficiency potential 10. Fail to increase their avoided costs for energy efficiency to reflect the cost of CO 2 regulations. 11. Assume that CO 2 prices do not reflect any increases, over time, of the stringency of regulation. 12. Assume delayed adoption or implementation of CO 2 regulations, e.g., not starting until Focus on decreasing carbon intensity (lbs per MWh) instead of reducing overall CO 2 emissions. 11

12 CO 2 Prices Used in Resource Planning Xcel Energy and Otter Tail Power Company CO2 Prices No ominal $/short to on Xcel High 2007 Xcel Mid 2007 Xcel Low Other Midwest Utility - High CO2 Prices

13 New Climate Change Related Risks for New Coal Plants Issuance of carbon principles by 3 leading financial institutions need to perform enhanced due diligence and consider CO 2 costs. (January 2008) Georgia state court decision on Longleaf Project a PSD air permit cannot be issued without CO 2 emissions limitations based on a BACT analysis. (June 2008) 13

14 Costs of New Power Plants Have Skyrocketed Power plant construction costs have increased dramatically since early 2000 s. Descriptive terms used are skyrocketing, staggering and sticker shock. Estimated costs of new coal plants have increased above $3,500/kW. 14

15 Duke Energy Carolina Cliffside Project Cost Increases Cost of Duke Energy Cliffside Project ($/kw) $2,500 Unit 1 Unit 2 North Carolina Utilities Commission approves only one unit of the Cliffside Project. $2,000 $1,500 $/kw $1,000 $500 $0 Summer 2006 Fall 2006 Winter 2007 Spring

16 Proposed AMP-Ohio Coal Plant - Increases in Estimated Construction Costs Since 2005 $4.0 $3.5 Billions of Dolla ars $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 October 05 May 06 June 07 January 08 Future 16

17 Other Significant Coal Plant Cost Increases Announced in 2008 Estimated cost of the Iatan 2 project in Missouri increased by 15% in April Project already under construction with completion due in This shows that even projects under construction are susceptible to increasing costs. (April 2008) Estimated cost of Duke Energy Indiana s Edwardsport IGCC Project increased by 18 percent from spring 2007 to spring Company says costs increased when it went out for actual project contracts and procurement. Company expects to have fixed prices for approximately 25% of the estimated cost of the Project soon. (May 2008) In mid-june, 2008, Wisconsin Power & Light announced that the estimated cost of its proposed circulating fluid bed coal plant had increased to about $3,500/kW. At the same time, the company announced that the cost of an alternate supercritical coal plant also had risen to above $3,500/kW. These represented increases of approximately 38% since late In support, the company submitted testimony to the Public Service Commission which said that the EPC costs of many coal-fired projects were in the range of $2,500/kW to $3,800/kW. 17

18 Factors Which Have Led to Rising Power Plant Construction Costs Cost increases are due, in large part, to significant increase in worldwide demand for power plants. Demand for plants is straining supply of design and construction resources. Increased demand from China and India. Despite recent cancellations, there is strong U.S. demand for new power plants and pollution control projects for older plants. Limited capacity of EPC (Engineering, Procurement and Construction) firms and manufacturers. Fewer bidders for work, higher prices, earlier payment schedules and longer delivery times. 18

19 Factors Which Have Led to Rising Power Plant Construction Costs (2) Significant cost increases for critical power plant commodities, e.g., steel, copper, cement, fabricated alloy piping. Worldwide competition for resources and supply and manufacturing bottlenecks unlikely to clear in the foreseeable future. 19

20 No Commercially Viable Carbon Capture Technology for Pulverized Coal Plants Timeline for developing commercially viable postcombustion carbon capture and sequestration technology uncertain. Pilot projects being planned for near future. Impact on cost of generating power currently expected to be significant. 20

21 Poor Electric Resource Planning Practice 21

22 Poor Electric Resource Planning Practice Passive attitude toward information. Rely on out-of-date construction cost estimates. Ignore CO 2 price, or treat it at the end as a sensitivity case. Overly constrain alternatives such as renewables and energy efficiency. Claim that the proposed coal plant is part of a strategy or plan for reducing CO 2 emissions. IMPRUDENT! 22

23 Good Electric Resource Planning Practice Actively seek out relevant information. Rely on up-to-date and realistic construction cost estimates. Include reasonable CO 2 price forecasts in the reference case, and analyze high and low sensitivities. Include full consideration of alternatives. PRUDENT! 23

24 April 2008 Virginia State Corporation Commission Decision Denying Request to Build New Coal Power Plant VA SCC Press Release headed SCC denies APCo request for rate increase and approval of new power plant; cites uncertainties of costs, technology, unknown federal mandates. Found Company s (APCo) cost estimate for project not credible -- had not been updated since November SCC said Indeed APCo has no fixed price contract for any appreciable portion of the total construction costs; there are no meaningful price or performance guarantees or controls for this project at this time. This represents an extraordinary risk that we cannot allow the ratepayers of Virginia in APCo s service territory to assume. SCC also noted the uncertainties surrounding federal regulation of carbon emissions and carbon capture and sequestration technology and costs and observed that the Company was asking for a blank check. On this basis, the Commission concluded that We cannot ask Virginia ratepayers to bear the enormous costs and potentially huge costs of these uncertainties in the context of the specific Application before us. 24

25 Questions, Comments, Follow-up 25