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Posted on Thu, Mar. 20, 2008
By STEVE EVERLY and KAREN DILLON
The Kansas City Star

Cost of Coal Power Rising

Plant-construction expenses and global demand combine to help drive up the price.

Electric bills are poised to soar for customers of utilities building coal-fired power plants.

The plants, long-trusted purveyors of low-cost power, no longer seem like such good bets because of soaring construction costs and the surging cost of coal. Moreover, many think Congress will impose penalties on emissions that contribute to global warming.

To be sure, some in the electric industry still view coalfired plants as the best lowcost option to provide yearround power.

But the growing costs, driven by burgeoning global demand, have prompted warnings of "seismic shifts" in the way the industry views the plants.

"It's a very tough environment right now," said Lawrence Makovich, a vice president for Cambridge Energy Research Associates.

Topeka-based Westar Energy, for example, was so troubled by the changes that it tabled plans for a coal-fired plant.

But the shift is being played out in a more dramatic fashion at Kansas City Power & Light, which is leading a group of four utilities already building Iatan 2, an 850-megawatt coal-fired plant near Weston.

The plant, which was originally estimated to cost $1.3 billion, already is $400 million beyond that figure and is expected to go up further. In the wake of "cost pressures," KCP&L now is "refocusing" its Iatan 2 budget and could release a revised estimate as early as April.

"What we're seeing is that increased pressure on prices," said Michael Deggendorf, a vice president for KCP&L.

The utility has faced questions about mismanagement of the construction. But the utility has denied that and added that KCP&L has fixed prices on some components of Iatan 2, which should help moderate the increased cost.

Even so, the eventual cost of the plant could be daunting. The cost of similar plants built elsewhere have doubled or more. That could mean that Iatan 2 could ultimately cost $2.6 billion, plus financing expenses.

That would set the stage for a rate shock for KCP&L customers, which will be responsible for paying for a majority of the plant. At the original price of the plant, KCP&L estimated that rates could go up 20 percent. But a rate increase of as much as 40 percent is conceivable if costs mount as much as at other plants.

Such a spike in electric rates would have implications not only for the utilities and their customers but also for economic development. Affordable electricity has served as a major selling point for Kansas City in attracting business investments.

"The increased cost is an issue that we're facing all over the country," said Jim Zakoura, an area lawyer who represents industrial customers.

Cost vise KCP&L isn't alone in getting squeezed by coal-plant costs.

The cost for the two generators that Sunflower Electric Energy Corp. wants to build in western Kansas has more than doubled to $4.2 billion, according to industry experts.

David Schlissel, a senior consultant with Synapse Energy Economics, said cost issues facing utilities are akin to building a new home without knowing how much it would cost, how much the taxes would be or the cost of financing.

"It is a worn-out cliche, but I call it a train wreck," he said.

KCP&L officials said a specific cost estimate for Iatan 2 would not be available until the current review was completed. But they said it would be competitive with other new coal-fired plants. Iatan 2 could be open as early as 2010.

"We're moving forward," said Matt Tidwell, a spokesman for KCP&L.

The same goes for Sunflower Electric, which along with two partners is pushing plans for 1,400 megawatts of coal-fired generation in Kansas. The contentious project was halted last fall by the state’s top environmental regulator. The project was resurrected by the Kansas Legislature, but that decision now faces a gubernatorial veto.

Steve Miller, a spokesman for Sunflower, said not building new coal plants could affect the economy because Americans continue to use more electricity.

"Does that mean we are going to continue to run dirty old power plants and we can't grow the consumption of electricity?" Miller said. "Surely America is not going to get to that point."

Others are taking a more cautious approach.

Westar in late 2006 said it was postponing plans to build an 800-megawatt coal-fired plant. The plant's cost had initially been estimated at just over $1billion. But rising costs for materials and labor increased the price to $1.7 billion. Today it would be more than $2 billion, said Jim Ludwig, a vice president for Westar.

In addition, the possibility of a carbon tax on greenhouse gases could cost utilities dearly. Even the price of coal can no longer be safely predicted.

"All these things are converging," Ludwig said.

Westar decided to postpone the plant indefinitely. It sketched out its plans in a document released in February called "A Strategic Plan for Uncertain Times."

The document mentioned "seismic shifts" in the industry and recommended a plan to keep demand down as much as possible with energy efficiency. The company could improve the distribution of electricity on its lines so less power is lost. Meanwhile, consumers would be encouraged to conserve.

Westar also plans to have 300 megawatts of wind energy in operation by the end of the year. Gas-fired plants, which cost less to build but more to fuel, also would be used more by Westar. The utility relies on natural gas to generate 4 percent of its power. The national average for natural gas is about 10 percent.

Concerns about coal plants are spreading.

"You’ve got to ask: 'Do you think we have reached a point where it economically doesn't make sense?' " said Michael Dworkin, law professor and director of the Institute for Energy and the Environment at Vermont Law School.

The stakes are enormous, especially for utilities that are in the middle of constructing coal-fired plants.

Wall Street investors last month announced that loans to build coal-fired power plants were risky because of escalating costs and uncertainty about environmental regulations. The U.S. Department of Agriculture has stopped providing loans and subsidies to rural and municipal utilities to build coal plants.

In a letter to Rep. Henry Waxman, a California Democrat, the agency's administrator wrote that there would be no loans until the agency could "develop a subsidy rate that reflects the risks associated with the construction of new base load generation plants."

Ripples from such decisions are already being felt.

This month, Associated Electric Cooperative, whose territory includes all of Missouri except Kansas City and St. Louis, decided not to build a plant 50 miles east of Kansas City. The cooperative was turned down for a federal loan.

In 2004, Southern Montana Electric Generation and Transmission Cooperative wanted to build a 250-megawatt coal plant. By last fall, the estimated cost of the plant was $750 million, said Jay Fletcher, spokesman for the federal government's utilities program.

On Feb. 19, the cooperative's request for a loan was turned down.

"One of the things we cited is the extremely high cost of the project," Fletcher said.

Fletcher said that in each of the past four years, the cost of building a power plant has gone up 30 percent. The measurement used to estimate costs reveal the increases. A few years ago, it cost about $1,500 a kilowatt hour to build a plant. The cost to build an almost 1,000-megawatt plant planned by AMPOhio is now at $3,000 a kilowatt hour.

Then there is the fuel.

Coal is still considered the cheapest fuel except for nuclear. But coal prices have gotten volatile. In 2003, a ton of coal delivered to electric utilities was $24.74 a ton. Last year, it was $36.09, an increase of nearly 50 percent.

Prices are being pushed higher by burgeoning global demand driven by emerging economies such as China. Some estimates call for coal prices to eventually be less volatile, but others expect prices to continue to increase.

"There’s not going to be a reduction short of a war or plague or radical new technology," Dworkin said. Carbon taxes

Soaring construction and coal costs are known factors for the utility industry. What is less certain is when Congress will enact global-warming regulations requiring utilities to pay for emissions of CO2, a greenhouse gas.

Waxman and fellow Rep. Edward J. Markey, a Democrat from Massachusetts, filed a bill Tuesday that would place a moratorium on all new coal plants until technology is developed to control global warming emissions or CO2.

"This bill will make companies prepare for the future and prevent them from building low-tech, coal-fired power plants before a global warming bill is passed," said Markey, chairman of the House Select Committee on Energy Independence and Global Warming.

One approach being considered is used in Europe, where emissions can cost up to $30 a ton.

"Federal regulation of greenhouse gases is no longer a matter of if - it is a matter of when," Schlissel said in testimony submitted to the Kansas Legislature.

Schlissel calculated that the CO2 emission penalties for Sunflower's proposed 1,400-megawatt plant could be from $67 million to $334 million annually by 2015. By 2030, the range is predicted to be $387 million to $966 million.

Experts do not think that the technology to prevent CO2 emissions will be available until at least 2030 - if ever. Miller, of Sunflower, discounted the cost of CO2 regulations.

"I cannot believe our Congress, and our Legislature, is going to allow the price of electricity to get so high the common person can't afford to pay their bill," Miller said. "In the end, it is all going to be about what the ratepayers are going to pay. I can't see Congress putting trillions of dollars on the taxpayers." To reach Steve Everly, call 816-234-4455

To reach Karen Dillon, call 816-234-4430

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