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RICHARD SUN — Kemper: What price fuel diversity?

Richard Sun

I a recent column, Bill Crawford asserted that the issue with Kemper is prudent fuel diversity. It is not and never has been.  The issue has always been whether the rate payers of Mississippi Power should bear the risk of unproven technology and a long-shot side bet on natural gas prices.

Bill Crawford uses natural gas fuel price uncertainty as the justification for diversifying with Kemper.  He cites a high gas price at Henry Hub of $18.48; that was a one day price on February 25, 2003; the day before and the day afterwards the price was below $12.00. The annual average that year was $5.47.  Since there is a very predictable seasonal winter peak in natural gas prices, the annual average is more relevant.

The annual average price Henry Hub price has been below $5.00 in every year since 2009—the entire construction period of Kemper.  Over the last 20 years, the highest average annual prices were $8.69 in in 2003 and $8.96 in 2005.

Even if Kemper had come in on budget and on schedule AND operated at the expected cost and reliability, it would have taken far higher gas prices to make Kemper economic and prudent.  I could find no credible public long-term gas price forecasts issued since 2009 that predicted natural gas would ever hit the required cumulative levels.  With the delays and over runs, even higher gas prices would be necessary for breakeven.  Diversity came at a probable price that was unacceptably (and imprudently) high.

No plant like Kemper, using TRIG technology at this scale, has ever been built and operated successfully anywhere in the US. Somewhere between 15 and 20 other coal gasification plants were proposed or started in the past 15 years; all but one were cancelled or are being converted to other use.  Duke Energy’s Edwardsport, Indiana plant came in over budget and behind schedule; it has been operating substantially below expected capacity and availability rates for two years.

Responsible utilities rarely (if ever) build plants using unproven technology.  Instead they use proven technology that has been operating at numerous other plants for many years.

New technology plants present two challenges:

First, the utility must build it to the engineers’ specifications within budget and on time.  That is the easier of the two challenges.  We have seen how that turned out at Kemper; billions over budget and years behind schedule.

The second and the really tough challenge is getting it to operate at the projected yields (efficient conversion of the lignite to the synthetic natural gas), operating and maintenance costs, and reliability.

The uncertainty over yields, costs, and reliability will exist for years.  Merely getting Kemper to run for a few months is not sufficient to prove its the long-term economic viability or prudence. Duke Energy’s Edwardsport plan has been operating for two years, but has not achieved the availability or capacity levels necessary to achieve the projected costs.

As documented in Steven Wilson’s October 18, 2016 article in MississipppiWatchDog.org, Kemper’s forecast operating cost estimates from Mississippi Power are already increasing, he reads their filings to estimate “a 288 percent increase over the utility’s original projections”.

If the Public Service Commission allows Kemper in rate base that risk of uncertain yields, operating and maintenance costs, and reliability and will no longer be borne by Mississippi Power, but will pass to the ratepayers.

This is not a case of penalizing a company for unforeseeable subsequent events. If it were, I would not have written this column. The over budget and behind schedule construction is a virtual certainty with new technology. None of the credible, public, independent natural gas forecasts showed prices that made Kemper likely to be economic or prudent, even if it had been build and operated as projected.  Southern Company and Mississippi knew the risks they were taking. Kemper was likely to fail from its very inception.

This was never really about fuel diversity; it has always been about unproven technology and a long-shot side bet on natural gas prices. The fall in natural gas prices merely made the consequences of a very bad decision even worse.  Mississippi Power should bear the entire cost of that predictably bad decision.

» Rich Sun, a Jackson resident, was an investment banker with Credit Suisse, Deutsche Bank, Goldman Sachs, UBS and a director of $5 billion global private equity infrastructure funds backed by the World Bank, AIG, and Singapore. He arranged, advised or invested in 100 private transaction valued at over $11 billion, 60% of which were in the energy sector. 

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