Kemper County Plant is the Right Choice

MEI President Patrick Sullivan’s Guest Column published in the Clarion Ledger June 3, 2012.

In financial management, diversity of assets in a portfolio is advised to protect against devastating losses. The same is true in an electric power generation portfolio. A well-balanced mix of fuel sources guards against extreme volatility due to unpredictable market fluctuations in one commodity.

The Mississippi Public Service Commission rightfully approved the construction of the lignite gasification power plant in Kemper County. By supporting more baseload power diversity in a service area already heavily reliant on natural gas, the Commission’s decisions are based on rate stability and affordability for Mississippi Power customers both in the near term and over the 40+ year life of this generation asset. Additionally, the fuel is indigenous lignite coal to be mined within sight of the plant, meaning fuel price over the life of the plant in this case is predictable, unlike most energy commodities.

A diverse, affordable fuel portfolio is the right energy strategy for Mississippi. To suggest ratepayers would be better off with more natural gas power in the place of the Kemper County plant ignores this basic policy and other important points.

First, history tells us natural gas prices are unpredictable. We only need to look back to the U.S. Energy Information Administration’s 1999 predictions for natural gas prices from 2000-2009. In the late 1990’s, large discoveries created a perceived supply glut. The prediction was cheap, steady, modestly rising prices with an average price of $2.32/mcf. The actual average price over this period turned out to be $5.70/mcf, an underestimation of 146%. In no way does this criticize the EIA, but this simply demonstrates our severe, if not total, lack of ability to predict demand and prices, even in the very near term. Even with the enormous shale gas developments in the U.S., speculation remains at best an educated guess.
Natural gas is a great fuel with multiple uses in our economy – power, heating, manufacturing, transportation – but putting all our eggs in one basket exposes ratepayers to unpredictable price swings. If this was a predictable venture, surely many market experts would have shorted natural gas futures in 2008 and taken a long position in 2000 and made fortunes for their clients and themselves.

Second, in Mississippi, natural gas already accounts for 54% of power generation, more than coal and nuclear combined. As long as prices stay low, this is good, and the hope is with the abundance of shale gas in the U.S., price will remain low for a long period. Low natural gas prices are good for just about everything in the economy, but there are no guarantees.

Basing long term investment decisions only on capital costs (coupled with unpredictable fuel costs) takes us back to the ill-advised notion of investing our entire estate on one stock. While coal and nuclear power generation are more capital intensive during construction, they historically cost less over time due to long operating lives and more stable fuel costs. This plant is slated to still be generating power in 2050. Diversity, capacity, and reliability are what we want to protect ratepayers and to attract business and industry to our state.

Third, for the first time in the United States at this scale, the Kemper County plant will be capturing carbon dioxide emissions for geologic sequestration. Why does this matter? Mississippi is one of few players in enhanced oil recovery (EOR) in the U.S. EOR is the use of carbon dioxide injections to revitalize oil production in old oil fields. Because of EOR, oil production in Mississippi has been on the rise for the last several years. Simply put, this means more investment and jobs out in rural Mississippi and more tax revenue for the state. Further, because EOR is so prevalent in MS, the captured carbon dioxide will have a monetary value and already has eager buyers, rather than be deemed a waste byproduct as in conventional coal plants. Selling carbon dioxide emissions will help offset the cost of building the plant.

New oil and natural gas technologies in the U.S. have dramatically transformed our country into an energy heavyweight, now with more known energy reserves than any other country in the world with the ability to produce at a low cost, including oil, natural gas, and coal. And on a much smaller scale, we are getting better at capturing energy from wind, sun, biomass, and water. As China and others become more industrialized and energized, world energy demand will rapidly increase. If U.S. leaders will sincerely embrace realistic energy development, we have a real opportunity to compete globally in ways that seemed impossible just 3 years ago. With our state’s aggressive growth goals, every reasonable opportunity Mississippi has to participate in energy development and innovation should be considered and pursued.

Like the shale gas and oil boom, successful solutions to energy challenges in many cases require technology development and commercialization. By showing the way on lignite gasification, carbon capture, and market based solutions like EOR, Mississippi is now home to a major platform for future energy.

Thank goodness we have regulators in Mississippi who understand the extremely long term nature of these projects and the importance of diversity. Due to our brief 4 year political cycle, the politically expedient decision for today is to build the cheapest source based on today’s prices, but this risky strategy would be contrary to sensible long term planning. Not only is the Kemper County plant in the best interest of Mississippi and its ratepayers, but the plant also sets out to prove Mississippi can be home to energy innovation.

Let’s plan for more innovation here.