Meridian Star

Columns

September 29, 2013

Kemper – the math doesn’t work

MERIDIAN — It is reasonable to declare the Kemper Integrated Gasification Combined Cycle (IGCC) project the 8th Wonder of Mississippi. The controversial plant being built by Mississippi Power (MP) in rural Kemper County (population 10,176) is something that needs to be seen firsthand to be fully appreciated.  

    Even on Google Earth, the Kemper plant looks big, but at ground level from the shoulder of highway 493, the size and scope of the project is much more stunning – scaffolding, cranes, concrete power poles and gasifying silos jut hundreds of feet into the air across a horizon that a few years ago was a serene and pastoral setting.  

    Surrounding this new industrial skyline are hundreds of acres of storage tanks, transformers, settlement ponds and parking lots. At the adjoining lignite mine gargantuan dump-trucks, mammoth tractor shovels, electric draglines and conveyors stand ready to dig and move millions of tons of dirt and lignite. All the while security personnel patrol the access roads notifying anyone who stops that pictures are not allowed and any taken of the plant should be erased.    

    The wonder doesn’t stop there. The Kemper project’s $5 billion plus price tag alone qualifies the plant as one of Mississippi’s great wonders. By all accounts Kemper will be the most expensive facility ever built in the state of Mississippi.  Some other notable facilities with price tags now dwarfed by Kemper’s are the Grand Gulf Nuclear plant - cost $3.8 billion, the Tennessee Tombigbee Waterway - cost $2 billion and the Beau Rivage - cost $800 million.  

    It is the outrageous price tag that has most Mississippians wondering. How did it get so high? How did we get to this point? Who will pay for which part? Who knew what and when? Is anyone accountable? And most importantly, is there a cheaper solution?

    Some context on the business of electricity is helpful. The electrification of America began in the 1880’s with Thomas Edison’s memorable claim, “We will make electricity so cheap that only the rich will burn candles.” Edison understood that low prices are the best way to grow new markets with bigger volumes and greater profits. Edison’s vision has been validated. The inflation adjusted price of electricity declined by 97 percent during the 20th century. Such is the nature of productivity – advances in technology and innovation create new abundances which in turn bring lower prices, greater prosperity and higher standards of living.  

    The vision from MP and Southern Company runs contrary to that of Thomas Edison. In a March 2010 media interview, Anthony Topazi, then president of MP, stated, “Rates are gonna go up about a third. They are going up a third whether I buy somebody’s gas, whether I build gas or whether I build Kemper.” What Mr. Topazi, MP and Southern Company missed, or chose to ignore, was the biggest breakthrough in the energy field in the past thirty years.  

    In 2010, innovative drilling techniques in shale were already unleashing vast new reserves of natural gas and, with them, sharply lower prices in this important fuel. Due to this shale gas revolution, the price of a kilowatt hour has been little changed since 2010 and the U.S. Energy Information Administration expects natural gas prices to stay low for the next thirty years.

    MP and Southern Company’s inescapable problem is that they have designed and spent billions building a very expensive way to make electricity.  Little known is the fact that one of Kemper’s biggest customers is the Integrated Gasification (IG) side of the Kemper project. Drying, gasifying and separating lignite into syn-gas and other component parts is so complex and energy intensive that it takes 225 megawatts to run the Kemper project – a.k.a. parasitic load. The net result is less output to the grid and some of the most expensive electricity in the country – upwards of 20 cents per kwh compared with 5 cents for a similar capacity natural gas plant.

    Kemper’s net output to the grid of 575 megawatts will only represent 18 percent of MP’s system capacity even as the cost for this experimental plant will represent 75 percent to 80 percent of MP’s total capital investment. As business management this deserves an F-.  As a matter of law, MP and its executives are in breach of their duties as proscribed in Mississippi Code 77-3-2, to provide “adequate, reliable and economical service to all citizens and residents” of its service area.

    Having already taken over $1 billion in write-offs, MP and its parent Southern Company now want MP's 186,000 ratepayers to take full responsibility for $3.75 billion. MP and its lobbyists claim that a 22 percent rate increase is all that’s needed to accomplish this. Don’t believe it – the math doesn’t work. It is too much money spread over too few customers.  

    Read the fine print of the proposed seven year plan and you’ll find a “heads we win, tails you lose” clause. Any Kemper costs above the new 22 percent rate over the seven years go into a special “accrual account” on which MP earns 7 percent. In year 8, the “accrual account” and its earnings roll over like a mortgage balloon to be added to the next rate plan. The 22 percent rate plan is a teaser plan designed to look reasonable enough to get passed while also locking in ratepayers for the life of the plant.

    A logical solution to this perilous predicament is to burn natural gas in the Kemper CC turbines for electricity and to turn over the ownership, responsibility and costs of the experimental IG side of the Kemper project to the Southern Company. Such a move should negate any need for rate increases for MP customers. It would be a bitter pill for Southern Company and its shareholders but would do wonders for southeast Mississippi and the state’s economy as a whole.



Ashby M. Foote III is president of Vector Money Management

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