King Dionysius I, ruler of Syracuse, Italy, in the 4th century B.C., invited his courtier Damocles to exchange places with him for a day. While enjoying a feast, Damocles immediately lost his appetite when he noticed a sword suspended above him by a single horsehair. Dionysius, as they say in Las Vegas, was making his point the hard way: handling risk is part of a leader’s job, and danger can arise at the most unexpected times.
Today, utility executives have a better retirement plan than Dionysius, but there’s a figurative sword hanging over their heads: uncertainty about the timing and strength of future federal and/or state CO2 regulations. Congress currently seems to be favoring a European-style cap-and-trade approach over a straight tax on carbon emissions, but that may change once this election year passes. Indeed, it may take the rest of the decade to exorcise the devil from federal legislation that will surely raise everyone’s electricity rates and create a two-tier (large and small carbon footprint) national bulk power supply system.
Managing risk
The list of utilities that have decided to cancel a new coal plant rather than bear its unquantifiable carbon risk is growing. Last month, POWER’s 2008 industry forecast attributed the cause of this collective loss of appetite to FUD: fear, uncertainty, and doubt—each anathema to utility executives.
For example, last November Southern Company and Florida’s Orlando Utilities Commission terminated a 285-MW integrated gasification combined-cycle (IGCC) project just two months after it broke ground at the latter’s Stanton Energy Center. The stunning reversal of fortune was viewed as a slap in the face to the U.S. DOE, which was planning to pay $294 million of the project’s $855 million cost to make it a showpiece for the Bush administration’s Clean Coal Power Initiative.
Mike Tyndall, a spokesman for Southern Company, said no single event during the two-month period had changed the company’s mind about the IGCC project. “It was a culmination of the growing uncertainty,” he said of the cancellation decision. “The partners are just not able to take the financial risk.”
As another example, Florida’s Public Service Commission, citing potential CO2 control costs and other related project risks, last June rejected a proposed coal plant by Florida Power & Light. The “no” vote came shortly after Gov. Charlie Crist (R) issued an executive order to substantially reduce Florida’s emissions of the greenhouse gas. Fear of carbon risk wasn’t limited to the Sunshine State, parts of which are projected to end up under water if global warming raises worldwide sea levels. Far from any coast, two 700-MW coal-fired units that Sunflower Electric Power Corp. had proposed building at its existing plant near Holcomb were axed by the Kansas Department of Health and Environment in late October.
Perhaps another dozen coal projects have gotten a thumbs-down from a state regulator over the past year; the reason most often cited was the rising uncertainty of carbon controls or untenable project cost risks. The crazy quilt of different state carbon caps that could emerge if California’s emissions standards aren’t adopted as national standards would only heighten the FUD felt by utilities. Expect more utilities to take a wait and see position on carbon and, in the interim, resort to the lowest-risk option for adding capacity—building more gas-fired generation.
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