Which Comes First?
On July 14, American Electric Power (AEP), one of the largest electric utilities in the U.S., announced that it will be terminating its cooperative agreement with the U.S. Department of Energy and putting its plans to build the carbon capture and sequestration (CCS) project at its Mountaineer plant on the shelf. AEP estimated the cost of the near-utility-scale CO2 processing plant at approximately $668 million.
The project documents predict 90% of the CO2 would be removed from the gas of 235 MW of the plant’s 1,300 MW. The gas would be compressed and then injected into a reservoir located over a mile deep in the earth. The new project was to have been in service in 2015. The auxiliary power required to run it was expected to be in the range of 50 MW to 80 MW (up to a third of the gross power). The pilot project, equivalent to 20 MW, reportedly operated very well during its 18-month operating period, between October 2009 and May 2011.
The reasons cited by AEP for its action are the "current uncertain status of U.S. climate policy and the continued weak economy." Michael G. Morris, AEP chairman and CEO, said in a press release, "We are placing the project on hold until economic and policy conditions create a viable path forward." He went on to say that "at this time it doesn’t make economic sense to continue work on the commercial-scale CCS project beyond the current engineering phase."
Blame Game Begins
Within hours, the blogosphere was flooded with editorials blaming AEP for dousing the future of CCS. For example, a Time magazine July 18 blog posting by Tara Thean said, "What scrubbed the plan [building the full-size CCS plant] is what scrubs so much that Washington gets near: politics and money." Thean then pointed the finger at the lack of carbon cap-and-trade regulations as the "politics" that killed the project.
To reduce the reasons for canceling the project to politics, as so many online commentators did, is a gross oversimplification and ignores the economic rules that govern public companies. The explanation also overlooks the real question that we should be asking about these DOE-funded projects.
AEP, like any public corporation, is in business to make a profit for its owners, the stockholders. However, as a regulated utility, AEP is also obligated to provide the lowest possible price of electricity for its customers. The various utility commissions in the states where AEP operates continuously monitor AEP’s operations and expenditures to ensure that the dollars spent are "prudent" and in concert with commission guidance. If an expenditure is not deemed prudent, then the stockholders are obligated to pay the bill, not the ratepayers. Rejected costs appear on the corporate balance sheet as reduced stock price and/or dividends. If the expenditures are judged prudent, then AEP is able to earn a regulated rate of return on that investment.
Unfortunately, the regulatory uncertainty experienced during the past few years places a utility in the unenviable position of guessing what may legislated by Congress, enacted through rulemaking by an Executive Branch agency, or later vacated by a court. If a company guesses wrong, then the cost of compliance increases or scarce investment dollars aren’t spent wisely. If the utility guesses right by investing in technology that does produce a market edge in the future, then the stockholders benefit.
Morris guessed that carbon regulations of some sort were coming years ago and hedged his bet with the Mountaineer CCS project, starting back in 2002. However, with carbon regulations now unlikely for some years in the future, commission regulators are in no mood to rubber-stamp guesswork. No doubt AEP would have continued into the construction phase with the larger CCS project should it have received Public Service Commission of West Virginia approval to do so. Ever practical, the Commission agreed in late March to allow AEP to pass on only about one-third of its expenses related to the pilot project to West Virginia ratepayers. Commissioners said that West Virginia ratepayers should not shoulder the entire cost of the project and urged AEP to spread the costs across all the states where it operates. That’s a generous proposal, but not helpful to AEP.
Impossible Situation
"We are in a classic ‘which comes first?’ situation," explained Morris. "The commercialization of this technology is vital if owners of coal-fueled generation are to comply with potential future climate regulations," he said. "But as a regulated utility, it is impossible to gain regulatory approval to recover our share of the costs for validating and deploying the technology without federal requirements to reduce greenhouse gas emissions already in place." Clearly, the chance of getting each of the 38 states where AEP operates to agree to accept a portion of the project cost recovery burden was not in the cards.
On the other hand, the number of utilities in the U.S. that have the balance sheet to support investment of hundreds of millions of dollars to develop CCS is fast approaching zero. Investments that are dollar-matched by the DOE have little power to sway utilities—there are so many other demands for capital to meet new environmental rules with specified compliance dates that optional projects such as the Mountaineer CCS project are dead on arrival.
What we learn from the AEP situation is that huge cost-shared projects that lack a legislative mandate will garner little utility or state regulator interest.
However, there is a much more significant question that hasn’t been answered: Why is the DOE investing hundreds of millions (likely billions) of dollars on technology projects that have no foreseeable legislative requirement?
—Dr. Robert Peltier, PE, is COAL POWER’s editor-in-chief.