Mississippi Power Co.’s plans to build a 582-MW integrated gasification combined cycle (IGCC) plant proposed in Kemper County could be scrapped after regulators last week ordered a cost recovery cap of $2.4 billion—some $800 million less than what the utility had originally sought.

The Mississippi Public Service Commission (MPSC) on Thursday approved Mississippi Power’s request to build the lignite plant, but it told the company that it could not charge customers up front to build the new plant. The commission also denied Mississippi Power’s March request for a “hard cap” of recoverable costs of $3.2 billion—keeping it at $2.4 billion.

Finally, the order requires that the Southern Co. subsidiary would have to pay all construction costs. If Mississippi Power accepts these conditions, the commission will determine in a future proceeding whether the company can recover financial costs of construction work in progress (CWIP).

The utility has long asked regulators to approve CWIP costs, saying that without them it could suffer a blow to its bond rating. That could raise borrowing rates and increase costs for ratepayers by up to $500 million, it claimed.

The conditions were necessary because of the economic downturn, Southern District Public Service Commissioner Leonard Bentz told WLOX, a South Mississippi television station last week. “There is no way the ratepayer could afford the additional cost of this plant on their bill at this time.”

In a statement on Friday, Mississippi Power spokesperson Cindy Duvall expressed disappointment at the commission’s decision. "We put forth the best option available to us to meet our customers’ needs with reliable and affordable energy," she said. "The Commission conditions seem to make it impossible for Mississippi Power to finance or construct the Kemper County IGCC Project even if the right to construct had been—or might in the future—be allowed."

Duvall told POWERnews on Tuesday, however, that the utility would file a motion with the MPSC for rehearing and reconsideration for the Kemper County IGCC project this week. “The request will contain a brief on why the conditions in Thursday’s order would not allow the company to act in a fiscally responsible manner,” she said. “The motion will also include an update on the parameters of the project, as well as alternatives for the commission to consider.”

But, if Mississippi Power opts to shelve the project, the utility may consider building a combined-cycle natural gas plant instead, reported our sister publication, The Energy Daily (subscription required)—a prospect that will substantially increase the state’s dependence on natural gas. The proposed IGCC plant was to have relied on Mississippi lignite coal, a largely unused resource mined locally in Kemper County. When initially proposed, the utility had said that “fuel alternative” would create significant energy savings that would more than offset the cost of building the plant.

In January 2009, when Mississippi Power filed for a certificate of public convenience and necessity to build the plant with the PSC, it had also claimed the IGCC project would cost about $2.2 billion. Construction for the plant was expected to begin this year with operational start-up for the facility expected by late 2013.

Cost concerns are a primary reason for IGCC plant cancellations. In 2007, 11 “clean coal” plants were abandoned or put on hold due to strained project economics from escalating costs or failed funding, while four projects suffered similar fates in 2008. Last year, NRG cancelled its La Porte, Texas, facility, while American Electric Power puts its 629-MW Meigs County IGCC project on hold.

Only last month, Duke Energy told regulators that the scale and complexity of its Edwardsport IGCC project under construction in southwest Indiana had added about $530 million to costs—a 23% increase from prior estimations. That plant, slated to begin operation in 2012, is now estimated to cost $2.88 billion.

If the Kemper IGCC project is cancelled, it would be the second shelved by Southern Co. In 2007, the company scrapped plans for a 285-MW project in Florida due, in large part, to regulatory uncertainties.

Sources: POWERnews, The Energy Daily, WLOX, MPSC