When Policy and Construction Timelines Diverge

Have you ever been surprised to have a nice gift rejected? Well, that’s what happened to the POWER team this summer.

This spring, we chose an interesting and diverse set of plants from around the world to recognize as Top Plant Award winners. However, in two cases, a plant chosen for an award refused to be recognized. In one case, the “please don’t write about us” request came up front; in the other case, it came after work on a story had started. One was a coal plant; the other was a gas plant. Both were in the same country. Can you guess which one?

The chosen plants were deserving of awards, and we could have written the stories anyway, but we didn’t want to rub salt in their wounds. You see, in both cases, the generating companies were publicity shy because they had already been burned. They had developed and commissioned state-of-the-art facilities with every expectation that they would be needed and valued, only to have power policy and markets shift so dramatically that the now-unprofitable plants are either offline or due to be shuttered. (If you guessed Germany, you’re right. In August, RWE announced it would take 3,100 MW of fossil-fueled capacity offline, E.ON had shut down or idled 6,500 MW, and Statkraft idled 1,200 MW in Germany due to weakened demand and increased renewable generation.)

Even if you believe the swings in Germany’s energy policy over the past few years were motivated by the best of intentions, you have to acknowledge that project developers are suffering whiplash. A nuclear phase-out announced in 2000 was followed by life extensions for nuclear plants in 2010 and then a moratorium the following year. Meanwhile, a strong push for renewables and against coal was complicated when high natural gas prices and a need to back up renewables led to calls for new coal plants. It’s no wonder that exemplary new fossil generation facilities, built with the expectation that their baseload or peaking output would be needed (and in some respects still is), suddenly find that policy decisions and market forces have squeezed them from both sides, making them uneconomic to operate. (For details of these policy twists, see “Germany’s Energy Transition Experiment” in the May 2013 issue.)

Out of Synch

Germany isn’t the only place where the fate and reputation of a power plant has changed dramatically between project approval and commissioning. In the U.S., Duke Energy’s Edwardsport integrated gasification combined cycle (IGCC) plant, one of the coal-fired Top Plants announced in this issue, has also been bruised. Though some of the reputational wounds that project experienced were self-inflicted, the original rationale for building the next-generation coal plant seemed sound at the time. As Bob Peltier notes in his profile of the Indiana plant, Duke promoted IGCC technology for Edwardsport despite its larger capital cost, in anticipation of federal cap-and-trade legislation. However, that carbon regulation never materialized, which made the plant’s cost escalations much harder to stomach.

Both in Germany and Indiana, next-generation technology projects—with admirable efficiency and optimal emissions profiles—were developed to be industry leaders and exemplars. Although energy policy can turn on a dime, power plant construction projects cannot. But does that mean the reputation of plants developed under previously supportive policy regimes should suffer?

All Technologies Face Policy Risk

Historically, in the U.S. at least, nuclear plant construction has faced the greatest risk from policy vagarities and retroactive changes in nuclear plant regulations. But these days, virtually all generating technologies have some exposure to risk from policy shifts. Renewable projects can be affected by changes in feed-in tariffs or permitting and interconnection rules. Coal plants built with the best available control technology can find themselves subject to new or more stringent regulations. Even gas-fired generation could find itself hobbled if, for example, greenhouse gas emissions regulations tighten or restrictions on hydraulic fracturing send gas prices back up.

Some might say the answer is zero regulation and zero government policy, but in a democracy, the public expects elected officials to craft policy responsive to (inevitably changeable) societal goals, whether those are cleaner energy, cheaper energy, or local energy. Admittedly, politicians and policy wonks often fall short of optimizing competing goals. But human limitations don’t let anyone off the hook. The need to provide electricity for growing populations around the globe is just one reason we need project developers and equipment makers to take calculated risks in developing better technology options. How, then, do we encourage innovation and avoid punishing those who push technology frontiers but get stranded when policy signals change?

Join the Conversation

If you have a practical solution to this conundrum that you think would work in the U.S. or another country, share your thoughts by adding a comment to the online version of this column at powermag.com. Your comment could be featured in our next issue.

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— Gail Reitenbach, PhD is editor of POWER. Follow her on Twitter @GailReit and the entire editorial team @POWERmagazine.