Financial Risks of Coal Energy Investment

Since 2005, a large number of coal-fired power plant proposals in the U.S. have been cancelled or rejected, due to opposition from grassroots opponents and national environmental organizations (such as Sierra Club). However, a large number of coal-fired power plant projects that faced little or no political opposition have also been cancelled in the past two years. This article lists a number of factors which have made coal energy increasingly unattractive to potential project sponsors and investors, and which have thus led many companies to decide that building a coal-fired power plant is not a sound business decision at this time.

Mandatory U.S. CO₂ emissions caps are a political certainty

The past five years have witnessed a sea change in public opinion and political discourse on the issue of climate change. Each of the three potential U.S. presidential candidates supports mandatory CO₂ emissions caps:

• Barack Obama supports “a market-based cap-and-trade system to reduce carbon emissions… 80% below 1990 levels by 2050.”
• Likewise, Hillary Clinton would “reduce greenhouse gas emissions by 80% from 1990 levels by 2050.”
• John McCain supports reducing carbon emissions by 60% by 2050, using mandatory caps.

Likewise, members of Congress from across the political spectrum are increasingly pushing for carbon caps. In Oct. 2007, Sens. John Warner (R-VA) and Joe Lieberman (I-CT) introduced the America's Climate Security Act of 2007, which would create a cap-and-trade system that would reduce carbon emissions to 63% below 2005 levels by 2050. Numerous such proposals have been made in Congress in the last decade; however, over time, the proposed cuts in carbon emissions have become increasingly stringent, and their support has become increasingly broad and bipartisan. Thus, it is not a question of whether emissions caps will be implemented, only of when.

In 2005, 32.8% of U.S. CO₂ emissions came from coal-fired power plants. If the U.S. is going to be cutting its CO₂ emissions by 60-80% by 2050, there is no way this would be done without drastically limiting emissions from burning coal in the U.S.

Other energy companies are increasingly recognizing this reality. Xcel Energy recently announced that, beginning in 2010, it will use a carbon allowance price range of $9-$40 per metric ton of CO₂ in its resource planning. Given the estimated 3.0 million metric tons of CO₂ that would be emitted annually by an average 500-MW plant running at 85% capacity, Xcel’s estimates would mean that carbon taxes would cost that plant's operators between and $27 million and $120 million per year.

Disclosing the financial impacts of global warming

In 2007, New York Attorney General Andrew Cuomo subpoenaed five national energy companies in an effort to publicize the financial risks of investing in fossil fuels. As a result of the action, Dynegy agreed to disclose information about how global warming may impact its business practices. The agreement calls for Dynegy to divulge in its annual reports the potential consequences if federal rules are adopted to limit carbon dioxide emissions. Dynegy also agreed to report its efforts to mitigate CO₂ emissions, estimates of its financial liability in settling possible lawsuits related to climate change, and the potential impact of climate shifts on its ability to generate electricity. Xcel Energy agreed to similar terms.

Social costs of CO₂ emissions will make coal energy into a pariah

Strong carbon regulations will become a reality in the U.S. in the near future. However, as the devastating social costs of global climate change become more obviously apparent to the American public over the next forty years, regulatory caps on carbon emissions may well become increasingly drastic.

In Oct. 2006, at the request of the British government, Lord Nicholas Stern released a highly comprehensive, 700-page report on the economics of climate change. In that report, Stern et al conducted a detailed review of the potential economic and social costs of global climate change under a “business as usual” paradigm – including increasingly flood risks due to glacier runoff (esp. in India and China), declining crop yields due to drought (esp. in Africa), ocean acidification, displacement due to rising sea levels, and water shortages (esp. in Southern Africa, India, China, and the Mediterranean). Stern et al estimated that the combined economic and social costs caused by unmitigated global climate change would amount to $85 per metric ton of CO₂ by 2050 – and he acknowledges that the potential for abrupt and large-scale “runaway” effects could drive the cost of climate change far higher in a very short period of time.

The consensus view of global climate scientists is that it is becoming increasingly probable that the social costs of global climate change will be dramatically horrific, and will disproportionately affect the world’s poorest people; furthermore, these events would take place on the world stage of global news media coverage. Were the effects of climate change to rapidly become highly socially destructive, changes in public opinion would force drastic responses by U.S. policymakers, and a massive political backlash against carbon-intensive energy producers would ensue. This possibility presents a huge potential risk for sponsors of any new U.S. coal-fired power plant. Potential investors in coal energy production should ask themselves: Are we willing to gamble on the potential effects of global climate change? Are we capable of paying even a fraction of the full social costs of the plant’s carbon emissions?

Carbon capture and sequestration is a false solution

Many coal energy producers are relying on the future development of carbon capture and sequestration (CCS) technologies in order to reduce the future costs of CO₂ emissions regulations. However, CCS is a highly experimental process, and it would be highly irresponsible for companies to stake their financial viability on an unproven, experimental process that would need to overcome a number of highly complex technical problems in order to become commercially viable.

A number of significant challenges must be overcome before CCS can be implemented on a large enough scale to make sequestration of carbon emissions from U.S. coal-fired power production possible:

• Unpredictable problems with CO₂ leakage. A 2007 Massachusetts Institute of Technology (MIT) study – by a group of researchers who are strongly supportive of CCS – acknowledged that “there is the possibility of leakage from storage sites. … If the leak is into a contained environment, CO₂ may accumulate in high enough concentrations to cause adverse health, safety, and environmental consequences. For any subsurface injected fluid, there is also the concern for the safety of drinking water. … The state of science today cannot provide quantitative estimates of… likelihood [of these risks]. … In terms of risk, leakage from wells remains the likeliest and largest potential risk.”
• Shortcomings in knowledge about CO₂ injection. Current simulations of CO₂ injections are highly inadequate; to cite a few examples, current research fails to adequately understand: (1) the geomechanical response of injection; (2) the possibility of seismic events caused by injection; (3) the long-term impact of CO2 on reservoir fluids and rocks; and, especially, (4) methodology to conduct comprehensive quantitative assessments of risks to human health and the local environment.
• Massive increases in water usage. The National Energy Technology Laboratory (NETL) estimates that CCS power plants will use 2.16 times as much water as non-CCS plants. The availability of this water will be an added challenge, especially in light of increasing water shortages in the southeastern U.S.
• Potentially massive costs. Most importantly, CCS is a hugely expensive set of technologies:
  • A 2007 NETL study found that adding CCS technology to a supercritical plant would increase auxiliary loads by 30-117 MW; thus, a 580 MW gross supercritical coal plant would produce 87 MW less power if CCS mechanisms were added.
  • Pursuing CCS on a large scale would necessitate a massive network of CO₂ pipelines, which would be cost a great deal to construct, operate, and maintain, and would trigger large-scale environmental regulatory response.
  • The potential costs of leakage monitoring strategies and requirements for CO₂ injection sites – and the nature and structure of liability for injection sites – have not been adequately assessed.
  • Four existing comprehensive reports have given estimates for how much electricity prices would increase in total due to the addition of CCS technology; their estimated power price increases range from 61-81%. That said - even given these potential problems - estimates of CCS costs are still highly hypothetical; in the end, attempting to predict the realistic costs of CCS involves a great deal of guesswork (as all CCS studies acknowledge), and CCS costs may end up being much higher.
• Potential public opposition. As the IPCC report on CCS (which is strongly pro-CCS) acknowledges, “the technology may still be rejected by some as too ‘end of pipe’, treating the symptoms not the cause, delaying the point at which the decision to move away from the use of fossil fuels is taken, diverting attention from the development of renewable energy options and holding potential long-term risks that are too difficult to assess with certainty.”

The severity of these challenges contributed to the failure of the FutureGen CCS pilot project in Illinois. In 2003, at the behest of President Bush, the U.S. Department of Energy and 11 leading coal production and energy corporations initiated the FutureGen project: an experimental 275-MW coal plant with CCS technology. In Jan. 2008, the Department of Energy pulled out of the project, citing costs that had already ballooned to $1.8 billion, more than a year before construction had even been scheduled to begin.

In a statement before the Louisiana Public Service Commission, an Entergy representative summed up the company’s assessment of these uncertainties:

"To date, carbon capture and sequestration has not been demonstrated commercially on any power plant in the United States. Even today, pilot scale projects are only now being developed in the United States. The Company does not believe that this technology is commercially and reliably viable on a utility scale at the current level of technology development. Significant research and development in the performance, cost, and reliability of carbon capture technology remains to be completed. In addition, further research is also required on underground sequestration of carbon, including costs, permitting, and technological advancement such as appropriate geological formations and appropriateness for long term storage of carbon dioxide and the transportation of CO₂ gas."
- Entergy Louisiana executive, Testimony before the Louisiana Public Service Commission, 2007

It’s possible that CCS will become commercially viable within the next decade. Alternatively, it’s possible that the technical problems acknowledged by Entergy will prove insurmountable, and CCS technologies will never become commercially viable. Potential investors in coal energy production should ask themselves: are we willing to gamble our financial future on a highly experimental and potentially unworkable technology?

Carbon emissions aside, rising costs make coal power unsustainable

Even without the massive question marks of potential carbon caps and CCS uncertainties, numerous other factors make coal-fired power an increasingly bad investment:

• Dramatically rising coal prices. Coal, once touted as a consistently cheap source of energy, has already risen substantially in cost in the past few years, and it will only become more expensive in the years ahead. In March 2008, Merrill Lynch predicted that coal contract prices for power plants will rise as much as 200% by the end of the year, after supply disruptions resulted in a severe global shortage. However, increased consumption had already been driving up the global price of coal: the Central Appalachian spot price rose from under $40/ton in early 2007 to over $90/ton in early 2008. Massive construction of coal plants in China and India will contribute to a dramatic increase in coal consumption: according to the Energy Information Administration, global coal consumption will increase by 74% between 2004 and 2030. Thus, recent increases in coal prices will only become more severe.
• Escalating coal power plant construction costs. In at least ten of the coal-fired power plant project cancellations that occurred in 2007, construction costs were cited as one of the most important reasons for cancellation. Increased construction in China, India, Europe, and the U.S. is driving a huge increase in global demand for coal power plant design and construction resources. In July 2007, Siemens President Randy Zwirn estimated that the cost of constructing an average new coal-fired power plant had risen 25-30% in the past 18 months alone. And, in some instances, price increases have been even more dramatic: for example, Duke’s Cliffside Project, which was originally estimated at $2 billion to build two 800 MW units, has risen to $1.8 billion for one 800 MW unit, before construction has even begun.

Major energy producers are abandoning coal

Increasingly, many of the biggest coal-fired power producers are recognizing that coal power is too risky of an investment. Out of the fifteen biggest private U.S. coal energy producers, nine – AEP (the #1 coal energy producer in the U.S.), Ameren (#4), MidAmerican (#5), Exelon (#6), FirstEnergy (#10), Reliant (#12), DTE (#13), Progress (#14), and Allegheny (#15) – are not currently moving forward with plans to build any . And many of the companies that are building new coal plants are increasingly realizing that coal energy has become too dangerous of an investment: Xcel Energy (the #7 coal energy producer in the U.S.) has acknowledged that the Colorado Comanche 3 plant may be the last coal-fired power plant the company will ever build.

In Nov. 2007, in a letter to the Public Service Commission of Utah, PacifiCorp explained its decision to cancel two proposed coal plants:

“Within the last few months, it has become apparent that Congress will enact some restriction upon carbon emissions, but the project cost impact upon new coal generation is currently within such a wide range as to make meaningful risk assessment futile. … Within the last few months, most of the planned coal plants in the United States have been cancelled, denied permits, or been involved in protracted litigation. … While the Company is not excluding new coal generation ownership from its 20 year options, absent some change in conditions, it cannot be determined at this time whether new coal generation will satisfy the least cost, least risk standards that would enable us to consider it as a viable option within our ten year plans.”

- PacifiCorp, letter to the Public Service Commission of Utah, Nov. 2007

Coal power plant projects are dropping like flies

Since 2005, increasing numbers of energy utilities have recognized that coal power is too risky of an investment, and coal power plant projects have been dropping like flies. In 2007 alone, fifty-nine new coal-fired power plant projects were abandoned, put on hold indefinitely, or rejected by regulatory agencies. Of these 59 cancellations, only 15 were due to rejection by regulators; 44 of these projects were canceled by the project’s sponsors.

Some of the most high-profile examples:

• In Feb. 2007, private equity firms that had recently purchased Texas energy firm TXU announced that they were canceling plans for eight new coal plants in Texas, totaling 6,800 MW. According to the New York Times, within TXU “the controversial plan to build a raft of coal plants had become so damaging to its stock price that its board had been privately weighing a plan to scrap part of the project.”
• In Dec. 2007, PacifiCorp cancelled plans for two coal-fired power plants in southwest Wyoming; a company spokesperson stated that “coal projects are no longer viable.”
• In Nov. 2007, Southern Company cancelled plans to build the Stanton IGCC Plant in Florida – two months after breaking ground on the project – citing “uncertainty about potential state regulation on greenhouse gas emissions.”
• In June 2007, Tenaska canceled plans to build a coal-fired plant in Oklahoma, citing rising equipment costs; a Tenaska manager stated that “we looked at the price of the power that would be produced because of those higher prices and equipment and it just wouldn’t be a prudent business decision to build it.”
• In Dec. 2007, Rentech announced that it was canceling plans to build a coal gasification plant in Illinois, citing “uncertainty surrounding proposed greenhouse gas legislation,” among other factors.
• In Aug. 2007, SouthWestern Power Group switched its proposed 1000-MW Bowie Power Station from coal to natural gas, citing “market economics” and “regulatory uncertainty.”
• In Oct. 2007, Kansas state regulators rejected an air permit for Sunflower Electric Power’s proposed coal plant in Holcomb, arguing that “it would be irresponsible to ignore emerging information about the contribution of carbon dioxide and other greenhouse gases to climate change and the potential harm to our environment and health if we do nothing.”

This spate of cancellations reflects companies' realizations, due to the factors listed above, that coal is no longer a financially viable energy source in the United States.

2011 report on financial risks

A March 2011 report, "A Risky Proposition: The Financial Hazards of New Investments in Coal Plants" by the Union of Concerned Scientists laid out the following risks with investing in new coal plants or pollution upgrades:

• Demand for coal power is being steadily eroded by competition from energy efficiency and renewable energy, which are benefiting from rising policy support, growing public investment, advancing technologies, and often-falling prices.
• Coal power faces much stronger competition both from new and existing natural gas plants.
• United States coal prices are rising and could be driven much higher by soaring global demand and shrinking reserves.
• Construction costs for coal plants remain high, and many of the external costs of coal may soon be passed on to the power supplier.
• Coal plants, new and old, are losing the cost advantages they once had, and lack the operational flexibility that will be valuable as the power grid evolves to integrate more sources of power.
• Coal power faces the financial risks posed by its many environmental and health impacts, such as mercury, soot, and smog, which are a major financial liability.
• Coal plants emit air pollutants that still kill thousands of people yearly, costing society over $100 billion per year, by one estimate (Clean Air Task Force 2010).
• Coal plants create vast quantities of toxic coal ash, with public groups seeking federal regulation.
• Huge cooling-water withdrawals by coal plants strain our increasingly vulnerable water bodies.
• Much of the nation’s coal fleet is already old, inefficient, and ripe for retirement. Rather than retrofit them, it makes greater economic sense to close them.
• There is financial risk associated with coal’s critical role in destabilizing the global climate.

Resources

External links

• David Schissel and Lucy Johnston, "The Financial Risks to Old Dominion Electric Cooperative's Consumer-Members of Building and Operating the Proposed Cypress Creek Power Station," Synapse Energy Economics, April 22, 2009