Why Are Bowling Green’s Electric Rates
Increasing?
David Schlissel
Thursday April 24, 2014
AMP’s April 14 Presentation Showed that
Bowling Green’s Power Costs Are Going Up
Dollars per Megawa Hour (MWh)
$120
$100
$96.28
$97.41
2015
2016
$94.64
$96.52
2017
2018
$78.93
$80
$72.90
$66.87
$61.35
$63.97
$60
$40
$20
$0
2010
2011
2012
2013
2014
•
50.5% increase from 2012-2015, 32% from 2013-2015.
•
Does not include $1.2 million that AMP will have borrowed from a line of
credit by April 30, 2014 to levelize (i.e., lower) Bowling Green’s electric rates.
These funds will have to be paid back with interest.
©2014 Institute for Energy Economics & Financial Analysis
2
Why?
Quick Answer - Long-Term Contracts Bowling
Green signed with AMP to buy expensive power
from the Prairie State Coal Plant and AMP’s New
Hydro Projects.
For example, the consultant to AMP and the City
of Bowling Green has recently projected that in
2016:
• Prairie State and the new AMP hydro projects will
provide 73% of Bowling Green’s power at very high
costs.
• The cost of power from Prairie State will average
$73.19 per megawatt hour (MWh).
• The cost of power from AMP’s new hydro projects
will average $129.77 per MWh.
©2014 Institute for Energy Economics & Financial Analysis
3
Background on Prairie State Energy Campus (PSEC)
• 1600 megawatt (MW) coal-fired power plant and
mine in Southern Illinois. Bowling Green’s contract
is for 35 MW.
• Peabody Energy Corporation was developer.
• 2001 Peabody began aggressive campaign to
induce municipal power agencies (like AMP) to buy
into the project.
• Peabody sold 95% of the project to 6 power
agencies and 2 cooperatives. These sell power to
234 communities and co-ops in 9 states.
• Peabody has a very minimal risk.
•
Only has to keep its 5% share of Prairie State for 5 years
unless other owners allow it to sell before then.
•
Guaranteed buyer for its coal.
©2014 Institute for Energy Economics & Financial Analysis
4
Prairie State Power is Very Expensive
• The cost of the power from Prairie State
has increased dramatically from what the
communities, including Bowling Green,
were told in 2007.
• The power from Prairie State is much more
expensive than buying capacity and energy
from the competitive wholesale PJM
energy and capacity markets.
• The plant has operated significantly worse
than AMP told the communities it would
back in 2007.
©2014 Institute for Energy Economics & Financial Analysis
5
The Actual Cost of Power in 2012 & 2013 Was Much
Higher than AMP Projected in 2007
$90
$81.49
$80
$67.77
Per Megawa Hour (MWh)
$70
$60
$50
$48.06
$47.15
$40
$30
$20
$10
$0
2012
Average Cost Forecast in 2007
•
2013
Actual Cost
Cost of power from Prairie State remains high in 2014 - $81.88 per
MWh in January and $83.75 per MWh in February. This is much
higher than the $48 per MWh price projected for 2014 by AMP in 2007.
©2014 Institute for Energy Economics & Financial Analysis
6
$180
$166.78
$160
$140
$116.50
$120
$104.59
$104.04
$100
$80
$94.11
$79.43
$75.36
$74.94
$73.13
$65.47
$83.75
$71.21
$65.35
$60
$40
$81.88
$80.45
$63.46
$56.85
$45.57
$33.43
$34.24
$38.68
$37.99 $36.99
$47.72
$35.33
$32.96
$33.82
$35.76
$20
$0
Ja
n13
Fe
b13
M
ar
-1
3
Ap
r-1
3
M
ay
-1
3
Ju
n13
Ju
l-1
3
Au
g13
Se
p13
Oc
t-1
3
No
v13
De
c13
Ja
n14
Fe
b14
Average Cost per Megawa Hour During the
Month
The Cost of Power is Much Higher than the Cost of
Buying Power from Competitive PJM Markets
Monthly Rate Paid by Bowling Green Before Rate Leveliza on
Average Cost of Market Power During the Month
$48 per Megawa Hour Average Cost of Power in 2013 Promised by AMP in 2007
©2014 Institute for Energy Economics & Financial Analysis
7
What Is Levelization of Prairie State’s Power Costs?
AMP expects to use approximately $1.2 million from a line of credit to levelize or stabilize
(i.e., lower) Bowling Green’s Prairie State power rates through the end of April 2014.
Bowling Green’s ratepayers and businesses will have to pay these funds back with interest.
©2014 Institute for Energy Economics & Financial Analysis
8
Forecast Cost of Power Rose Substantially After AMP
Communities Committed to Prairie State in Late 2007
Dollars per Megawa Hour
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
201 201 201 201 201 201 201 201 201 202 202 202 202 202 202
Actual 2012 and 2013
August 2007 AMP Project Feasibility Study
2009 R.W. Beck Consul ng Engineer's Report
2010 R.W. Beck Consul ng Engineer's Report
Sawvel/AMP Es mate for 2014-2021
©2014 Institute for Energy Economics & Financial Analysis
9
Why Have the Costs of Power from Prairie State
Increased So Much Since 2007?
• Prairie State’s construction cost
increased by approximately $1 billion.
• The plant’s operating performance has
been much poorer than AMP had told
communities it would be.
©2014 Institute for Energy Economics & Financial Analysis
10
The Cost of Building Prairie State Has Been
Much Higher than AMP Said in 2007
©2014 Institute for Energy Economics & Financial Analysis
11
Prairie State’s Operating Performance
Has Been Worse Than AMP Projected
100%
90%
80%
70%
60%
58%
59%
50%
40%
30%
20%
10%
0%
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
201 201 201 201 201 201 201 201 201 202 202 202 202 202 202
Actual Capacity Factors in 2012 and 2013
Projected Capacity Factors in 2009 R.W. Beck Consul ng Engineer's Report
Projected Capacity Factors in 2010 R.W. Beck Consul ng Engineer's Report
Capacity Factors Projected by Sawvel Associates in January 2014
Projected Capacity Factors in 2007 AMP Project Feasibility Study
©2014 Institute for Energy Economics & Financial Analysis
12
Why Has Prairie State’s Operating
Performance Been So Poor?
• Technical problems experienced during initial
“shakedown” period.
• Decision to purchase boilers that were originally
designed to burn coal from the Powder River Basin.
• Many problems caused by the poor quality of the
coal.
©2014 The Institute for Energy Economics & Financial Analysis
13
Costs of the Power from Prairie State Likely
to Remain Very High in Coming Years
• Consultant for AMP and the City of Bowling
Green recently forecast continued high costs
for Prairie State power even if operating
performance improves significantly.
• Cost per MWh will be even higher if plant’s
operating performance does not improve as
much as AMP claims it will.
• Natural gas prices are expected to remain low,
leading to continued low energy market prices.
• This means cost of power from Prairie State
will continue to be much more expensive than
buying from competitive PJM markets.
©2014 The Institute for Energy Economics & Financial Analysis
14
Even with Periodic Spikes, Natural Gas Prices
Expected to Stay Low in Coming Years
$6
Per Million BTU (MMBTU)
$5
$4
$3
$2
$1
$0
2014
2015
2016
2017
2018
2019
2020
©2014 Institute for Energy Economics & Financial Analysis
2021
15
Low Natural Gas Prices Can Be Expected
to Lead to Low PJM Energy Market Prices
©2014 Institute for Energy Economics & Financial Analysis
16
Prairie State Power Will Continue to Be Very Expensive –
Even If Plant Operates as AMP Claims it Will
Prairie State power will be even more expensive if the plant
continues to operate worse than AMP predicts.
©2014 The Institute for Energy Economics & Financial Analysis
17
What This Means
• Bowling Green’s ratepayers and businesses
could pay between $48 million and $54 million
between 2014 and 2021 more for power from
Prairie State than they would pay for power
from the competitive PJM wholesale markets or
through AMP’s Northern Pool.
• This would be $48 million to $54 million that
will not be available for other personal,
business or city uses.
©2014 Institute for Energy Economics & Financial Analysis
18
Other Prairie State-Related Economic Risks
• How much coal is in the mine?
• Adoption of a federal plan to place a cost on CO2
emissions and/or regs. increasing coal ash costs.
• Prairie State could emit as much as 12 million tons
of CO2 per year. Even with modest $10 dollar per ton
CO2 cost, these emissions would increase the cost
of power from Prairie State by $120 million per year.
• Bowling Green’s share of these CO2 costs would be
approximately $2.6 million per year.
• Over 40 years, Prairie State could emit approx. 500
million tons of CO2.
• It is unreasonable to expect that no price on CO2
emissions will be adopted at any time within the
next 40 years.
©2014 Institute for Energy Economics & Financial Analysis
19
Alternatives to Prairie State Power
• Bowling Green should prepare an Integrated Resource
Plan (IRP) to determine the appropriate portfolio of
supply-side and demand-side resources.
• Goal -- do as much energy efficiency and renewables as
are technically and economically feasible and as little
natural gas as is necessary.
• Issue a Request for Proposals (RFP) for power from a
natural gas combined cycle plant – evaluate prices
offered by suppliers.
• Do more aggressive energy efficiency. EE is cheap –
approx. $30 per MWh.
• Solar and wind prices are declining.
• Short-term -- buy from PJM markets or from AMP
Northern Pool.
©2014 Institute for Energy Economics & Financial Analysis
20
Was Bowling Green Misled?(1)
• AMP communities like Bowling Green were
only given a short time in 2007 to decide on
whether to enter long-term contracts for power
from Prairie State, a second coal plant (AMPGS
in Meigs County) and AMP’s proposed hydro
projects.
• The consultant for the town also has been a
consultant for AMP – Sawvel Associates.
Possibly R.W. Beck as well.
• Peabody said in early 2007 that a “hot” labor
and equipment market had led to increases in
the prices of building new coal plants.
©2014 Institute for Energy Economics & Financial Analysis
21
Was Bowling Green Misled?(2)
• To minimize this effect, Peabody said PSGC
(Prairie State Generating Company) was
negotiating with Bechtel for a “Turnkey EPC
Contract” with a capped price.
• But PSGC was unable to get such a capped
price contract – instead it signed a target price
contract which gave Bechtel incentives but
there was no fixed price for Prairie State.
©2014 Institute for Energy Economics & Financial Analysis
22
Was Bowling Green Misled?(3)
• AMP nevertheless reassured the communities
considering Prairie State that the target price
contract would minimize the potential for
schedule delays and budget overruns. AMP
also said that the total estimated construction
cost for Prairie State would increase by only as
much as 6 percent.
• This was based on the “experience related to
the construction and construction costs for
coal plants similar to Prairie State.”
• By the time that a fixed price contract was
finally signed in 2010, the estimated cost of
building Prairie State had increased by
approximately 25 percent to $4.9 billion.
©2014 Institute for Energy Economics & Financial Analysis
23
Was Bowling Green Misled?(4)
• Peabody and AMP knew or should have known
in 2007 that there was a significant risk, if not a
certainty, that the cost of building Prairie State
would increase by more than 6 percent.
• The industry was using terms like “soaring,”
“skyrocketing” and “staggering” to describe
the cost increases being experienced by coal
plant construction projects.
• The estimated costs of coal plant construction
projects were routinely being increased by well
over 6 percent over a period of months, not
years.
©2014 Institute for Energy Economics & Financial Analysis
24
AMPGS Cost Increases 2005-2008
$4.0
Billions of Dollars
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
October 05
May 06
June 07
January 08
©2014 Institute for Energy Economics & Financial Analysis
Future
25
Duke Cliffside Coal Plant Construction Cost Increases
$3.5
$3.0
Billions of Dollars
$2.5
North Carolina U li es Commission approved
only 1 unit of the Cliffside Project
$2.0
Unit 2
$1.5
Unit 1
$1.0
$0.5
$0.0
Summer 2006
Fall 2006
Winter 2007
Spring 2007
By Spring 2007 building 1 new coal plant at Cliffside was estimated
to cost almost as much as the estimated cost of building both new
units has been just a year earlier.
©2014 Institute for Energy Economics & Financial Analysis
26
AMP’S NEW HYDRO PROJECTS
©2014 The Institute for Energy Economics & Financial Analysis
27
Projected Construction Cost
$12,000
$9,625
Dollars per Kilowa (KW)
$10,000
$8,000
$6,000
$4,360
$4,000
$2,000
$0
Fall 2007
Moody's Ra ng Dated May 20, 2013
©2014 Institute for Energy Economics & Financial Analysis
28
Projected Cost of Power
©2014 The Institute for Energy Economics & Financial Analysis
29
What are Bowling Green’s Options – Prairie State
1.
Acknowledge that AMP and perhaps Peabody provided
bad and possibly misleading advice concerning the
Prairie State coal plant.
2.
Investigate whether AMP or Peabody misled Bowling
Green into entering into long-term contracts for power
from Prairie State.
3.
Acknowledge that the City’s consultant(s) on Prairie
State had a potential conflict of interest and also
provided bad and perhaps misleading advice.
4.
Retain other, more independent, consultants to assist
the City in resource planning.
5.
Investigate options for withdrawing from the contract to
buy power from Prairie State.
6.
Talk to other AMP communities that also entered into
long-term contracts to buy power from Prairie State.
©2014 Institute for Energy Economics & Financial Analysis
30
What are Bowling Green’s Options –
AMP Hydro Projects
1. Retain truly independent consultants to assist the City in
evaluating its options and in future resource planning.
2. Investigate whether AMP misled Bowling Green into
entering into long-term contracts for power from the AMP
hydro projects.
3. Investigate options for withdrawing from the long-term
contract to purchase power from AMP’s new hydro
projects.
4. Investigate options for recovering from AMP for
imprudence related to the design and construction of the
new AMP hydro projects
5. Talk to other AMP communities.
©2014 Institute for Energy Economics & Financial Analysis
31
Bowling Green’s Alternative Options for both
Prairie State and AMP’s Hydro Projects
1. The City could do nothing beyond entering into
levelization and stablization plans that will
merely defer some of the expensive power
costs from these projects to future years where
some of these deferrals will have to be repaid
with interest.
2. This would make the City’s residential
ratepayers and businesses suffer the burden of
paying tens of millions, if not over a hundred
million dollars, in unnecessarily high power
costs during the coming decades.
©2014 Institute for Energy Economics & Financial Analysis
32
FOR MORE INFORMATION OR A COPY OF
THIS SLIDE PRESENTATION:
David Schlissel
617-489-4840
david@schlissel-technical.com
and
www.ieefa.org
©2014 Institute for Energy Economics & Financial Analysis
33