Southern Company’s Kemper County Folly

Chalk up some new setbacks for Southern Company for its poorly conceived and wildly expensive Kemper County coal gasification power plant in eastern Mississippi.

In a ruling last week, the Mississippi Public Service Commission ordered Southern to refund $350 million in Kemper cost overrun charges it had levied against ratepayers. Standard and Poor’s promptly put the company on a ratings watch.

It’s not like Southern executives couldn’t have seen the trouble coming. Mississippi Power, a subsidiary of Southern Company, first proposed the Kemper plant in 2009, putting the cost at $2.2 billion—an all too conservative number—and then ignoring warnings not to proceed.

In a commentary posted a few months ago, my colleague David Schlissel enumerated all the many risks executives were aware of when they forged ahead with the project.

• That the costs of building new coal plants in the U.S. was skyrocketing in general.
• That technology used at Kemper was untested.
• That natural gas prices would be substantially lower than the company foresaw in its viability analyses.
• That the company would have less of a need for the power from Kemper due to either reduced demand, changes in energy forecasts or cancelled plant retirements.
• That the plant’s untested IGCC technology would keep it from operating as well as forecast.
• That carbon dioxide emissions prices would ultimately be higher than the company assumed.
• That sales of byproducts from the gasification and combustion processes at Kemper would not produce the revenues that the company was projecting.

Most of these risks have materialized, and the result, as Schlissel wrote, “is a debacle that should never have been.”

The cost of the project has skyrocketed to $6.2 billion, three times the original estimate, and the plant is not expected to be fully operational until mid-2016, two years behind schedule.

Kemper was designed to use integrated gasification combined cycle technology, or IGCC, which aims to capture and store carbon dioxide emissions Although carbon capture and storage was once touted as the way to continue reliance on coal-fired power generation without further climate disruption, the problems at Kemper and at Duke Energy’s plant in Edwardsport, Indiana (the other IGCC project in the U.S.), do not bode well for this technology. Edwardsport, too, is billions of dollars over budget and behind schedule.

Last week’s ratepayer-refund order stems from a 2013 ruling by the Mississippi Public Service Commission that Mississippi Power could raise rates to recover some of the Kemper construction cost overruns, even though the plant was not yet operational. In February of this year, the Mississippi Supreme Court struck down that decision, stating that the commission had failed to determine whether the costs had been prudently incurred. The court remanded the case back to the PSC.

Mississippi Power has already written off about $2 billion of Kemper’s cost—that’s $2 billion in losses that Southern Company’s shareholders have had to absorb. So investors have suffered alongside ratepayers.

The project sustained a related setback in May, when the Southern Mississippi Electric Power Association, which had committed to purchasing a 15 percent stake in the project, backed out. The association said it changed its mind because Kemper had become too expensive. That decision forced Mississippi Power to return the association’s $275 million deposit on the project, plus interest.

Credit rating agencies have taken note of the mounting financial problems. Last month, Fitch Ratings downgraded Mississippi Power, and last week, S&P announced its credit-watch warning on Southern, saying the PSC decision “suggests a deteriorating regulatory relationship with the company.”

Kemper is one of only a few coal-fired power plants approved for construction in the U.S. in recent years—part of a list that includes Edwardsport and the Prairie State Energy Campus in southern Illinois, which is struggling to deliver what it promised and is costing scores of towns and cities dearly.

At the end of the day, Kemper, Edwardsport and Prairie State offer an abject lesson in the folly of supposedly advanced coal-burning generation. While their owners and managers promote these projects as success stories, they serve mostly a reminder of the wisdom in cancelling the construction of dozens of other similar proposed coal plants.

Cathy Kunkel is an IEEFA fellow.