Duke Energy faces rising costs of coal

Westar Energy knew its coal-fired plant was in trouble.

The Kansas company wanted to build a $1 billion, 800-megawatt power plant, but construction costs kept rising as global demand for steel and other materials skyrocketed. Soon $1 billion became at least $1.4 billion — costs ultimately passed to consumers.

Faced with sobering numbers, the utility in January shelved the project. “We didn’t even get to the point where we were bidding,” said Greg Greenwood, the company’s vice president for power plant construction.

The company’s predicament is emblematic of problems facing an industry trying to update its aging fleet with coal-based technology. Fast-moving markets and demand for plant construction — in China, a coal-fired unit goes online almost every week — are making it difficult to accurately predict cost. The result: Construction estimates are obsolete even before bids go out.

A similar story is playing out in Western North Carolina as Duke Energy Corp. tries to build two 800-megawatt units at its Cliffside facility, which straddles the Cleveland and Rutherford county line.

The Charlotte company, which hasn’t brought a coal-fired plant online in three decades, originally said the twin units would cost $2 billion. But late last year, the figure jumped to $3 billion. Instead of scrapping the project, Duke is moving ahead, saying the new estimate is solid. Critics, though, aren’t so sure, claiming costs will continue to climb.

“There’s a big stake in the price issue to the ratepayers,” said Gary Davis, a lawyer for the Southern Alliance for Clean Energy. “There’s going to have to be a big rate increase to cover the costs.”

A call for coal

With 2.2 million customers in the Carolinas, Duke is trying to justify the new estimate to the N.C. Utilities Commission, which must decide if $3 billion is a wise investment for the public.Duke said it must start building the units by April to meet future energy demand by 2011. The company said the new units are needed because it has been adding 50,000 customers annually for the past five years.

It also said coal — even with its environmental warts — provides a needed balance, so the company and consumers are not too heavily leveraged in fewer energy sources, including natural gas and nuclear energy.

Duke is not the only company looking to build coal-fired units.

Across the country, 148 plants are in the planning stages and 21 are under construction, said Jim Owen, spokesman for the Edison Electric Institute, a member organization that represents the electric power industry.

A decade ago, only a few coal-fired plants were being built, he said. At the time, natural gas prices were low and gas-fired plants — less expensive to build — were the rage as utilities geared up for deregulation and wholesale energy sales and trading.

Deregulation didn’t go as planned: Energy trading became unpopular in the wake of the Enron scandal and the California power crisis, and natural gas prices spiked. The industry, looking for large-scale generation and stable fuel, turned to coal.

Most of the planned projects, like Cliffside, are larger base-load plants — the Clydesdales of power company stables that operate about 85 percent of the year. Their life spans are about 50 years.

Westar, for its part, isn’t sure what it will do, Greenwood said. It’s researching a natural gas plant instead of coal. But those units have their own set of financial risks because natural gas prices are volatile. And other power companies — getting sticker shock over the price of coal plants — might have the same idea, eventually driving up construction costs for natural gas plants, he said.

Supply and demand

Labor shortages and the higher prices of materials have created delays and other problems for U.S. power companies, like Duke, trying to meet deadlines for new plants.

The higher tabs are due to increased domestic and global demand from Asia for the building blocks of power plants, including steel, cement and skilled labor.

Suppliers are jammed up, factories backlogged.

The price of boilers made of steel plate, for example, increased by 50 percent from Duke’s first estimate in 2005, said Bill McCollum, Duke’s group executive and chief regulated generation officer. The cost of the units’ air-quality systems, designed to reduce pollution, increased by 35 percent, he said. The actual prices are confidential.

The global surge in construction has limited the supply of steel and increased its price, said Peter Fish, managing director of MEPS Industry Ltd., a steel industry consulting and publication company based in England.

Fish said the price of steel increased 31 percent, from $508 a ton in July 2005 — about the time Duke made its first cost projection — to a peak of $665 a ton in July 2006. The price of rebar — the steel rods that reinforce concrete — rose from $445 a ton to $541, a 22 percent increase.

The trend has created opportunities for the largest engineering, construction and manufacturing firms that specialize in power plants.

Alstom, a French company that says it has manufactured 25 percent of the installed power-generation equipment in the world, had a record first six months this fiscal year, increasing sales by 46 percent.

But a high-skilled labor shortage, exacerbated by retirements, also has hit the firm and others.

In response, the company scrambles to recruit workers from foreign countries, offers retraining for unskilled workers, and even advertises its higher-quality washrooms and lunchrooms, said Mary Lou Dlugolenski, spokeswoman for Alstom US, based in Windsor, Conn.

“In addition to critical (labor) needs created in the South by Hurricanes Rita and Katrina, North America is witnessing a massive power and infrastructure build-out,” she said. “We are all competing for the same labor, at the same time that much of the labor is retiring.”

The environmental price

Duke blames the market for the upswing and missed bid. And McCollum told the utilities commission it was possible the $3 billion projection might increase again.Still, Duke is moving forward with the project, asking the commission to make a decision by Feb. 28 so the company can lock in some prices.

Duke Chief Executive Jim Rogers argued before the commission that the Cliffside proposal was necessary to meet future demand with the added financial security of using coal. The fossil fuel is cheap and a domestic product, and clean-coal technologies can be perfected.

The company also needs its own plants, he said, so it doesn’t have to buy outside power from other sources.

Coal might be cheap, but there is an environmental price, opponents of the project say.

Opponents like Davis, the lawyer with the Southern Alliance for Clean Energy, note that Congress plans to regulate carbon dioxide emissions for the first time, which will add to the cost of building and running coal-fired power plants.

Coal is a prolific source of the gas, blamed as a cause of global warming. There’s strong consensus in the scientific community that carbon dioxide is causing the steady rise in temperatures, a phenomenon that could flood coastlines and change weather patterns.

Duke’s missed estimates give fuel to the environmental opponents of coal.

“They haven’t justified the need for the plant, and we’re arguing that they`ve underestimated the cost,” said Gudrun Thompson, lawyer for the Southern Environmental Law Center. “We’re going to be paying to breathe dirtier air, and it will ultimately hit us in the pocketbook.”

Uneasy Energy Choices

Duke’s proposal to build two coal-fired power units at its Cliffside facility and opposition to the project is an increasingly common story of the tension between fiscal reality and energy choices for states and regulated utilities.

Duke says it needs more power into the future, but what to choose?

Ӣ Choose coal, with its 250-year domestic supply, and the price of construction is higher and the effect on the environment controversial. Carbon dioxide emitted from coal plant smokestacks, among the largest sources in the world, is believed by many to be a major cause of global warming. Congress is considering regulations on the gas, which could cost Duke and other owners of coal-fired plants.

Ӣ Choose natural gas and the plants can be built in a third of the time for less money. But the price of the volatile fuel might spike, driving up consumer bills. Natural gas is largely imported, unlike coal.

”¢ Choose nuclear, a clean-air technology, and the plants are difficult and expensive to build because of the rising prices of the same raw materials needed for coal plants. Nuclear plant projects have had high failure rates because of regulatory hurdles and fear of meltdowns. There’s also the open political question in Congress of where to store nuclear waste.

Source: www.charlotte.com