Southern Company Power Plant Investigation Misses Larger Policy Scandal

The New York Times this week released the results of an investigation of Southern Company’s carbon capture and storage (CCS) power plant in Kemper, Mississippi. Originally budgeted for $2.4 billion, the Kemper project has cost $6.7 billion, is more than two years behind schedule, and is still not operational. Every month of delay adds more than $20 million to the overall cost.

The investigation is a muckraking exposé. In a response posted the same day, Southern Company contends that concerns raised by whistleblower Brett Wingo, the primary source for the inquiry, are “unsubstantiated and not otherwise supported by the facts.” Southern also claims it “addressed and publicly acknowledged every founded concern regarding the safe and successful completion of the project.”

Having noted that caveat, let’s review the article to see what policy lessons we might learn.  

Investigation: Method and Findings

Times investigators reviewed “thousands of pages of public records, previously undisclosed internal documents and emails, and 200 hours of secretly though legally recorded conversations among more than a dozen colleagues at the plant.” They also interviewed “more than 30 current or former regulators, contractors, consultants or engineers who worked on the project.” They found that “the plant’s owners drastically understated the project’s costs and timetable, and repeatedly tried to conceal problems as they emerged.”

For example, “While engineering expenses and purchases went up, reported construction costs went down and scheduling timelines were shortened.” According to one consultant who worked on the project in 2012, his predecessors altered reporting “software so it no longer automatically adjusted the final price and completion date to reflect problems as they emerged.”

Amazingly, “Mississippi Power started construction with less than 15 percent of the plant designed.” If so, it’s no wonder Kemper is behind schedule, as project managers would have to improvize the design as they build. Shoddy construction reportedly also caused delays. Engineers interviewed complained about “the poor quality of work: leaking gaskets, cracked ductwork, and pipes missing inspection records, valves and supports.”

If those failings are genuine, what explains them? Times reporter Ian Urbina comes close to laying the blame on the corrupting influence of political subsidies:

The system of checks and balances that are supposed to keep such projects on track was outweighed by a shared and powerful incentive: The company and regulators were eager to qualify for hundreds of millions of dollars in federal subsidies for the plant, which was also aggressively promoted by Haley Barbour, who was Southern’s chief lobbyist before becoming the governor of Mississippi. Once in office, Mr. Barbour signed a law in 2008 that allowed much of the cost of building any new power plants to be passed on to ratepayers before they are built.

The “rush to qualify for millions of dollars in federal subsidies” appears to be what induced the Mississippi Public Service Commission to approve the project before most of it was even designed, according to the current chairman of the commission.

Once the subsidies were approved, the company hid problems to keep the gravy train running, the Times suggests. In meetings and communications with higher-ups, Wingo and fellow engineers “were told by plant managers that they needed to present an optimistic timetable for the project or the utility risked ‘financial Armageddon’ of lost tax subsidies, spooked investors, possible bankruptcy, and harsh criticism from the news media, regulators and lawmakers.”

Subsidies included a $270 million grant from the Department of Energy (DOE) and rate hikes for Kemper County residents. Promoters touted the project as a boon to the local economy. Although the project did generate tax revenue and create jobs, “Mark Klinedinst, a retired economics professor from the University of Southern Mississippi, said that more were lost in the region as businesses laid people off to pay for the higher electrical bills caused by Mississippi Power rate increases from plant construction.” Similarly, the University of Southern Mississippi “raised annual tuition $236 per student, partly to offset its additional $1 million in higher electrical costs,” according to the Times.

Policy Implications

Why did the Obama administration subsidize Kemper? Environmental Protection Agency administrator Gina McCarthy claims the administration wants to ensure a future for coal in a carbon-constrained world. Fat chance. CCS subsidies are an inherent feature of the administration’s strategy to bankrupt the coal industry.

In October 2015, EPA promulgated carbon dioxide (CO2) emission standards that new coal plants cannot meet without installing CCS technology. New natural gas combined cycle (NGCC) power plants are already cheaper than new conventional coal power plants, and, as Kemper reveals, installing CCS can add billions to the cost of a new coal plant. The standards are a de-facto ban on investment in new coal generation.

EPA naturally disputes that characterization. The agency claims CCS is “adequately demonstrated,” meaning commercially viable as well as technologically proven.

However, there is still no utility-scale CCS power plant in regular commercial operation anywhere in the world. The “adequately demonstrated” claim is utterly ridiculous unless some CCS power plants are actually built and turning a profit. So the only way to mandate an uneconomic technology and maintain the pretense that it is affordable is—to subsidize it.

Common sense would suggest, of course, that subsidy dependence proves CCS is not commercially viable. EPA counters that even without subsidies, utilities can reduce CCS costs to “reasonable” levels by selling the captured CO2 to companies engaged in enhanced oil recovery (79 FR 1478). More on that presently.

The key point EPA evades is that, aside from a few subsidized projects, utilities will not build new coal power plants once the agency has established CO2 emission standards that can’t be met without costly investment in CCS.

Grey Lady Misses Big Picture

A more fundamental issue, never addressed by EPA—not even in the agency’s response to my colleague William Yeatman’s comment letter—is that, in actual commercial practice, CCS does not reduce power plant CO2 emissions.

To be lawful under the Clean Air Act, emission standards for new coal power plants must reflect the adequately demonstrated “best system of emission reduction” (BSER). But when combined with enhanced oil recovery (EOR), as planned for the Kemper project and every other federally-subsidized CCS project, the net effect is to increase CO2 emissions.

That’s because more CO2 is released when the recovered oil is combusted than is injected underground to coax the oil to the surface. Specifically, Department of Energy and EPA data imply that, on a life cycle basis, CCS combined with EOR emits about 1.4-2.6 tons of CO2 for every ton stored underground. In commercial practice, a CCS power plant emits more CO2 than does a conventional coal power plant.

EPA’s de-facto CCS mandate for new coal power plants is the predicate regulation for the agency’s so-called Clean Power Plan for existing coal power plants, which in turn is the largest single component of President Obama’s emission-reduction pledge under Paris climate treaty.

There is potentially a bigger scandal here than that which the Times purports to have uncovered. President Obama’s “legacy” climate policies—the Power Plan and Paris Agreement—depend on a virtual CCS mandate that U.S. government data indicate is unlawful under the Clean Air Act.