Subsidized Coal Gasification: A Legacy of Failure

President Obama’s alleged all-of-the-above energy policy–really all-of-the-bad-to energy policy– includes large taxpayer subsidies for so-called clean-coal technologies, including carbon capture and storage. Just last week, as if the federal budget was not in chronic deficit, Obama proposed $8 billion in federal loan guarantees relating to decarbonizing coal.

This proposal is nothing but window dressing to make it appear that the administration isn’t completely anti-coal.  The new proposal would throw good money after bad. Not only is taxpayer money being wasted, businesses are being enticed into investments that are costing their shareholders dearly as real-world experience shows.

Kemper Plant Sorrows

“Clean-Coal Effort Stymies Southern Co.,” the Wall Street Journal headline reads. Subtitled “Atlanta Utility Replaces CEO of Its Mississippi Power Unit as Price Tag of Gasification Project Soars,” author Rebecca Smith describes how the estimated cost of building the 582-MW lignite-to-gas-to-electricity Kemper Power Plant, complete with carbon capture, doubled from the original estimates. The once touted “showcase for clean-coal technology” is officially a boondoggle.

Mississippi Power took the government bait to launch the project in 2010: a $270 million grant from the Department of Energy and $133 million in investment tax credits approved by the IRS.

The $2.4 billion project is now estimated to cost $4.3 billion, a soft number that could increase by the time the project is finished next year. Southern Company explains the overrun as a byproduct of “first-of-a-kind technology.”

Southern Company took a $540 million first-quarter charge to earnings, and more red ink could follow as the firm redoes its financial controls and reports back to the Mississippi Public Service Commission.

Smith describes the “awkward” position of Southern Company, which must go through a prudency review with state regulators before being allowed to recoup Kemper costs through utility rates. Regulators will not look kindly upon massive cost overruns on a cost-plus, no-competition project. However, this is exactly the sort of project the Obama administration is working on subsidizing.

Great Plains Boondoggle 30 Years Ago

This is not the first time the federal government lured companies into wasteful spending on these sorts of technologies. Back in the 1970s, U.S. energy planners had it all figured out: turn superabundant coal into “scarce” methane to generate electricity. In 1980, the Federal Energy Regulatory Commission (FERC) okayed the Great Plains Coal Gasification Project. President Reagan, overriding his budget director David Stockman, okayed a $2 billion federal construction loan, and the project was built.

It did not end well. The sponsors lost all of their equity, the Department of Energy took back the plant, and new municipal owners took it over (Dakota Gasification).[i]

Here is the story recounted in my book, Edison to Enron: Energy Markets and Political Strategies [ii]:

Predicting $7 per Mcf gas for the mid-1980s, Transco and three industry partners—American Natural Resources (ANR), Peoples Gas Company, and Tennessee Gas Pipeline (wholly owned by Tenneco)—announced plans in 1978 to build the nation’s first commercial-scale coal gasification plant, to be located in Mercer County, North Dakota….

What its sponsors had called the “Great Plans” or “Great Pains” project could finally enter construction. The FERC-approved sales rate for the coal-gas was put in the NGPA “new gas” price category for January 1981, which was $6.75 per Mcf, plus a monthly escalation. Great Plains would ensure plenty of gas for TGPL well into the future. But transforming 14,000 tons of lignite into 125 MMcf of gas each day was an elaborate and expensive process compared to finding gas in its natural state—and uneconomical should gas prices head south.

But Transco was not quite ready to own up to a long-lived gas surplus. Jack Bowen, cognizant of his company’s $100 million investment, told security analysts that “domestic oil and gas will never be in an oversupply position.”

Transco’s $113 million equity interest in the Great Plains Coal Gasification Project was in trouble even with most of its construction cost underwritten by taxpayers. Spot gas prices were less than half the maximum price that the coal-gas was authorized to receive by FERC. No one wanted gas at that price. Government price guarantees and rolled-in pricing—under which the cost of Great Plains gas would be averaged down by all the other gas in a pipeline’s mix—were now necessary for the project to be completed.

Getting oil prices back up and keeping them up was required to aid Great Plains, a project whose economics required 30 years of high gas prices. “Transco urges that we not lose sight, in this short-term period of apparent surplus of oil and natural gas, of the long-term need for synthetic fuels to replace our diminishing domestic supplies,” Jack Bowen and his president Ken Lay said. “Only with the use of our abundant coal, peat, and oil shale resources can we be assured that we will not have to return to a dangerous reliance on imported energy.”

After pipeline-led earnings produced a solid 1984, Transco bit the bullet by writing off its entire equity investment in Great Plains. There was little choice, inasmuch as natural gas was selling at half the cost of what it took to manufacture coal-gas. The $92 million after-tax charge left 1985’s net income at $18 million….

History matters. Failed rent-seeking of decades past should be understood and avoided by today’s energy executives, not to mention government policymakers. Stockholders, not only taxpayers and ratepayers, lose when political capitalism is substituted for free-market capitalism in the quest to make unproven, failed technologies viable.