It was the afternoon of April 30, 2014, and Southern Co. CEO Tom Fanning once again was explaining to investors why the company had to write off millions of dollars for its next-generation coal-gasification project in Mississippi.
Besides the cost increases, the company disclosed that the Kemper County energy facility's schedule had slipped again, this time into 2015, which meant the project was now roughly a year behind.
Analysts on Southern's earnings call peppered Fanning with questions, as had become the norm in recent quarters. Like a man who had plenty of practice, Fanning met each blistering question with calm, confident, straightforward answers.
"You know from following us that we're a conservative company; we always try and take a long view," he told analysts at the time. "And I think it is absolutely the right thing to do in our judgment to adjust this schedule."
For those who believe in the possibility of "clean coal," Kemper is a flagship U.S. project. The technology is called integrated gasification combined-cycle, or IGCC. If it works, it would run on the dirtiest, most abundant fossil fuel in the world but capture up to 65 percent of carbon dioxide emissions. It could present a path forward for coal at a time when natural gas, climate concerns and changing demand patterns all hint at the end of the road.
But those who know about carbon capture and storage, whether they are detractors or supporters, have always recognized that its main issue is cost. That's why the case of Kemper, with a price tag of $6.2 billion and climbing and a two-year time lag, raises questions about who is on the hook when costs spin out of control -- and whether there was sufficient oversight to avoid that problem in the first place.
"Anytime you build something on a first-of-a-kind basis, you're going to have a lot of uncertainty. The cost estimates will be, at best, cost estimates," said Charles McConnell, who helped oversee Kemper as an assistant secretary at the Department of Energy and is now at Rice University. "The ability to deliver a guaranteed performance on a project which is the first of a kind is really unheard of in the marketplace."
Scaling up -- in size and cost
Kemper's marquee technology started development in the late 1990s. At a research lab in Alabama, Southern, DOE and industrial firm KBR Inc. began to build a prototype that could "gasify" coal: superheat it into its chemical building blocks.
One of those was natural gas, which would be sent off for power generation. But also key were the "impurities" generated in the process, like sulfur, ash and CO2. If these could be captured efficiently and sold -- for chemicals, oil production, even paving roads -- the economics of the plant would be completely different. CO2 capture and storage would have something it had never had before: a claim to a viable business model.
But the technical challenge was daunting. Southern would have to take its successful prototype and show it could work at scale.
"Scaling it up the size at which the Kemper plant is, is an incredible ramp-up in terms of what's ever been built before," McConnell said. "Individual pieces of technology? Absolutely. But stringing them together, integrating it and then constructing it at the scale the Kemper plant is? Never been done before."
Kemper's challenges, even before its first dirt was turned, have been well-documented. Files available on the Mississippi Public Service Commission website show an ongoing tug-of-war between the utility and regulators over who should shoulder the most risk for the plant and its new technology.
Mississippi Power and the PSC fought over an acceptable cost cap, and at least one commissioner said Kemper was a bad risk to take. The tug-of-war ended in April 2012 with a $2.4 billion cap, with a 20 percent "contingency" approved because the plant featured new technology. This amount did not include the mine and CO2 pipeline.
Within weeks, Mississippi Power reported a cost increase, mostly because of higher prices for engineering, equipment and materials, and construction. Regulators maintained that the utility needed to stick to the plant's certified cost of $2.4 billion plus contingencies because they had agreed to that amount.
Both sides eventually struck a settlement in January 2013 that essentially capped the costs of what is recoverable through rates to customers at $2.88 billion, plus interest and other items. Anything beyond that was Mississippi Power's burden to bear.
With the cost cap in place and customers essentially protected from the point of view of the PSC and company, the project continued to move forward. Mississippi Power and Southern executives frequently talked up Kemper's progress and insisted the project would meet a May 2014 startup date.
That target was key to receiving $133 million in federal tax credits. But the scramble to meet that date turned out to have costs of its own.
Regulators trusted the previous diligence, saying customers would be protected.
"At that point, the groundwork had already been laid," said Commissioner Steve Renfroe, who was appointed after the project had started. "I thought that that agreement and that order, the capped costs, that whole juncture was smart, and it was something that would serve ratepayers well going forward."
There were also bodies in charge of oversight. The commission, PSC staff and Mississippi Power each had their own consultants to oversee the project, and the utility filed monthly reports. Consultants and members of the PSC and its staff also have met monthly at Kemper since construction began.
Triage on the inside, trouble on the outside
But by 2012, it became clear the project was deviating from its original plan.
The extra cash contingency had eroded, and Mississippi Power met with consultants and began re-evaluating project costs and estimates. The company remained confident that the expected costs would be above $2.4 billion but below the $2.88 billion cap, Mississippi Power spokesman Jeff Shepard said.
By late 2012, Mississippi regulators were being told they had a triage situation on their hands. The PSC staff heard about it from Greg Zoll, a New Jersey-based engineering consultant with Burns & Roe Enterprises Inc. In a November 2012 report, he said Kemper's schedule had slipped roughly three months, and that the delays would nudge the total project cost over $3 billion.
Southern Co. Services Inc., Mississippi Power's engineering contractor, "is not utilizing some basic project management and project controls tools and techniques that are available and customarily used in the industry for a project of this magnitude," Zoll wrote.
Mississippi Power strongly disputed Zoll's assessment, and records show that their disagreements played out for years. The utility said costs were rising, in part, because it wanted to meet its promised launch date of May 2014. Zoll said the firm should consider whether slowing down would be financially prudent.
Zoll said that after so many cost overruns, Mississippi Power should revise the total project cost to account for uncertainties. The utility responded: How is it possible to quantify uncertain costs? And what is supposed to be the reference point for a first-of-a-kind power plant?
Kemper was also being buffeted by factors outside its control. In 2008 especially, a global construction boom caused the costs of labor and materials to spike. In 2014, it was the polar vortex that hampered construction.
Starting in April 2013, the costs of the project began to show up significantly on Southern's balance sheet. At that point, Kemper's price tag had increased 42 percent -- to $3.42 billion (ClimateWire, April 25, 2013).
Two decisions -- made long before construction -- were compounding the cost overruns, experts said. First, Southern had chosen to build the plant inland, thanks to the recent experience of Hurricane Katrina.
"They wanted to avoid hurricanes that wipe out and push their gas plants offline in the event of a hurricane," said John Thompson, who directs the Fossil Transition Project at the Clean Air Task Force. "That doesn't sound like a big deal, but it actually is, because it means that you can't assemble your gasification plant somewhere else and barge it into the coast" -- a much cheaper option than moving everything by truck over rural roads. (On the upside, being inland meant being closer to coal mines.)
Mississippi Power said having Kemper right next to the lignite mine should help keep fuel costs lower over the long term, however.
The second choice was about technical design. Kemper's architects had decided to run its gasifier, its most crucial piece of equipment, on air instead of oxygen. "That's a trade-off," Thompson said. "What you're basically trading is higher capital costs for lower operating costs."
The catch? It's bigger. It takes "more metal, more pipe, more everything," he said.
And so the cost escalations continued. By July 2013, the bill had risen to just under $3.9 billion. During a July 31, 2013, conference call with analysts, Fanning said a chief issue stemmed from Mississippi Power agreeing to a cost cap and schedule when only 10 to 15 percent of Kemper had been engineered.
"What's happened is as we've completed the engineering, we ran into a problem that, oh, my goodness, we're going to run over on cost and schedule, and we've reduced the schedule," Fanning said.
"We didn't know we had a problem then. But in fact, that's when we had a problem. We only knew we had a problem once the engineering became complete and we saw the implications of the rapid construction."
Asked why 10 to 15 percent engineering was sufficient, Shepard of Mississippi Power said a complete blueprint would have been prohibitive. Fully engineering and designing all 16 of Kemper's pieces would have taken $500 million, he said, as well as arranging vendors, contractors and other major cost components, all before it had even asked the state for permission to build the plant.
"All involved recognized the limitations in terms of the thoroughness and quality of the estimate that could be developed for a project of this size with limited resources," he told EnergyWire.
In terms of cost estimates, Shepard said Mississippi Power hit the mark with major pieces, including the gasifier, steam generation and combustion turbine. The company missed it on integrating the components and systems, particularly with how much piping and wiring was needed and the labor associated with that, he said.
Shepard said that is typical of first-of-a-kind operations such as Kemper.
But these hang-ups forced Mississippi Power to dial back its promised startup date of May 2014. First, Southern and Mississippi Power conceded a few months, kicking the date back to the last quarter of 2014. Just a few months later, in April, they announced another delay, this time into 2015.
McConnell, the former DOE assistant secretary, said because Southern is taking the brunt of all cost overruns -- which has reached more than $2 billion in write-offs -- the company should be praised for taking a risk.
"First-of-a-kind situation, cost overruns, delays, you can point at it, you can make fun of it, you can criticize them all day long. And it's the challenge that one takes on when you're a pioneer," he said.
The vision remains
The saga isn't over. Kemper now has an expected startup date of the first half of 2016. Meanwhile, a combination of financial setbacks has put Mississippi Power on the brink of bankruptcy. In a split vote, the PSC agreed to let the utility start collecting money in emergency rate relief.
Construction on Kemper is largely finished, and the project is going through key startup tests this month and into the fall. Mississippi Power continues to tout long-term benefits to customers and to the state's economy.
Broadly, Southern wants to take the technology and sell it worldwide. Coal may be declining in the United States, but it represents 30 percent of primary energy use globally, according to the International Energy Agency.
Kemper's supporters say that the project's true value will be established in the long run. In the history of industrial technology, they say, the first go is always the priciest.
Jeff Phillips, a senior program manager at the Electric Power Research Institute Inc., expects the next plant of Kemper's type to cost 10 to 15 percent less. Subsequent plants should cost even less, as engineers figure out where cement, steel and other components aren't needed.
"That has always been the vision for how -- whether it's IGCC or some other technology -- it's going to become competitive, though today the numbers may look a little scary," he said. "To be fair to them, they're not the only first-of-a-kind major project that's been over budget. Generically, there's lots of things that tend to come up and surprise you."
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