Officials with the Rural Utilities Service (RUS) have some advice for utilities thinking they might rely on the federal agency to help finance new coal-fired power plants: hold on until 2010.
That may be the earliest that the RUS—a
1936 New Deal creation that is part of the Department of Agriculture—may be able to resume writing loans. The Office of Management and Budget told the RUS last year to stop lending money for baseload coal plants until construction cost risk could be addressed. If and when lending resumes, new RUS loans could come with a 200 basis point fee to cover the risk of a project’s failure due to construction costs. RUS calculates those costs have climbed at a 30 percent annual rate in recent years.
Sitting tight may be tough to do for some utilities. The National Rural Electric Cooperative Association estimates that electricity demand among its members is growing by around 4 percent a year, well ahead of the national average. Concerns over meeting demand growth may be most acute in the West where a supply squeeze could begin in 2011.
That’s when Bonneville Power Administration plans to stop providing electricity via long-term contracts to utilities east of the Continental Divide and start imposing 10 percent cuts and market-based rates on utilities west of the Divide. The primary reason: growth is outpacing the ability of BPA’s 31 hydro dams and one nuclear power plant to provide energy. BPA also owns and operates three quarters of the Northwest’s transmission grid. It sells power into the Western grid and provided load support during a 2006 heat wave-induced power crisis.
One coal-fired plant that likely won’t be built due to the RUS moratorium is the Highwood Generating Station in Montana.
“The feasibility of it made us a little bit nervous,” James Andrew, RUS administrator, was quoted as saying in a local Montana news report. In late February, the RUS turned down an application for the plant filed in 2004 by Billings-based Southern Montana Electric Generation and Transmission. The G&T is a coalition of five utilities serving 60,000 customers. Following the RUS loan application rejection, Southern Montana said it may seek private financing.
When SME originally applied for the federal loan in 2004, Highwood was projected to cost around $450 million (or $1,800/k W), Andrew said. By last fall, the price had risen to $750 million (or $3,000/kW), the result, he said, of higher prices for concrete and steel and demand for power plants from countries such as India and China.
The RUS moratorium also has affected Associated Electric Cooperative. The wholesale power supplier for 57 electric
cooperatives serving 800,000 customers in Missouri, southeast Iowa and northeast Oklahoma, said in late February it would delay indefinitely plans to build the 660 MW Norborne coal plant due to increasing costs and “other uncertainties.”
Project costs have “significantly increased” in less than three years, Associated said, and are now estimated at $2 billion, more than $3,000/k W. Worldwide demand for engineering, skilled labor, equipment and materials was cited.
With the RUS sidelined for now, Associated said that seeking private money would increase project costs even more, despite what it said was a good credit rating.
It also cited “increasing uncertainty in the regulatory environment” as Congress continues to discuss the environmental and economic effects of reducing greenhouse gas emissions. The unsettled nature of these talks keeps the potential cost of reducing carbon dioxide from being known.
Associated said that member cooperatives’ electricity requirements will grow about 2 percent a year for the next 10 year, or about 100 MW a year.
Environmental groups are also pressuring RUS to curtail making loans. A lawsuit filed in early March would force the agency to link two otherwise separate analyses of the impact of East Kentucky Power Cooperative’s proposed power plant and power transmission line expansion projects.
RUS was considering providing funding to enable East Kentucky to build two units at its Smith station. Getting electricity from Smith to customers would require 36 miles of new transmission lines.
The lawsuit alleges that the RUS failed to assess the impacts of the power plant and the power lines together. It also alleges that the RUS is in violation of National Environmental Policy Act provisions, which the lawsuit claims specifies that closely related proposals should be analyzed together. An RUS spokesperson declined to comment on the litigation.
Andrew said that although the RUS is currently barred from funding new baseload coal plants, it can continue funding renewable energy and efficiency projects. The agency estimates that 17 to 21 percent of projected demand growth can be met this way. One concern, however, is whether sufficient transmission resources exist to get the renewable power to market. Many of the nation’s best wind sites are in remote places that historically have lacked transmission. Siting new transmission corridors can be every bit as difficult as siting power plants.
For many rural utilities, precisely how to meet the remaining 70 to 75 percent of demand remains uncertain.
“I don’t know what they’re going to do,” Andrew said of the rural utilities. “These guys are sweating bullets.”
References:
Archives