Some say stalled Holcomb expansion will cost consumers

Topeka Capital-Journal, The, Apr 20, 2008

Jousting about environmental and political ramifications of a massive coal plant expansion in southwest Kansas is obscuring an alarming trend.

Construction budgets for new power plants in the United States are under intense inflationary pressure - 27 percent annually, by one estimate - potentially adding hundreds of millions of dollars to the bottom line. The project earmarked for the dusty flatlands near Holcomb is no exception.

Utility cooperatives vested in the 1,400-megawatt development - Sunflower Electric Power Corp. in Hays and Tri-State Electric Generation and Transmission Association, of Westminster, Colo. - acknowledge the escalating costs.

The companies track forces integral to the calculation but are reluctant to make public a fresh projection of the sticker shock their customers would feel in the form of future rate hikes. Officially, they are sticking with a year-old figure.

"We are not comfortable revising the current estimate of $3.6 billion for the construction cost of the Holcomb expansion project, even though we know prices are increasing," said Steve Miller, Sunflower spokesman.

In doing so, Miller retracted a $3.9 billion ballpark estimate tossed out during an interview with The Topeka Capital-Journal.

"We know from internal models we can afford to do this," Miller said. "Everything is going up. It's all relative."

Company executives say they are content to keep the inflation- adjusted price close to the vest as the Legislature, Gov. Kathleen Sebelius and dozens of lobbyists resume a fight April 30 over the fate of the Finney County project. State regulators denied Sunflower a required permit in October. Legislators are working to overcome Sebelius' veto of two bills authorizing construction.

Tri-State and Sunflower officials say they are unlikely to produce a revised figure until a state permit to build is acquired through Statehouse wrangling or courthouse maneuvering. A precise analysis of price could cost $500,000, Miller said.

Critics of the Holcomb project said the current price should be part of the policy debate on coal.

"We need to know what the cost will be to Kansans, both in financial and ecological terms," said Nancy Jackson, executive director of the Climate and Energy Project in Lawrence.

Evidence of construction inflation in the power plant industry can be gleaned from consultants who make it their business to crunch numbers. Cambridge Energy Research Associates, which delivers analysis of energy markets and industry trends, reported the cost jumped 27 percent during 12 months ending in October. The Cambridge measure for coal, natural gas, nuclear and wind units is a benchmark similar in concept to the Consumer Price Index.

If this analysis is accurate and remains constant, the cost of the Sunflower plant expansion could be $4.5 billion by the end of October 2008.

"As the cost of construction rises, firms may become reluctant to invest in new plants or delay and postpone these projects," said Candida Scott, a Cambridge Energy researcher.

Ezra Hausman, a senior associate at Synapse Energy Economics, said, "In case after case and state after state, we have seen costs of proposed coal plants rising by up to a factor of two or more."

International demand for steel and cement, equipment, shipping and specialized labor that contribute to rising assessments remain unchecked, said Ed Legge, spokesman for Edison Electric Institute, an association of shareholder-owned electric companies.

"Demand hasn't gone down, and nothing is projected to go down," Legge said.

Additional evidence of financial pressure on power plant developers can be found in the growing roster of U.S. generating stations undercut by bulging price tags.

In August 2006, Sunflower and Tri-State declared an intention to build three, 700-megawatt units for $3.6 billion. In less than a year, Tri-State dropped one unit. But cost of the development remained unchanged.

Westar Energy in Topeka balked in December 2006 at building a coal-based plant, originally priced at $1 billion, due to a $400 million increase in estimates for construction. A year later, the Kansas Board of Public Utilities shelved blueprints for a coal- fired plant near Kansas City, Kan. Kansas City Power & Light's coal- fired plant under construction near Weston, Mo., is experiencing budget overruns.

"I don't think it's a sure thing that Sunflower's plant will be built," said Craig Volland, a member of the Sierra Club of Kansas and leading critic of the project. "Who's going to finance this thing? Who's going to stick their neck out on such a huge investment?"

Investment banks Morgan Stanley, Citibank, J.P. Morgan Chase and Bank of America agreed in February to weigh the potential of federal regulation of carbon emissions when assessing proposals for new utility plants. In March, the U.S. Department of Agriculture's low- interest loan program for rural electric cooperatives vowed to make no deals on coal plants until a new president and Congress were in place.

The price of coal from Wyoming fields supplying Sunflower is rising as Asian countries clamor for the world's most abundant source of energy.