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Kemper CCS: Wishful Thinking Hits the Fan

Carbon Capture and Sequestration (“CCS”) technology is perhaps the most important technology which needs to work if the world is to limit GHGs to anything close to the levels envisaged in politicians’ speeches. It is also an extremely difficult technology, somewhat controversial, and horribly expensive. Most proposed U.S. CCS projects have fallen by the wayside as the costs became clearer, even though (like many green technologies) it is being showered in government money.

But one CCS project –the first large scale U.S. coal-fired power plant built with CCS technology — is proceeding. It is demonstrating these cost challenges with extreme, and for Southern Company shareholders, Mississippi ratepayers, (and U.S. taxpayers), no doubt painful, clarity. As has been well-publicized, the Kemper project is already $1 billion over budget and the subject of increasingly acrimonious debate – and litigation — over who will get stuck with the tab.

What has not been made clear is exactly what everyone is paying for.

Mississippi Power (a Southern Co. subsidiary) says that “The project will capture at least 65 percent of the carbon dioxide produced”. This figure is the one that generally gets repeated, e.g., Kemper will capture and sequester “around 65 per cent of the plant’s annual CO2 emissions” (Global CCS Institute).

Note that such claimed percentages of CO2 capture need close scrutiny. CCS consumes an enormous amount of power, and to generate a given amount of electricity for sale, a CCS plant needs to be at least 25% larger — and so emit 25% more CO2 before sequestration– than an equivalent non-CCS plant. So reducing a CCS plant’s emissions by 65% actually equates to a 55% reduction for a non-CCS counterpart. We use Kemper’s quoted numbers at face value, but bear the reality in mind.

We wondered which regulatory authority was requiring Kemper to achieve this reduction, and the answer turned out to be none. As far as we can tell, even though Kemper is subject to at least three separate sets of CCS-related requirements, none of these – individually or collectively — requires Kemper to capture and sequester “65%” of its carbon emissions.

The first of these is the “Mitigation Action Plan”, a set of conditions attached to Kemper’s wetlands permit issued by the Army Corps of Engineers. The Plan requires Southern Co. to “use best efforts to achieve 67% carbon capture during the demonstration period.” Putting aside the issue of how this came to be part of a wetlands permit (and where the 67% number came from) it requires only “best efforts” to achieve this and, even more importantly, only during Kemper’s 54-month “demonstration period”.

Next comes the Department of Energy (“DOE”) “Clean Coal Power Initiative Round 2” $270 million grant. According to the “Amended and Restated Repayment Agreement” between DOE and Southern Co., the latter would have to repay the grant if it:
“…does not, with respect to the planned coal-fired power plant in Mississippi receiving CCPI Round II funds: (a) design, build, and operate the facility with the intent to capture and geologically sequester by enhanced oil recovery or otherwise one million tons per year of CO2 (approximately 25% capture rate); and (b) establish, and actively work toward, the goal of capturing and sequestering 50% of CO2 emissions from the plant by 2020 and thereafter.”
No 65% CCS there: just “design, build and operate” with the intent of 25% CCS and “actively work toward” 50% CCS by 2020. Not even “best efforts”, and nothing close to 65% (or 67%).

Finally there are $412 million in federal tax credits: “$133 million (Phase I) and $279 million (Phase II) of Internal Revenue Code Section 48A tax credits . . . . In order to remain eligible for the Phase II credits, Mississippi Power plans to capture and sequester (via enhanced oil recovery) at least 65% of the CO2 produced by the Kemper IGCC during operations in accordance with the rules for Section 48A investment tax credits.” (This $412 million is apparently not enough, because on October 15, 2012, Mississippi Power applied for an undisclosed additional amount of 48A credits.)
The 48A tax credits could be the hook for the elusive 65% CCS requirement, until you read the fine print, i.e., Internal Revenue Code Section 48A(e)(1)(G) (and the IRS Guidance thereto), which requires only “that the project includes equipment which separates and sequesters at least 65 percent . . . of such project’s total carbon dioxide emissions.”

So, if this requirement means “build and operate” said equipment, then there it is. But, as noted above in connection with its own grant program, DOE (which is the gatekeeper for Section 48A credits) clearly thinks there is a distinction between installing equipment capable of CCS and operating that equipment. And, of course, even if DOE, the IRS and Southern Co. all agree that this really is a 65% CCS requirement, the only penalty for non-compliance is loss of some or all of the $279 million “Phase II” tax credits.

So, there you have it. Clearly Kemper will be built with CCS, and we applaud Southern Co for taking these risks to prove such a potentially important technology – and we hope it works as advertised. But, in addition to the construction cost overruns, it is a mystery to us as to how Southern Co. will actually afford to operate it. In fact, it appears that the more carbon Kemper captures, the more money it will lose, a situation which encourages lower levels of CCS.

Southern has contracts for the sale of its CO2, and while we do not know their terms, CO2 currently sells for around $30 a ton. CCS operating cost estimates are notoriously imprecise and opaque, but many industry operating cost estimates are around $50/ton. If, as a ballpark figure, Kemper loses a net $20/ton on 3 million tons per year of captured CO2, that’s a $60 million annual loss, unless they get some sort of price premium for the electricity from Mississippi ratepayers beyond the current agreement, which specifies permissible increases through 2020. Of course, a carbon tax would go a long way towards making this far more rational both economically and policy-wise.

This was all entirely predictable. The $700 million in federal grant funds and tax credits, averaged over the life of the plant (let’s say 20 years, though it is probably much longer) amount to less than $10/ton CO2, which nobody, anywhere, thinks is anything like enough to reflect the costs of CCS.

We suspect that somewhere at Southern Co. there are a whole bunch of spreadsheets with various permutations of percentage of carbon capture, loss per ton of CCS, cost of losing some or all of the 48A tax credits, cost of repaying some or all of DOE’s grant, risk of penalties – or an injunction — for violating Mitigation Action Plan, etc. They would make interesting reading.