Cinergy Proposes Most Expensive Air Pollution Compliance Plan for PSI Ratepayers

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Cinergy’s plan is much more expensive that it should be. The company ignores cheaper options such as energy efficiency and targeted renewable energy investments, which is particularly important when dealing with the prospects of future carbon dioxide regulations and phasing out obsolete, 1950s-vintage power plants. Cinergy also plans to retrofit obsolete plants that even its own consultant says will be idle in a few years.

The following is a synopsis of:

  • Prefiled Direct Testimony of Bruce E. Biewold, Synapse Energy Economics, Inc., to the Indiana Utility Regulatory Commission, Cause No. 42718, Petition of PSI Energy, Inc. requesting that the Commission approve PSI’s “Phase I” plan for complying with pending SO2, NOx, and Mercury emissions reductions requirements. Filed March 17, 2005.
  • Prefiled Direct Testimony of Grant Smith to the Indiana Utility Regulatory Commission, Cause No. 42718, Petition of PSI Energy, Inc. requesting that the Commission approve PSI’s “Phase I” plan for complying with pending SO2, NOx, and Mercury emissions reductions requirements. Filed March 18, 2005.

PSI has proposed a $1.4 billion compliance plan supported by several analyses to install post-combustion emission controls for sulfur dioxide, nitrous oxide, and mercury on Gibson, Cayuga, Gallagher, Wabash River, and Edwardsport units.

Combined with their recent 8.5% rate increase and plans to build a $1 billion coal gasification plant, PSI ratepayers could experience a 35% increase in rates within a 10 year period. But in order to meet compliance, is this really necessary?

Four critical flaws suggest that more cost-effective compliance options were overlooked:

  1. The 1.4 billion dollars appears to be overestimated for the control technologies PSI wants to use. At more standard prices, the cost of the proposal would amount to $872 million.
  2. The analyses supporting PSI’s proposal do not take carbon dioxide emissions or future carbon prices into consideration, which increases financial risk for the company and their ratepayers. For an investment of this magnitude, more proactive planning with regard to future environmental regulations would be desirable.
  3. PSI has not considered energy efficiency or renewable resources as compliance options. In making such a large investment, it would be prudent to consider all available options against a number of possible futures (especially regarding environmental regulations).
  4. PSI wishes to install emission controls on several older, smaller, less efficient units that should be candidates for retirement. To maximize the cost-effectiveness of the investment, a thorough plant retirement analysis should be conducted.

A Closer Look at the Flaws with PSI’s Proposal
Inconsistent cost estimates for emission control technologies make it impossible for the IURC to determine the reasonableness of the proposal. Problems include:

  • Estimates are inadequately documented and inconsistent.
  • One of PSI’s consultants, Sargent and Lundy, communicated to Cinergy that their cost-estimates for scrubbers may be too high.
  • Cost estimates in the proposal sometimes differ from those used in their supporting analyses
  • Cost controls for Cinergy are higher than those for non-Cinergy units.

It is recommended that PSI be required to justify all costs and prepare a consistent analysis.

Climate Policy/Carbon Prices are not properly considered in PSI’s analysis. PSI owes it to ratepayers and shareholders to anticipate future environmental regulation and factor them into its planning.

Cinergy currently emits roughly 1% of the world’s carbon dioxide emissions. Despite this, PSI’s analyses and proposal ignore carbon dioxide and do not rely on expected carbon price forecasts.

Carbon dioxide is a major contributor to global climate change and poses significant environmental impacts. It is probable that in the near future, federal policy requiring greenhouse gas emission reductions (including carbon dioxide) will be enacted. It would therefore be prudent to account for this in making long-term, large investments.

By failing to account for carbon dioxide emissions in its analyses, PSI’s proposal:

  • Fails to maintain flexibility so that its long-term investments can be cost-effective over a variety of possible futures with regards to environmental requirements and carbon prices;
  • Fails to minimize risks, including legislation to control carbon emissions, civil/tort lawsuits to seek damages, and changes in seasonal load and damage to utility infrastructure caused by climate changes resulting from carbon dioxide emissions. It is recommended that PSI’s planning be done with high and low case carbon price trajectories.

Energy efficiency and renewables have not been considered as compliance options.

PSI’s proposal provides no information as to whether additional DSM (demand-side management, referring to energy efficiency methods for electricity consumers) should be part of a cost-effective compliance plan. Currently, PSI’s DSM spending and projected savings are small compared to those of many utilities.

It is estimated that, with investments in a comprehensive energy efficiency program (that would cost a fraction of the $1.4 billion proposal):

  1. The need for the planned 600 MW, $1 billion coal gasification plant would be eliminated, and older, dirtier, less economic plants could begin to be shut down.
  2. More jobs would be created over the Cinergy territory than with power plant construction while significant sources carbon and other pollution would be avoided and eliminated.

Regarding renewables, wind and biomass have been rejected without proper justification. PSI’s rejection of wind as an economically feasible generator in the past has been based on assessments that are not detailed enough to allow a thorough analysis. Wind as a compliance option is not considered at all in PSI’s analyses supporting its proposal.

The biomass co-firing report that was done for Cinergy concluded that a production tax credit of $.005 to$.01/kWh, or a carbon tax credit of $45-$91/ton would result in “significant amounts of co-firing”. That price range for carbon emissions works out to a price range of $12 to $25 per ton of carbon dioxide, which is likely in the near future. So, had PSI considered future carbon prices in its analyses, biomass co-firing would have been a more economically appealing option.

In general, PSI’s failure to consider carbon dioxide and future carbon prices (above) under-prices the coal-burning option. While proponents of coal-fired power state that Indiana’s low electricity prices are due to coal-fired power, environmental liabilities lie ahead. PSI’s proposal is proof: a $1.4 billion emission control proposal is hardly inexpensive. Further, it is estimated that $170 billion in health related costs each year nationally can be attributed to coal-burning power plants, which is not factored into the price of coal.

By contrast, both energy efficiency and renewables carry air emissions benefits because, by reducing the amount of fossil fuels burned, they reduce carbon dioxide emission as well that of as sulfur dioxide and nitrous oxide. Therefore, renewables and energy efficiency are more cost-effective when considering future carbon prices.

So, in failing to consider a full range of compliance options including the use of renewables and energy efficiency, PSI is probably overlooking the most cost-effective solution.

It is recommended that PSI be required to do a complete, detailed, and up to date analysis of the potential for efficiency programs and new renewable generation to be implemented in order to reduce costs of compliance to its customers, and to manage risks.

Plant Retirement Analysis is critical to ensuring that investments are cost effective. PSI has several small, older, and inefficient units including Edwardsport, Gallagher, and Wabash River. ICF’s modeling analysis, which takes into account an expected carbon price forecast, shows up to ten units should be retired.

It is recommended that PSI be required to conduct rigorous studies of the continued operation of certain generating units compared with retiring them, including the costs of environmental compliance in cases where the units are operated.

Overall Recommendation: The IURC should reject PSI’s filing until it receives a proper analysis that allows for an informed, reasoned determination of what a reasonably optimal environmental compliance plan would include for PSI.

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