expensive coal

This just in from Restructuring Today ($ub req’d): Sunflower Electric, of the recent Kansas decision not to allow an electric permit because of CO2 concerns, has argued that the decision was a bad idea because it will drive up power prices. But their math is wrong.

Here’s a partial excerpt from the RT story:

A decision by the Kansas Department of Health & Environment to deny a coal power plant permit would mean higher power bills for some. That’s “an absolute certainty,” Sunflower Electric Power told us Friday.

How much higher? At today’s prices the firm could pay 1.5¢ for coal versus 8¢ for natural gas.

Uh, no. But this is a mistake that is aggressively and frequently made by our electricity generators.

One-and-a-half cents is the cost of the coal. It doesn’t include the cost of the generators, or the cost of the pollution cleanup (and I’m not even talking about unregulated pollutants like CO2), or the cost of construction financing, or the cost of the transmission and distribution to get that power out to electric users, or any profit for the investors.

Eight cents is the cost of the gas. But it also doesn’t include all those other variables.

In other words, it is a totally irrelevant comparison. Labor in China is cheaper than labor in Stanford, Conn., but that doesn’t mean that folks who live in Stanford can save money by hiring babysitters from Beijing.

Put simply, you can’t build a power plant without investing capital to generate and deliver that power. Indeed, the only possible way that this 1.5¢ number is true is if the coal plant’s investors are willing to sell power for the cost of their fuel, and foresake any return on their investments (or interest payments on their debt). Perhaps the Kansas regulators should call them on this bluff?

As I’ve noted before, the true cost of new, Clean Air Act-compliant coal (including capital recovery, at today’s prices) is over 10 cents/kWh at the customer meter, once you include transmission, distribution, and capital recovery. About the same as gas, coincidentally.

If we get carbon regulations that don’t grandfather in the coal plants, that number balloons to 17 cents or so.

Both of which make coal a really dumb idea, and not just because of the environmental consequences. Coal plants simply don’t make any economic sense unless you can get someone to guarantee your equity returns. If you ever built a plant that expensive, you couldn’t afford to run it without taking a massive loss on your invested capital.

More from RT:

Politics aside, the 1.5 million cooperative customers still need reliable, low cost power,” said Earl Watkins, Sunflower CEO.

Amen, Earl. That’s exactly my point.