Friday, January 30, 2009

Forum Reponse to HEA Healy Editorial

An Open Response to Homer Electric Association’s “Open Letter to HEA Members Regarding the Healy Clean Coal Project”

It was good that HEA General Manager Brad Janorschke took out a full page ad to share his response to the HEA Members Forum’s January 16 letter. While that response made clear his continued support for a coal-fired power plant to light our homes, it failed to address some vital issues that will determine whether HEA member/ratepayers continue to pay escalating power costs. HEA Members Forum participants can’t afford to buy that much advertising but will attempt to review and clarify those issues below.

General Background
It’s important for all HEA memeber/ratepayers to recognize that HEA recently agreed to terms with Golden Valley Electric Association (GVEA) and the Alaska Industrial Development and Export Authority (AIDEA) to re-start the problem-plagued Healy Coal Plant No. 2 near Denali. At the February 10 Board meeting HEA will consider whether to lock these terms into a long term contract – a contract that will last for as long as the Healy plant burns coal.

Under the terms, HEA will be required to buy half the power produced at the coal plant. So far so good. But here’s the catch: there’s no cap on the price we’ll have to pay for the power from Healy! So, GVEA will borrow roughly $95 million to re-start the facility, then they’ll turn around and stick us with the restart and operating costs in the form of higher electric rates! While HEA’s books may not show a debt liability for new capital costs, you can be sure your electric bill will reflect these pass-through costs.

But that’s just the beginning. State and federal governments have poured over $300 million into Healy’s experimental technology. Yet according to GVEA, the Healy Coal Plant never worked as designed and could not be run in a safe, efficient and economical manner. That’s why it sat idle for the past decade. Even the Department of Energy – the agency touting this unproven technology – conceded the facility would be expensive to run and parts would be hard to find.

There are other risks and unknowns. For example, HEA and its partners have completely ignored the costs likely to flow from anticipated mercury and greenhouse controls. While proponents like to refer to the “clean coal” aspects of Healy, the fact remains the facility cannot address mercury and CO2 emissions. Whether through rules or taxes or cap and trade systems, the writing is on the wall that coal-fired power plants will face rising operating costs. That means higher costs for ratepayers.

Finally, there’s the invariable fuel cost increases dictated by the laws of supply and demand. Remember when natural gas in Cook Inlet was cheap? That’s before demand rose, supplies fell and we tied our gas prices to Outside price indexes. The same exact thing will happen with coal. While Alaska has enormous coal reserves, the price for coal is set by international markets. So, once those Asian markets heat back up – and they most certainly will – their energy appetite will help drive up the cost of coal in Alaska. And if we buy into Healy, that means you’re rates will go up with the price of coal.

So, what’s the answer? HEA should divert the time and money being wasted on resurrecting a defective, outdated coal plant to serious efforts toward supporting development of renewable base load technologies. Folks laughed when the Bradley Lake Hydroelectric facility in Kachemak Bay was built because, at a time, natural gas was cheap and Bradley Lake power looked expensive. But Bradley Lake operates without fuel costs, so it’s producing power for the same costs it did 20 years ago. The proposed Lake Chakachamna hydro project promises to do the same, as would development of Mt. Spurr geothermal leases. We still have a lot of natural gas on the Kenai Peninsula which can be the bridge fuel we need during development of such longer term solutions.

Instead of looking backwards to coal, HEA has an opportunity to look ahead, to clean, fixed cost power and the sustainable jobs and economies it can produce.

Independent Generation by 2009

Brad states that “ is HEA’s mission to provide its own independent generation starting in January 2009...” It is difficult to understand how an agreement to purchase energy from GVEA at an unspecified price for 25-50 years will achieve a goal such as this? Has Brad discovered a new definition for “independent?” And is such an objective even desirable? To meet our growing energy need it is more likely that, as envisioned by Governor Palin, greater cooperation between railbelt utilities will be required.

Strategic diversification of the sources from which HEA acquires energy can make sense, but diversification for diversification sake does not. In a time of unprecedented rate increases, every source we incorporate into our energy mix needs to do more than provide a few additional MW of electricity. Each source must make economic sense for HEA member/ratepayers. Each source must provide energy at a competitive price when compared to all other options. Far more important, any new source must have a high likelihood of helping stabilize ratepayer costs over the long term. This can only be evaluated through careful assessment of technological, regulatory, legal, and commodity market issues relevant to each proposed new energy source.

HEA’s management and Board have failed to provide evidence of any comprehensive effort to compare Healy 2 to other short-term energy options available to us. Likewise, there is no indication that a meaningful assessment has been done of potential long-term impacts of the Healy 2 deal on our electric rates.

No New Capital Required from HEA
The fact that terms agreed to with AIDEA, GVEA require no “up-front” costs for HEA might be comforting to management and Board but should scare the pants of HEA member/ratepayers. The terms would have us commit to letting GVEA recover all costs associated with restart and operation of Healy 2 by increasing the rate they charge us for power. There is no limit on this. The arrangement allows management to make the coop books look good by not incurring debt or making a large expenditure of funds. For this, our monthly electric bills will continuously increase.

Access to all technological studies of Healy 2, including the complete Shaw report, has been denied to HEA members. Repeated requests have been made for these over the last 18 months, to no avail, until last week. Volume One of the Shaw report was delivered to one Forum participant. After additional requests for Volume Two, he was finally told that he could pick it up at the Homer HEA office. While it would be worthwhile to review this report, one should read with the understanding that it is not a thirdparty assessment of the technological considerations. The Shaw report was commissioned by the three parties intent on justifying their plan to restart Healy 2. Still, it would be interesting to see how Shaw attempts to refute several earlier engineering assessments which concluded that the plant could not be operated economically without removal of the so-called “clean coal” components.

Even the US Department of Energy -- a major supporter of the project -- couldn’t say much good about Healy 2. While the 2003 DOE Assessment concludes that Healy 2 “...operated for the required 90 days on coal typical of that expected from the Usibelli Mine,” it goes on to equivocate -- “However, because the properties of the coal burned during the 90-day test differed slightly from those specified in the test protocol, the HCCP was not deemed to have passed the 90-day commercial operating test...” In conclusion, DOE admits that, “Economically, costs appear to be in the upper range when compared to those for competing boiler types.” And finally, “...acquisition of TRW [the company responsible for Healy 2 technology] by Northrop Grumman casts doubt on the potential for commercialization of this technology.” That means it will be very difficult to find parts and expertise to maintain Healy 2 even if it is successfully started.

How rational and fiscally responsible is it for HEA management and Board to omit consideration of potential costs associated with increasing federal regulation of coal plants when evaluating the viability of the proposed Healy 2 deal? In spite of Brad’s assertions to the contrary, these changes are on a fast track.

On March 15, 2005, EPA issued the Clean Air Mercury Rule, which creates performance standards and establishes permanent, declining caps on mercury emissions. Usibelli coal may be relatively low in mercury but no figures are given, no estimates of potential Healy 2 mercury emissions are stated, and no comparison is made to EPA requirements. The Obama Administration is unlikely to allow a waiver for Healy 2. Installation and maintenance of mercury emission control equipment will add significant costs to the Healy plant. Utilities know what those costs are. They should be considered up front in calculations for Healy 2.

Last November the Environmental Protection Agency's (EPA) Environmental Appeals Board ruled that, in light of a May 2007 Supreme Court decision that recognized CO2 as a pollutant under the federal Clean Air Act, EPA must regulate CO2 emissions from coal-fired power plants. President Barack Obama has made reduction of CO2 a major priority for his Administration. On January 22, the EPA placed a hold on approval of a coal-fired power plant in South Dakota, because the state’s proposed permit for the plant didn’t meet Clean Air Act requirements.

Following two recent disasters involving massive fly-ash pollution events from two different U.S. coal plants there is movement in Congress to force EPA to regulate such ash as a toxic and hazardous substance.

Coal Prices
Assumptions that coal costs will remain low over time do not reflect reality. According to a July article from the AllBusiness website, coal prices are predicted to rise dramatically -- “At the recent Reuters Global Energy Summit in Houston, Arch Coal CEO Steve Leer said the coal shortage across the globe could last three years. ‘In 2008, we estimate we're 25 to 35 million tons short across the globe,’ Leer told the summit, adding that he sees that virtually doubling by the end of 2009.” In reference to the December 2008 World Coal Assessment 2009 presented by International Commodities Trading and Consulting Company, Cyrios, Inc., President Albert Abkarian stated that, "We are projecting that the lower coal prices are temporary and that the prices will increase between 20 and 30 percent within the next six months.”

In addition, Healy 2 will have only one source for coal -- the Usibelli mine. Without competition there is no reason for Usibeli to enter into an agreement that limits his future profit. This is especially so since the mine hopes to export as much coal as possible to other countries who, in light of the predicted global shortage, are likely to compete with GVEA for the product. While coal contracts may typically be long-term arrangements, we have seen no indication of price or duration for a potential agreement between GVEA and Usibelli.

It’s difficult to see how HEA’s management and Board can to be looking out for member/ratepayer interests by pursuing the Healy 2 boondoggle. Their assumption that becoming involved in a bargain with AIDEA and GVEA absent any adequate assessment of the technical, regulatory, and financial risks point in quite the opposite direction. Until the people running our coop can show us some factual bases for their enthusiasm toward this potentially rate-raising proposal, an increasing number of HEA members will join in active opposition. Given our recent electric bills, none of us can afford to remain complacent.

Mike O’Meara, Spokesman
Homer Electric Association Members Forum

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