Friday, March 7, 2008

Government stops financing coal-fired power plants

Government stops funding coal-powered generators


Posted on Thursday, March 6, 2008


BILLINGS, Mont. — The federal government is suspending a major loan program for coal-fired power plants in rural communities, saying the uncertainties of climate change and rising construction costs make the loans too risky. After issuing $ 1. 3 billion in loans for new plants since 2001, none will be issued this year and likely none in 2009, said James Newby, assistant administrator for the Rural

ties Service, a branch of the Department of Agriculture. The program’s suspension marks a dramatic reversal of a once-reliable source of new coal plant financing. It follows the announcement last month that several major banks will require plant developers to factor in climate change when seeking private funding.

“This is a big decision. It says new coal plants can’t go to the federal government for money at least for the next couple years, and these are critical times for companies to get these plants built,” said Abigail Dillen with the environmental law group Earthjustice. The group filed a federal lawsuit last year seeking to block the loan program.

At the time of its suspension, at least four utilities were lined up for loans totaling $ 1. 3 billion — for projects in Kentucky, Illinois, Arkansas and Missouri. A project in Montana was denied funding last month. Two more were recently withdrawn: last October in Wyoming and earlier this week in Missouri.

Newby said material and labor costs for new coal plants have been rising at 30 percent a year, even as utilities struggle to pinpoint future costs of controlling greenhouse gas emissions. The 2 billion tons of those gases produced annually by coal-fired plants in the United States exceed the emissions of any other source. Newby said those uncertainties prompted the White House’s Office of Management and Budget to ask that new loans be put on hold until risks can be better quantified.

Rural utilities provide power to about 40 million customers across the nation. More than 60 percent of that electricity comes from coal.

Whether the plants that were awaiting federal loans can find alternative financing remains to be seen.

Associated Electric Cooperative, Inc. announced this week it was “delaying indefinitely” its proposed plant in Norborne, Mo., after receiving word of the loan program suspension.

At least one developer, the East Kentucky Power Cooperative, is hoping to wait out the suspension of the loan program rather than seek more expensive loans on the open market, said spokesman Nick Comer.

Two more projects — Southern Montana Electric’s Highwood Generating Station and Basin Electric Power Cooperative’s Dry Fork plant in Wyoming — already are seeking private funding.

Dynegy Inc. is constructing the 665-megawatt Plum Point coal-fired power plant near Osceola in Mississippi County. Dynegy, which owns 21 percent of the plant, began construction two years ago. The plant is almost 30 percent completed and is scheduled to begin operation in 2010.

Dynegy already has its funding in place for the construction, and will not be affected by the change in governmental financing, said David Byford, a company spokesman.

A representative of East Texas Electric Cooperative, which owns 7. 5 percent of the Plum Point plant, said his utility already has received alternative financing since governmental financing will not be available.

The new financing “will increase the interest expense, which will increase the electric bill for the consumers at the end of the line,” said the cooperative’s Ryan Thomas. Southwestern Electric Power Co., which has received partial approval to build a 600-megawatt coal-fired power plant in Hempstead County, also will not be affected by the government’s decision to suspend financing for the plants, said Scott McCloud, a spokesman for SWEPCO.

Three big investment banks recently announced that in deciding whether to make loans for new coal plants, they would take into account potential future costs related to carbon dioxide emissions.

Citigroup, JPMorgan Chase and Morgan Stanley said they had negotiated this policy with seven big utility companies that are major coal burners, including American Electric Power, SWEPCO’s parent company. Two advocacy groups, the Natural Resources Defense Council and Environmental Defense, also participated. Newby, with the Rural Utilities Service, said his agency is considering imposing upfront fees on coal plant developers as a way to mitigate taxpayer exposure through the loan program. Initial discussions have centered on a 0. 2 percent fee — equivalent to $ 2 million on every $ 1 billion in loans.

Newby added he was confident the government would work through the concerns over risk and resume issuing loans possibly as soon as 2010.

The chief executive of the National Rural Electric Cooperative Association said the program’s suspension was a sign of “nervousness” among lenders anxious over the potential ramifications of climate-change legislation now before Congress.

Depending on what policies are adopted, retail electricity prices could increase sharply once the costs of reducing greenhouse gases are factored in, said the association’s Glenn English. Utilities that drop coal-fired power proposals will be forced to shop for more expensive electricity on the open market, he said.

“What you’re seeing (with the Rural Utilities Service ) is a general reflection of the attitude we find in the financial community, mainly this apprehension about what the future holds and what can be expected out of government,” English said. Information for this article was provided by David Smith of the Arkansas Democrat-Gazette and Matthew L. Wald of The New York Times.
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