Looking Round The Bend Ahead: UnderRecognized Risks of Investments in Traditional Coal Fired Generat

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Looking Round The Bend AheadUnder-Recognized
Risks of Investments in Traditional Coal Fired
Generation

• New York Society of Security Analysts
• February 26, 2008
• Michael Dworkin, Professor of Law Director
• Institute for Energy and the Environment
• Vermont Law School
• MDworkin_at_vermontlaw.edu 802-831-1319

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Four Themes to Add to Synapse Work

• Coal plants are long-term, all or nothing,
  investments
• Over the life of long term financings, revenue
  recovery is riskier than recognized
• Over units operating lives, cost factors beyond
  those that Synapse stressed actually strengthen
  Synapses warnings
• Enhanced Due Diligence True Due Diligence means
  considering the costs of risk-control

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1 Proposed plants are long term, all-or-nothing

• Long-term investments are high risk
• Predictions of low unit-costs rely on recovering
  costs by estimating net operating income over
  20-30 years. That means exposure to both cost
  and revenue surprises over those decades
• All-or-nothing investments are high risk
• If you need to spend 2 billion before you can
  sell your first kWh for 10 cents, what do you do
  when you are 1 billion in and construction costs
  go up by 50 ? (Remember PSNH ? WPPS? Shoreham?)

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2a Revenue Risks are Real

• Regulated entities face market risk unregulated
  IPPs see market risks even more directly
• Unprecedented funds are going into the
  competition i.e., renewables, co-generation,
  demand-side management and end-user efficiency.
  These will reduce volume of sales.
• Customer-discretion over demand will increase
  with
• smart meters
• discretionary uses, and
• Demand-elasticity at unprecedented price levels

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CEC Rosenfeld California
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Lovins Decades of energy demand below projections
government
Actual US quads BTU/yr 1975-2003
gas
nuclear
renewables
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2b Revenue Risks Are Real

• Most plants are being proposed by rate regulated
  entities (Forward Capacity Markets are regulated)
• Rate regulation has enforced the prudent
  investment test and the used and useful test
  consistently for decades nuclear over-runs are
  just a highlight
• Large industrial users, not under-funded
  environmentalists, will be the litigators !
• Prior-approval statutes cannot shield against
  allegations of mismanagement or against lack of
  foresight and alleged failure of
  those with greatest knowledge to disclose risks
• Foreseeability is clear See, e. g, the exchange
  between G. Morgan and M. Dworkin in Science

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3a For Coal Plants, Capital and Fuel Costs Are
Riskier Than Often Recognized

• Coal plants are capital intensive, with on-site
  construction costs recently estimated at 1
  billion per 1,000 MW plant now approaching 3
  billion. This means 10 cent/kWh price at
  bus-bar. Exchange rates, world demand for metals
  and labor will worsen this.
• Coal is particularly constrained by
  infrastructure limits (rail and shipping)
  requiring major, lumpy, investments
• Coal fuel prices are increasingly driven by
  exports to meet world energy demand, ending
  centuries of conveniently isolated North American
  markets
• Productivity quality (calories/ton) has been
  dropping consistently since 1970.

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Putting World Demand for Coal Construction and
Fuel in Perspective The Basics In Rough
Numbers6.1 Billion People in the late 1990s
world0.6 Billion averaging 10,000 kWh/household
(US level ca. 12,000)2.0 Billion averaging
5,000 kWh/household (Latin/Eastern Eur)2.0
Billion averaging 1,000 kWh/household (Asia,
Africa)1.5 Billion without electricityWhat
happens if 5.5 billion people want 5,000 kWh/
year in 2025 ? Answer about 200 of 1990s
electricity demandWhat happens if 9 billion
people want 5,000 kWh/year in 2030 ? Answer
almost 300 of 1990s electricity demand What
happens if 9 billion people want 10,000 kWh/year
in 2030 ? Answer over 500 of 1990s electrical
demand.Pareto assumption new need met without
reducing current usage levels of 600 mm
peopleWith thanks to, but different from,
Stanford Electricity and the Human Prospect
Forum, December 2004
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3b For Coal Plants, Capital and Fuel Costs Are
Riskier Than Often Recognized

• For coal plants, GHG issues (high vulnerability
  to credit allotments) exacerbate other cost
  escalators
• Being sequestration-ready means
• Technical capability IGCC, etc.
• Site capability acreage, plus transport to
  sequestration
• Legal liability regime
• Comprehensive, federal, with sector-wide
  insurance funds
• Pre-funded sequestration funds.
• Higher start, swifter top off, than nuclear
  decommissioning

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Air Pollutants The Willie Sutton Principle
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U.S. Carbon Emissions
About 1/3 200 million Cars Trucks Most
vehicles made by 7 manufacturers
Less Than 1/3 2 Billion Other Sources

• More Than 1/3
• 3,000
• Power Plants
• 15 from 20 plants
• 50 from 100 plants
• 90 from 300 plants

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4 True Due Diligence Means Looking at the Costs
of Reducing Risks

• The Carbon Principles apply traditional due
  diligence concepts
• Carbon Mitigation Plans, Independent Assessments
  of Demand, Public Disclosure and Reporting are
  called process steps
• Substantive Due Diligence means characterizing
  the materiality of risks, best done by estimating
  the cost of hedging or pre-funding risk-responses
• Risk management means implementing that
  

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