The 2008 economic crisis and coal
Prior to the economic crisis that began in 2008, the projected boom in new coal-fired power plants and synfuels plants had already been blunted by rising construction costs, concerns over new carbon regulation, and public opposition. In 2008, two additional factors came into play: a shrinking economy and tightening credit markets. The combination of factors further inhibited industry expansion plans. And an unexpected drop in consumption shook the industry's bottom line, causing utility shares to plunge.
Even before the credit markets froze, the U.S. power industry had delayed or cancelled scores of coal plants over climate change pressures and rapidly rising construction costs. Those costs have effectively doubled in recent years, reinforcing the industry as one of the most capital-intensive in the economy. Before the crisis, investor-owned utilities planned to spend over $1 trillion in the next twenty years on new plants, transmission lines and maintenance. The U.S. Department of Energy's forecast earlier this decade was for 36,000 megawatts (MW) of new coal-fueled power to come online by 2008. Instead only 5,000 MW of supply were built.
Widespread credit difficulties in the United States have greatly diminished the ability of new coal plants to secure financing, making it even more difficult to push forward with new coal projects. Credit is much more expensive and difficult to secure, and because of the financial crisis, there are fewer independent banks able to loan money to utilities. In February, 2008, the Rural Utilities Service, which is often the first stop for financing for Rural Electric Cooperatives, suspended financing to coal plants. In the letter to Representative Henry Waxman announcing the suspension, RUS Administrator James Andrew wrote that the suspension would continue "until the Agency and OMB develop a subsidy rate sufficient to cover the risks associated with the construction of new generating plants."
At the time of the suspension, the RUS was considering applications for loans totaling $1.2 billion, of which three were for RECs involved in minority shares of the privately-funded plants:
- Kansas Electric Power Cooperative, 30 MW (3.5%) of a 850 MW plant, $55 million.
- East Texas Electric Cooperative, 50 MW (7.7%) of a 650MW Plant, $102 million.
- East Kentucky Power Cooperative, 278 MW, $685 million.
- Prairie Power (Illinois), 130 MW (8.2%) in two plants totaling 790 MW, $385 million.
These projects are seeking alternate sources of financing, including loans from the National Rural Utilities Cooperative Finance Corporation (CFC). CFC loans are typically at higher interest rates than RUS loans. East Texas Electric Cooperative has also filed a federal lawsuit against the RUS over the financing moratorium.
Weaking economy and declining demand
In the third quarter of 2008, many utility companies announced major financial losses and a declining demand for power among consumers. Although utilities have historically expected a 1-2 percent growth in sales per year in the United States, this new trend shows shrinking power use by households and businesses across the country. Dynegy CEO Bruce Williamson announced that "very little new power plant development is going on in the country and very little can be economically justified in the current environment." He suggested that economic conditions would likely slow the demand for power in the short term. Michael Morris, the CEO of American Electric Power, said the industry should be careful about moving forward with new projects: "The message is: be cautious about what you build because you may not have the demand."
Utility companies are using a variety of methods to get through the the economic crunch. Some utilities have been holding on to cash reserves and using credit lines. Many are shelving plans for new electrical generation and raising rates for consumers. On average, the DOE is forecasting rates to rise 5.2 percent in 2008 and 9.9 percent in 2009.. Richard McMahon of the Edison Electric Institute said investor-owned utilities planned to spend an estimated $1 trillion over the next 20 years on new plants, transmission lines and other expenses, but that the economy and credit markets will dictate whether that can happen.
American Electric Power
American Electric Power (AEP) saw total electricity consumption decline by 3.3 percent overall and by 7.2 percent for residential customers. To compensate, AEP plans to cut capital expenditures by $750 million in 2009. The company has also requested a 45 percent rate hike over the next three years for its Ohio customers.<"ap"/> In Texas, the company expects to raise rates by 17.7 percent for residential customers and by 11.6 percent for commercial and small industrial customers. The company is also halting a $17 million project to install mercury reduction technology at the Pirkey Power Plant in east Texas.
When Constellation Energy's stock plummeted because of liquidity and accounting issues, the company, the largest power wholesaler in the U.S., sold to a unit of Berkshire Hathaway as a means of staying afloat.
A recent third-quarter earnings report from Consumers Energy, said projected electrical demand is down 3 percent in 2008 and is expected to drop another 1 percent in 2009, compared to a 2 percent increase per year for the last several yearsWhile many companies are shelving plants, Consumers Energy is moving forward with its proposed Karn/Weadock Generating Complex Expansion, based on a belief that the economy will recover by late 2009 or 2010. A spokesman for Consumers said the company expects the economy to rebound and customer demand for electricity to continue to rise, adding that, "there's plenty of time for all those good things to happen coming out of this downturn.
In the Midwest, Dukes' electricity sales were down 5.9 percent overall and 9 percent among residential customers from the year before. Sales were down 4.3 percent in the Carolinas. The changes were announced along with a 65 percent decline in third quarter earnings and are expected to reduce capital costs by $200 million in 2008. Duke announced plans to roll back on new power generation because of the decline in demand. The company will delay the construction of two gas-fired power plants in North Carolina and postpone the approval process for the a nuclear plant in South Carolina. The cost-cutting moves did not include any changes to Duke's heavily-opposed coal plant proposals.
Despite CEO Williamsson's statements that new economic generation is not economically warranted, Dynegy is moving forward with its Midland Power Plant, based on a belief that the economy will recover by late 2009 or 2010. Dynegy's Williamson stated that in the longer term, he believes that weather conditions, rather than economic conditions, will be the prime driver of electricity demand, such that global demand will "continue to put upward presure on power prices."
Florida Power & Light
Florida Power & Light cut its 2009 capital expenditures plan by almost 25 percent to $5.3 billion. It also decreased the amount of wind power generation it plans to build to 1,100 megawatts from 1,500 MW.
Southern Montana Electric
Financing for the Highwood Generating Station has been impacted by the widespread credit difficulties in the United States. The plant still has a loan pending with the RUS. Because of a November 2008 regulatory deadline, the developers of the Highwood Generating Station were forced to start building the plant with only enough money to lay the foundation. The air permit would have expired on November 30 if construction had not begun.
Tennessee Valley Authority
CEO Dick Kelly said Xcel Energy saw a 3 percent decline in residential electricity use during the period from August through September. He described it as "the first time in 40 years I've seen a decline in sales" to homes. Xcel's earnings for the third quarter of 2008 dropped $32 million to $223 million from the year prior. The company attributed the decline to the economic downturn and warmer weather.
In September 2008, the U.S. Congress passed a $700 billion financial bailout package, H.R. 1424, entitled the Emergency Economic Stabilization Act of 2008. Folded into the final version of the bill was a previously separate piece of legislation known as the Energy Improvement and Extension Act of 2008, which included $10.8 billion in energy incentives, of which $2.8 billion represented tax breaks for the coal industry.
Sen. Jay Rockefeller, D-W.Va. was one of the leading advocates of the tax breaks for coal. The provisions include incentives for carbon capture and storage technology and for coal-to-liquids technology.
Coal provisions include:
- $1.4 billion in tax breaks over 10 years to power projects that will capture and store at least 65 percent of their total carbon dioxide emissions;
- $1.1 billion for a $20 per ton tax credit for carbon capture and storage.
The bill also extends tax breaks for renewable energy and energy efficiency:
- Extends the Renewable Energy Production Tax Credit through 2009 for wind and 2010 for other renewables.
- Extends the Investment Tax Credit for solar and fuel cell technologies through 2016, removes the $2,000 cap, and expands it to include small wind, geothermal and combined heat and power.
- Extends the Biodiesel Production Tax Credit through 2009 and closes the “splash and dash” loophole, under which biodiesel that is imported then exported is eligible for the tax credit.
- Authorizes $800 million in new Clean Renewable Energy Bonds for state, local and tribal governments’ public power providers and electric cooperatives.
- Extends the Tax Credits for Energy Efficient Homes through 2009.
- Extends the Tax Deduction for Energy Efficient Commercial Buildings through 2013.
- Extends the Manufacturer Tax Incentives for Efficient Appliances through 2010.
- Creates a new tax credit of up to $7,500 for Plug-In Electric Vehicles.
- Rebecca Smith, "Surprise Drop in Power Use Delivers Jolt to Utilities," Wall Street Journal, November 21, 2008.
- "Utilities hunker down for tough year ahead," Associated Press, November 10, 2008.
- Matthew Brown, "Credit crisis dims the lights for power industry," Associated Press, November 17, 2008.
- Steven Mufson, "Government Suspends Lending for Coal Plants," Washington Post, March 13, 2008.
- Letter from James M. Andrew to Representative Henry Waxman, received March 11, 2008.
- "Loss of federal loan fails to derail four other coal-fired power plants," Great Falls Tribune, October 19, 2008.
- Dynegy Inc. Q3 2008 Earnings Call Transcript, Seeking Alpha, November 6, 2008.
- Lindsay Chapman, "Financial Crisis Weighs on Power Industry," Finding Dulcinea, November 18, 2008.
- "Higher power bills ahead," Marshall News Messenger, November 22, 2008.
- "Officials: Power plants still a go despite economy," Bay City Times, November 14, 2008.
- "Duke Energy taking steps to deal with slowing power needs," Charlotte Business Journal, November 7, 2008.
- "Xcel earnings down in 3rd quarter," Denver Business Journal, October 23, 2008.
- Ken Ward, Jr., "Coal gets help in financial bailout", Charleston Gazette, October 7, 2008.
- Julie Cart, "'Dirty fuels' profit by bailout bill's tax breaks for renewable energy", Los Angeles Times, 10/4/08