Backgrounder: Closing Coal Plants Will Be Costly

December 7, 2018

by H. Sterling Burnett, Ph.D.

The plan by Northern Indiana Public Service Company (NIPSCO) to shut down two large coal power plants and replace them with renewable energy sources is bad for ratepayers and bad for the state’s business climate. In fact, the only winner is NIPSCO, who will reap profits on the backs of ratepayers and federal taxpayers.

NIPSCO provides electric power to approximately 460,000 customers across Indiana. In the Integrated Resource Plan NIPSCO filed with the Indiana Utility Regulatory Commission (IURC), the company proposed closing four coal-powered generators at its Wheatfield plant by 2023 and one coal powered unit in Michigan City by 2028. NIPSCO plans to replace reliable, affordable electricity from coal power plants, with a mixture of 1,500 MW of solar and battery backup, 150 MW of wind, 125 MW of reduced demand through efficiency and demand-side management programs, and 50 MW of electricity purchased from other utilities by 2028.

Data from the U.S. Energy Information Administration (EIA) and numerous studies show natural gas and coal power provide the most affordable electric power across the nation. Because 95 percent of the electricity generated in Indiana comes from existing coal or natural gas plants, Indiana’s electricity prices are 10 percent below the national average.

On the other hand, solar power, which would provide the majority of the electricity under NIPSCO’s plan, is the most expensive source of electric power in the world. As a result, NIPSCO’s proposal, which would cut the percentage of electric power generated by coal from 65 percent today to zero by 2028, would substantially increase electricity prices for Indiana residents and businesses.

Although NIPSCO says its plan will save ratepayers more than $4 billion in the long-run, it has asked IURC to approve a 12 percent rate hike to pay for decommissioning its existing power plants and building the renewable capacity to replace it.

Here are a few facts NIPSCO is not advertising about its plan.

Wind, solar and other forms of renewable energy are more expensive and less reliable than traditional energy sources like natural gas and coal, which explains why states that require or subsidize renewable energy sources have higher electric power rates than states lacking renewable power subsidies or mandates.

Furthermore, utilities pushing to replace existing coal facilities with new wind, solar and battery storage have a history of overestimating the costs of future coal power and the amount electric power consistently provided by the new facilities. Utilities also consistently underestimate the costs of building and maintaining, and the timetables for replacing renewable power equipment, as well as ignoring entirely the cost of building, maintaining, and operating “backup” power supplies for when the wind isn’t blowing or is blowing too hard, or when the sun isn’t shining — like every night for instance — or for regulating the variable power flow from such facilities to ensure the power grid operates smoothly on a second by second basis.

Indeed, there is evidence NIPSCO is already guilty of this. NIPSCO estimates its plan will cost the average household approximately $11 per month or about $132 per year, but based on 2017 EIA data on the average household costs of electricity in Indiana a 12 percent increase in the average Indianan’s electric bill will be closer to $164 per year.

Moreover, household and automobile batteries often malfunction or cease functioning well before they are supposed to. Even when they work properly, batteries, including rechargeable ones, have to be replaced periodically. The battery backup for NIPSCO’s solar facilities will cost tens of millions of dollars — and even if none of the batteries in the vast arrays overheat, stop working early, or malfunction, they will need to be replaced at the cost of additional tens of millions of dollars long before the useful life of the power facility itself will end. This will delay any purported cost savings from the new system indefinitely.

In addition, unlike a coal plant which can function efficiently for 30 to 50 years or beyond, solar facilities — even if they operate as intended, with no panels failing prematurely or being broken or damaged by storms or other events — must be cleaned regularly, adding to maintenance costs, and even when cleaned properly and regularly, the amount of power produced by solar panels declines over a number of years. By 20 to 25 years — well before a more reliable coal plant would cease operating and well before they are paid off if they are financed over 30 years—the entire array of panels will have to be replaced. This means ratepayers will likely never see the saving’s NIPSCO is promising decades into the future.

In case you are wondering, despite asking for a rate hike immediately, NIPSCO is not offering any enforceable guarantee its plan will reduce ratepayers’ bills in the future.

NIPSCO is not submitting this new plan out of the goodness of its heart or to benefit electric power consumers but rather because the plan will deliver more profits to it in the short-term.

As a government-protected monopoly utility, Indiana guarantees NIPSCO a profit of approximately 10 percent for every dollar it spends on new facilities and equipment. As a result, NIPSCO has a financial self-interest to build expensive new power facilities, even when existing facilities, which have already been paid off, are working perfectly well. The new power plants will simply generate more revenue for NIPSCO. Even worse, NIPSCO’s profits will increase if costs are higher than estimated—which is very likely to happen. In addition, federal taxpayers, including Indianans, pay the owners of solar power equipment 30 percent of the costs of solar facilities. Not surprisingly, this is not accounted for as a cost in NIPSCO’s filing.

So taxpayers pay more, ratepayers pay more, and NIPSCO reaps a windfall. Sure sounds like a good deal for NIPSCO if the company can get the IURC to approve the scheme.

As a regulated monopoly, the IURC must approve NIPSCO’s plan. For Indiana’s sake, I hope they reject the plan, in the process keeping businesses and the jobs they provide in the state rather than fleeing to states or overseas to countries like China and other Asian tigers, with lower energy costs due to the continued use of reliable coal and natural gas for electricity.

H. Sterling Burnett, Ph.D., a senior fellow at the Heartland Institute, wrote this for the Indiana Policy Review. Contact him at hsburnett@heartland.org.



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