A rate hike proposed for Springfield City Water Light & Power customers would have the utility double down on a bad bet.
CWLP went into debt to build the new power plant and reasonably assumed that it could pay down that debt by selling excess power to the wholesale market outside Springfield. Instead, power demand dropped dramatically when the recession hit, leaving CWLP with far less revenue than expected. A rate increase is now being requested to increase revenue and pay down the remaining debt.
At Tuesday night's city council meeting, Mayor Houston said the proposed rate increase would only keep the utility afloat for a few years until they could begin generating more revenue by selling excess power again. Houston is betting that demand for coal power will significantly increase within a few years.
At the same time, CWLP proposes going deeper into debt to upgrade and maintain its oldest coal boilers, Dallman units 1 & 2. Like an old clunker car, these units are becoming financial liabilities, both because of their age and due to new environmental regulation. Coal units of a similar size and age are being retired across the country because coal companies know it's no longer cost effective to maintain and upgrade them.
CWLP deserves credit for running a coal fleet with better pollution controls than most other coal utilities, certainly in comparison to others in Illinois. But, new regulation and required maintenance will make the late 60's and early 70's era Dallman 1 & 2 units a money-pit.
Springfield doesn't need these smaller units to meet its energy needs, so the only reason to keep shoveling money into them is in the hopes that they can eventually be used to sell excess power on the wholesale market. There are several factors that make this a risky gamble.
1) State and federal energy efficiency policies will keep power demand from rising rapidly. The federal stimulus bill spent billions on efficiency projects. The Illinois energy efficiency standard will keep demand down within the state. If these policies are only partially successful then we can't expect a quick return to pre-recession power demand.
2) Demand for new energy will be for clean sources, not aging coal plants. Illinois' renewable energy portfolio standard requires that an increasing amount of the state's power come from wind and solar, not polluting coal plants. President Obama proposed a similar standard at the federal level. Additionally, community aggregation will likely result in more cities demanding clean energy.
3) Natural gas may remain cheaper than coal for at least several years. A fracking boom is about to start in Illinois. Even if fracking is better regulated, as it badly needs to be, it's likely that natural gas will be cheaper than power produced from the Dallman 1 & 2 boilers, which are less efficient than the newer Dallman 3 & 4 units. Also, wind power is coming down in price as it remains the fastest growing energy source in America.
These can all be difficult realities to accept for a coal-based utility, but Springfield can no longer afford to do things because "we've always done it that way." The economics of coal are rapidly changing.
The most likely scenario is that CWLP will go even deeper into debt to maintain its two oldest, smallest coal boilers, and still not be able to use them to generate significant revenue from sales to the wholesale market. We're digging ourselves deeper into the hole by keeping Dallman 1 & 2 running.
The city council shouldn't be rushed. They can pass a city budget tonight without a CWLP rate increase. Then ask CWLP to come back with another proposal that reflects what it would cost to retire its oldest, least efficient coal boilers instead of going deeper into debt to maintain units that we don't need.
CWLP's chief engineer stated that not passing the rate increase would force significant changes in how the utility operates. That may not be a bad thing.