Another chapter has recently closed on one of the more troubled energy projects in the U.S., the Kemper County IGCC in Mississippi.
At the request of the state’s Public Service Commission, Southern Company has given up on the portion of the project that involved lignite gasification – the process that was supposed to capture carbon dioxide, fulfilling the promise of clean power from coal. The plant has instead operated on natural gas for three years.
The project may have been doomed from the beginning. An article in E&E News quoted the CEO of Southern – the parent company of Kemper project owner Mississippi Power – saying as much:
In an interview last year, Southern CEO Tom Fanning said the one thing he would change about the project was committing to a fixed price for customers with only 10 percent of the plant’s engineering work completed.
“If we had taken more time to do more engineering … we would have circumvented a lot of the problems that we incurred,” Fanning said.
In the end, the Kemper project was $4.5 billion over budget and more than three years behind schedule, and ultimately captured only a small amount of carbon dioxide. It was a first-of-its-kind (FOAK) technology, where unforeseen issues would almost certainly arise.
Thus, with the PSC’s ruling, the part of the Kemper program that generated billions in cost overruns is apparently being abandoned and Southern Company will have to absorb most of these overruns.
What are some useful lessons that can be drawn from this project’s failure? Will Kemper County make companies gun-shy about investing in much-needed innovation and alternative technologies?
Kemper County appears to have suffered from a set of all-too-common problems in the industry. By establishing a fixed price at such an early level of maturity, the owner affixed premature and overly optimistic budget and schedule outcomes, resulting in outsized expectations that were dashed when the program failed.
- Establishing a fixed price for a project with only 10% of the engineering completed almost certainly resulted in all stakeholders misunderstanding the size, scope and likely cost of the project. Thus, the owner set an expectation that it was unlikely to meet.
- Establishing a fixed price so early in project development runs counter to industry advice and best practices. The Association for the Advancement of Cost Engineering (AACE) has produced well-known guidelines for projects to link the maturity level of design with different “classes” of cost estimates. However, these guidelines are not one-size-fits-all. They require proper interpretation on a project-by-project basis.
R&D and FOAK projects like Kemper County are risky ventures. A June report from the American Energy Innovation Council – a group of corporate leaders that includes Fanning – highlights the challenges inherent in the leap to commercializing new technology:
“Innovators must leave the lab and create a viable product, which means confronting high technical and management risks that can compound the need for large amounts of patient capital,” the report said.
The report argues that public / private partnerships can bridge that gap, with the government providing targeted investment with a longer-term vision and expectation of return than that of more risk-averse private enterprise.
Federal support for energy projects has decreased as a portion of the government’s total R&D spend, to 5.3 percent, from 14.4 percent in 1987, the report said, resulting in what it calls a “drag on the energy innovation ecosystem.” The council argues for an increase in funding to this capital-intensive sector of the economy.
Regardless of how the project is funded, however, risks still must be properly identified and monetized. When risks that are not properly expressed later materialize, the project is deemed to be a failure because it didn’t live up to its outsized expectations.
- As we’ve noted, scaling up a new technology from a lab or small-scale application is inherently risky, and that risk is likely exponential, not additive, based on the scaling applied to it. Advancing a risky technology to commercial viability needs to follow careful and deliberate steps.
- There is often a concern that if a project’s true risks were identified, it would never get off the ground because it would be too expensive to capture that risk. However, as seen with Kemper County, it does no good to proceed with a project of this type blind to the risks, because the consequences of failure are extreme.
With this type of unproven technology, proper expectations need to be set at the outset so when costs rise and schedules expand as circumstances change, no one is surprised. As we’ve said before in discussing the Kemper project, the political and other external pressures surrounding this type of project is intense.
However, that pressure makes it even more crucial for project owners to remain steadfast in their commitment to slowing down, working with objective information and doing proper planning from the start.
