Southern Company's Kemper Project Suffers Another Setback

Electric utility firm The Southern Company’s (NYSE:SO) much delayed Kemper Project in Mississippi suffered a major setback yet again. This has raised questions over the project’s future. The company – one of the largest generators of electricity in the nation along with the likes of Exelon Corp. (NYSE:EXC) , RWE AG (OTC:RWEOY) and Duke Energy Corp. (NYSE:DUK) – has spent years in the construction of the project based on clean coal gasification technology but now might have to run the plant as a natural gas facility.

Recent Update

The Mississippi Public Service Commission recently issued an ultimatum ordering Southern Company to redesign plans and run the Kemper Project solely on natural gas. The commission instructed lawyers to draft the formal order which it plans to issue on Jul 6 and has given the company 45 days to comply with the same. Mississippi regulators have encouraged rate reductions throughout. They wanted to eliminate rate-payers risk for the gasifiers’ assets and not to increase the rates for Mississippi Power customers.

Challenges Galore

The Kemper Project has been facing continuous criticism owing to its poor execution, cost overruns and multiple delays.

The plant is already three years behind schedule and is over $4 billion beyond the stipulated budget. The overall cost of the plant was estimated to total to around $3 billion in 2010. However, with several delays adding to the project’s cost, the current price tag of the plant has ballooned over $7.3 billion. In the past 18 months, the company has announced 10 delays due to project management problems. The project found it difficult to get its two gasifiers to operate consistently. Mississippi Power, subsidiary of Southern Company and in charge of the Kemper Project, has been unable to make the project economically viable in the face of natural gas prices.

Earlier this month, the company revealed plans to redesign and replace a key component in its plant – syngas cooler super heater system – in order to establish long-term sustained operations. Sustained operations will also require relocation of ash loading process together and other minor improvements. Further, the company also intends to undertake additional improvement projects over the next few years to fix leaks and other issues relating to the plant’s performance, safety and operations which are likely to hike the overall cost of the plant by $186 million.The plant which has run periodically on syngas for about 200 dayshas not been able to integrate the coal gasification process fully over extended periods of time.

What Lies Ahead?

The Mississippi regulators who don’t want to pass more of the plants ballooning costs to ratepayers, want them to pay for the $840 million in equipment that has been already approved by the regulators.

The recent development has left the company in a fix. Management is in a dilemma in regard to its investment costs retrievement. The company won’t be able to pass the costs to ratepayers now. Mississippi Power which is already grappling with weak financials might have to suffer additional losses. If Southern Company is unable to reach a satisfactory agreement with customers, the company might have to scrap off the costly gasification project.

Kemper project had been central to ex-President Obama’s Climate Plan as it is based on clean coal. Notably, the project also received the support of President Trump. Discontinuing the project may be a major setback for the Southern Company.

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