Increased federal tax credits in the Inflation Reduction Act will help lower the cost of applying carbon capture technology to coal-fired power plants, according to Black Hills Corporation, but not enough to justify the cost to Wyoming ratepayers.
Adding carbon capture to the Wygen II and Neil Simpson II coal plants, according Black Hills’ ongoing analysis, would increase rates for its customers in Wyoming by about 15%, or a range of $22.75 to $25.34 per month for the average residential customer and $40.71 to $103.97 per month for commercial customers. It would also reduce electrical generation output at the plants — both located outside Gillette — by more than 30%, exposing ratepayers to additional costs for replacement power.
“We’re fully supportive of [coal carbon capture],” Black Hills Energy Director of Regulatory and Finance Kyra Coyle told Wyoming public service commissioners during a public hearing Monday. “But we feel like we’re not quite there yet.”
Though the increased federal tax credits are not yet factored into rate estimates for installing carbon capture, it’s unclear how much the tax credits might lower the burden on customers, according to Black Hills.
One major risk lies in the federal 45Q tax credit program, Coyle said. The Inflation Reduction Act extends the timeline to tap the tax credit program and increases the value of the credit by about 70%. But the federal government, historically, has clawed back about half the 45Q tax credits it doles out, Coyle estimated, due to failures to meet stringent technological and performance requirements in storing and utilizing captured CO2.
“There’s significant financing risk with this level of investment in the plants, especially with the risk associated with the 45Q tax credit,” Coyle said. “You have to ensure that you own the [carbon capture] equipment that is installed. You are responsible for the transportation and sequestration of the CO2, or you’re contracting for that. It has to be in the ground without any leakage for at least three years. So there’s a lot of administrative responsibility and lack of true qualifications for 45Q tax credits.”
Wyoming’s ‘low-carbon’ portfolio standard
About 70% of electricity consumed in the state comes from coal-fired power plants, according to the Energy Information Administration. Gov. Mark Gordon and state lawmakers want to lower utility CO2 emissions without cutting back on coal-fired power. Doing so might help delay or prevent coal plant closures in the state by better aligning them with carbon standards in other states.
Most states have enacted some type of renewable portfolio standard (RPS) requiring utilities to provide a certain percentage of their power from renewable sources, such as wind and solar. For example, public utilities in New Mexico must provide 40% carbon-emissions-free electricity by 2025, 80% by 2040 and 100% by 2045.
Wyoming chose a different approach.
House Bill 200 – Reliable and dispatchable low-carbon energy standards, passed in 2020, does not prescribe a specific CO2 emissions-free percentage or specific timeline. Instead, the law directs the Wyoming Public Service Commission to come up with a percentage of non-CO2 emissions power for each individual coal power facility — with one major caveat: utilities with coal-fired power plants in the state must retrofit those facilities with carbon capture technology.
State officials have envisioned that carbon capture might help coal-fired plants achieve 80% CO2 emissions-free power while maintaining power delivery reliability and without drastically raising rates for Wyoming customers. This week, Black Hills Energy officials told the commission the percentage of CO2 emissions-free generation they can affordably and reliably achieve using carbon capture at the Wygen II and Neil Simpson II coal plants is zero.
But that doesn’t mean Black Hills is ruling out adding carbon capture to its Wyoming coal plants, Coyle said.
“We continue to stay engaged and evaluate additional opportunities that are out there as they become more technologically viable,” Coyle told commissioners. “[Black Hills will] decide what is best for our customers, both in regard to reliable generation as well as economic impacts.”
To get out of the HB 200 carbon capture requirement, utilities must prove it is technologically unfeasible or too costly to add the technology to their coal-burning power plants. But it’s unclear what standard must be met to gain an exemption. The public service commission is still developing rules to comply with HB 200.
Rocky Mountain Power is also presenting its initial cost and technical feasibility analysis to the commission. Both have until March 2023 to finalize their findings.
Wyoming’s HB 200 applies only to Wyoming-consumed electricity, which means Black Hills Power and Rocky Mountain Power can only tap their Wyoming customers to pay for the cost of adding carbon capture to their coal plants located in the state. It’s up to public utility authorities in other states to decide whether the companies can tap their customers for capital investments mandated by Wyoming.
The public service commission has contemplated a 2% rate increase cap for Wyoming ratepayers in enacting HB 200. But it’s unclear whether the commission will stick to it.
Dyno Nobel, which operates an explosives manufacturing plant outside Cheyenne, is one of Black Hills’ largest commercial electricity customers. The company wants the state to either cap ratepayer increases at the lowest possible level, or grant exemptions to utilities that determine adding coal carbon capture is too costly.
“We are concerned that some of the price tags that have been thrown around are jaw dropping and would have a significant impact on ratepayers,” Dyno Nobel legal counsel Rick Thompson told commissioners. The HB 200 coal carbon capture mandate “seems somewhat counterproductive,” Thompson added. “It’s so prohibitively expensive that companies can no longer afford to purchase power.”
Both Dyno Nobel and HF Sinclair Corporation, which operates a renewable diesel refinery in Cheyenne, intervened in the Black Hills case before the public service commission.
Black Hills’ initial estimate of a 15% rate increase could easily double, or even shrink, depending on the success of various federal programs aimed at bolstering carbon capture, utilization and sequestration technologies, Deputy Administrator for the Wyoming Office of Consumer Advocate Anthony Ornelas told commissioners.
“Frankly, we are not yet where we need to be in order for the commission, or other interested parties, to really ascertain whether or not a potential CCUS technology solution is currently feasible and economic and in the best interest of Wyoming ratepayers,” Ornelas said.
Powder River Basin Resource Council attorney Shannon Anderson noted that carbon capture requires water. Black Hills’ analysis doesn’t include potential costs for securing and consuming more water, which is a scarce commodity in northeast Wyoming. Wygen II and Neil Simpson II, among other coal plants in the region, rely on air-cooling systems to supplement what little water is available.
The utility’s initial estimate for adding CCUS to Wygen II is $505.9 million — more than twice the cost of building the plant in 2008, Anderson noted. The estimated cost of adding CCUS to Neil Simpson II is $474.8 million — triple the cost to build the plant in 1995. That additional ratepayer burden, shouldered solely by the utility’s Wyoming customers, Anderson said, doesn’t even factor the cost of replacing the 30% loss in generating capacity that comes with adding CCUS.
“The initial cost projection of carbon capture compared to the overall cost of the generation units exemplifies why careful review of cost and risk is so necessary as we proceed with implementation of House Bill 200,” Anderson said.
Commissioners directed Black Hills to include more detailed analysis regarding costs for replacement power, managing CO2 that’s captured and how the utility would secure more water. They also directed Black Hills to provide more details about how emerging federal CCUS programs might influence the cost and feasibility analysis.