Indiana regulators reject Vectren gas plant over stranded asset concerns

Dive Brief:

Indiana utility regulators on Wednesday unanimously rejected an 850 MW natural gas plant proposed by Vectren, directing the utility to evaluate alternatives to the large, centralized generation.
Regulators are concerned the facility — slated to replace three retiring coal plants — could become a stranded asset as customer demand changes and the cost of renewable energy declines. They directed Vectren to outline alternatives to the plant in an Integrated Resource Plan to be filed later this year.
Regulators also approved upgrades to Unit 3 of Vectren's Culley coal plant to comply with federal coal ash and effluent standards. Coal interests and former EPA Administrator Scott Pruitt pressed lawmakers this month to save Vectren's aging coal fleet by preventing upgrades or replacements, but legislators refused.

Dive Insight:

The order from the Indiana Utility Regulatory Commission (IURC) is another ding against utility megaprojects that used to define the sector.

For most of the last century, utilities built large-scale, centralized generation facilities to serve their customers. As the economy grew, power demand increased, allowing them to recoup the cost of big investments.

But since the 2008 recession, electricity demand has largely stagnated in the U.S. and decoupled from economic growth. At the same time, renewable energy and storage prices have declined dramatically and a few utility megaprojects — like the V.C. Summer nuclear facility — have been canceled at ratepayer expense.

Indiana regulators say that situation means Vectren's $900 million proposed gas plant could become an uneconomic asset if customer demand changes or alternatives decline in price.

"The proposed large scale single resource investment for a utility of Vectren South's size does not present an outcome which reasonably minimizes the potential risk that customers could sometime in the future be saddled with an uneconomic investment or serve to foster utility and customer flexibility in an environment of rapid technological innovation," regulators wrote.

Last year, the Northern Indiana Public Service Co., a neighboring utility, filed an IRP showing increased competitiveness of renewable energy in the state. Wind and solar backers said subsequent NIPSCO contracts show Vectren "overestimated" the cost of renewable energy.

Vectren's case for the gas plant proposal comes from its 2016 IRP. Regulators wrote the plant was "consistent" with that analysis, but subsequent modeling "effectively screened out multiple less-expensive alternatives."

"It seems straightforward to suggest that smaller-scale options, especially for a relatively small electric utility, serve to minimize the risk should a challenge arise at any one option," regulators wrote. "Vectren South should use its scheduled 2019 IRP process to address problems in its modeling, incorporate more options for partnering with other entities and competitive inquiries into smaller-scale options."

Vectren had planned to retire all of its coal generation except Culley Unit 3 and use the gas plant to replace the lost generation. Now regulators want it to identify alternatives "that can be acted upon swiftly to meet the end-of-2023 date upon which additional capacity may be needed."

The decision is notable in a conservative state traditionally served by centralized coal generators that still derives more than 70% of its electricity from the resource. Each of the IURC's regulators was appointed by a Republican governor, typically more friendly to fossil fuel interests.

Though regulators rejected the gas plant, they approved upgrades to the Culley coal plant to allow it to comply with new federal regulations. The Coal Combustion Residuals (CCR) rule and Effluent Limitation Guidelines, finalized in 2015, place stricter rules on coal ash and wastewater effluents from coal plants.

When he was head of the EPA, Pruitt put a two-year hold on the ELG rule and tried to replace the CCR guidelines, but both those actions are held up in court. Coal interests argued at the IURC that potential changes to the federal rules mean that regulators should delay any upgrades or plant retirements, as they may not be needed.

Coal interests also took that argument to the state legislature this month, with Pruitt lobbying GOP lawmakers to institute a generation moratorium that would prevent Vectren and NIPSCO from replacing their old coal plants with new assets. But the legislature twice refused to take up that language, and regulators rejected the notion as well.

"No party disputed that the Culley 3 Compliance Projects will allow Vectren South to comply with ELG and CCR or that ELG and CCR are federally mandated," regulators wrote. "Based on the evidence presented, we find that Vectren South's Culley 3 Compliance Projects, will allow the utility to comply with the ELGs and the CCR Rule. Therefore, we find that Vectren South has satisfied the requirements" of Indiana law.

Regulatory discussion in the IURC order delivered another surprise: Vectren testified that the EPA's Affordable Clean Energy rule — a modest carbon regulation package meant to replace a more robust Obama-era rule — could actually increase its compliance costs. EPA has repeatedly said the rule would be cheaper for utilities.

During testimony, Vectren Vice President of Environmental Affairs and Corporate Sustainability Angila Retherford said that "ACE would increase uncertainty and could actually increase the cost of compliance," according to the order. "For units with high heat rates — such as A.B. Brown — ACE would cause significant future compliance costs."