By

REBECCA SMITH

  and

CAMERON MCWHIRTE
DE KALB, Miss.—For decades, the federal government has touted a bright future for nonpolluting power plants fueled by coal. But in this rural corner of eastern Mississippi, the reality of so-called clean coal isn’t pretty.
Mississippi Power Co.’s Kemper County plant here, meant to showcase technology for generating clean electricity from low-quality coal, ranks as one of the most-expensive U.S. fossil-fuel projects ever—at $4.7 billion and rising. Mississippi Power’s 186,000 customers, who live in one of the poorest regions of the country, are reeling at double-digit rate increases. And even Mississippi Power’s parent, Atlanta-basedSouthern Co., SO +0.29% has said Kemper shouldn’t be used as a nationwide model.
Meanwhile, the plant hasn’t generated a single kilowatt for customers, and it’s anyone’s guess how well the complex operation will work. The company this month said it would forfeit $133 million in federal tax credits because it won’t finish the project by its May deadline.

One of just three clean-coal plants moving ahead in the U.S., Kemper has been such a calamity for Southern that the power industry and Wall Street analysts say other utilities aren’t likely to take on similar projects, even though the federal government plans to offer financial incentives.
Southern recently took $990 million in charges for cost overruns approaching $2 billion. The company’s stock has been battered in the past year, and the company’s market value has dropped $6.4 billion since April, to $35.8 billion. Mississippi Power’s credit rating has dropped to three notches above junk.
Kemper “is scaring people away,” says Michael Haggarty, an analyst for Moody’s Investors Service in New York.
And clean coal’s costs have looked even worse recently in comparison with a new inexpensive alternative: plants fueled by the natural gas unleashed by a U.S. drilling boom. Southern last year decided against purchasing a 10-year-old gas-fired plant in Jackson, Miss., that would have generated about as much electricity as Kemper. Another company bought it for $206 million, billions less than Kemper will cost.
Rising on what was once farmland here, the 582-megawatt Kemper plant is designed to convert a low grade of coal, lignite, into clean-burning syngas, which is similar to natural gas. As part of that process, the plant will strip out and capture 65% of the carbon dioxide, a greenhouse gas, that would have been released into the atmosphere by burning coal. Turning coal to gas before burning it, or gasification, has proved necessary for capturing CO2 because efforts to cull it from plants that burn coal haven’t been practical.
Keeping CO2 out of the atmosphere is a goal of the Obama administration’s since greenhouse gases have been implicated in climate change. The government last month set limits on CO2 emissions from new power plants and cited Kemper as evidence that power plants could meet the new standards.
“We’re confident plants of the future will be built with this technology,” says Janet McCabe, acting assistant administrator of the Environmental Protection Agency. The administration’s pollutions limits, she says, are “practical and achievable.”
Southern’s view is more nuanced.
Ed Holland, chief executive of Mississippi Power, says the federal plan to limit greenhouse-gas emissions “bodes well for this technology.” While expensive, he says, it is “one of the few alternatives available allowing us to continue to use coal.”
But Southern last month said Kemper “cannot be consistently replicated on a national level” and therefore “should not serve as a primary basis for new emissions standards.”
Federal officials say it isn’t unusual for new technology to be expensive at first and that clean coal’s costs should come down over time.
Through various subsidies, the federal government had committed nearly $700 million for the Mississippi Power plant, though part of that was the $133 million that the utility will forfeit because of delays. For decades, under Democratic and Republican administrations, the department has poured billions of dollars into clean-coal research and development, sometimes working with Southern’s “test kitchen” for new technology near Wilsonville, Ala.
Demonstration projects haven’t gone smoothly. The Department of Energy spent several hundred million dollars on two early clean-coal projects in the 1990s that had a series of technical problems.
Southern proposed building a clean-coal plant in Florida in 2005 but canceled the project in 2007 after state officials expressed anticoal sentiments.
Mississippi officials welcomed Kemper two years later, however. Republican Haley Barbour, governor at the time, was happy to see Mississippi Power use large deposits of lignite that had “virtually no value,” he says today. He still supports the project, and his lobbying firm does work for Southern. “This is cutting-edge technology,” he says.
The Mississippi Public Service Commission approved Kemper, fearing that the price of the natural gas that powers many plants in the state would increase, says Leonard Bentz, who was a commissioner until August.
Mississippi Power told the commission in 2009 that natural gas could hit $20 per million British thermal units and would drop no lower than $7.38 between 2014 and 2054. The forecast was filed confidentially, so wasn’t subject to public review. The Journal obtained a redacted copy from the utility after filing a request under public-records law.
Its forecast was made even after energy companies had discovered a way to pull gas from previously inaccessible shale-rock formations. The resulting glut means that natural-gas prices haven’t topped $6 per million BTUs since January 2009. Today, they are around $3.75.
Jeff Burleson, vice president of system planning for Southern, says the projections look flawed today because the industry was “in transition from conventional gas to shale gas” in 2009.
The company in June 2010 won state approval to go ahead with the project and by that December had broken ground on a 3,000-acre tract.
Kemper’s cost, previously projected at around $2.9 billion, soon began to soar. Southern recently estimated the price tag at $4.7 billion. The utility says it underestimated labor costs and the amount of steel pipe, concrete and other materials it would need for so big a plant.
Because the state Legislature allowed Southern to charge customers for the plant’s costs before it began generating power, customer rates began to rise, jumping 15% this year. A 3% increase is scheduled for next year, though the company is seeking 7%.
Criticism has been growing from environmental groups, tea-party activists and some business leaders, who fear that rising electricity rates will make Mississippi less competitive.
The state chapter of the Sierra Club, which has been trying to block the plant, says public opinion is shifting in the club’s favor.”When it first came out, it was the greatest thing since sliced bread,” says Louie Miller, state director of the environmental group. “Now everyone has turned against it.”
Regulators and Southern agreed in January to cap costs that customers would cover at $2.88 billion, far below the $4.7 billion projected cost. But Southern recently won approval from the Legislature to sell up to $1 billion in bonds to help cover about half the difference; customers will repay the bonds through a surcharge on bills.
“Cost overruns are not something we wanted, but we believe we’ve done right by customers” by splitting the cost between customers and shareholders, says company spokeswoman Christy Ihrig.
Customers are not pleased.
In Meridian, just south of Kemper County, Neubern Atkinson says his Lucas Road Art and Jewelry gallery hasn’t recovered from the recession. “I’m already on a shoestring budget in this economy,” the 66-year-old says, “and this may be the deciding factor in me staying open.”
Mississippians who still favor the plant mostly live in and around De Kalb, which has welcomed construction workers to its rental houses and grocery stores. At the project site, cranes are in almost continuous operation. Six days a week, the sounds of welding, hammering and truck engines resound across the low hills.
Faye Wilson, executive director of the Kemper County Chamber of Commerce, says the income will “benefit the county for years to come.”
Some locals have another reason to remain enthusiastic: They don’t have to pay for the plant. Many Kemper County residents get power from the federal Tennessee Valley Authority, which charges some of the lowest electricity rates in the country.
Write to Rebecca Smith at rebecca.smith@wsj.com and Cameron McWhirter atcameron.mcwhirter@wsj.com