Southern’s Subsidies Subverted Sound Strategy

In recent House testimony, I said that energy subsidies should be repealed because they distort business decision making. They induce firms to invest in activities that do not make sense in the marketplace.

That appears to be the case with Southern Company’s “clean coal” plant in Kemper County, Mississippi. The plant is far behind schedule and massively over budget—a first-class boondoggle. The Wall Street Journal reports that the estimated cost has soared from $3 billion to $7.1 billion. (This says the original estimate was $2.2 billion). The utility’s customers could be in for a $4 billion rate hike.

What the WSJ leaves out is that the Kemper plant received federal subsidies and Obama administration support, which may have tilted company executives in favor of the wasteful project instead of a far cheaper natural gas plant. The project had been scheduled to receive hundreds of millions of dollars in grants and tax credits, although I understand that some of the bounty was later rescinded.

Federal subsidies covered only part of the original estimated cost, but they were likely the tail that wagged the dog. When subsidies induce private businesses to invest in dubious projects, the damage comes not just from wasting taxpayer dollars, but also from misallocating private investment funds.

More on energy subsidies, here, here, and here. More on Kemper, here, here, and here.