Duke Energy’s shareholders will absorb nearly $900 million in cost overruns for its new Edwardsport coal-fired power plant, the Indiana Utility Regulatory Commission ruled Thursday.

The commission approved a settlement agreement that caps project costs that Duke may pass to retail customers at nearly $2.6 billion. The plant is expected to actually cost $3.5 billion.

By resolving who will pay Edwardsport’s mounting costs, the order clears a major hurdle for the Charlotte-based Duke shortly after it settled North Carolina investigations of its merger with Progress Energy.

Duke has taken $866 million in charges against earnings for Edwardsport’s mounting costs since 2010, most recently in the third quarter of this year.

Duke is Indiana’s largest electric supplier, serving 790,000 customers. Average retail bills have gone up 5 percent to pay for the plant, and Duke expects them to rise an additional 3 percent to 4 percent in January. Overall, customer bills will likely go up 14 percent to 16 percent by early 2014.

In addition to the hard cap on recovering the plant’s costs, Duke will be allowed to recover $54 million in financing costs that have accrued since June 30.

The 618-megawatt plant, which is expected to start commercial operation by mid-2013, was initially expected to cost about $2 billion. The plant uses new technology that turns coal into gas, sharply reducing air emissions, but has not been built on such a large scale in the United States.

“The decision reduces the amount Duke Energy’s Indiana customers will pay for an advanced-technology, environmentally cleaner coal power plant and provides clarity to the company for cost recovery on this project,” Duke’s Indiana president, Doug Esamann, said in a statement.

The commission ordered Duke to credit customers $28 million in cost-control incentive payments that were “found to be unwarranted” in light of the project’s escalating costs.

The settlement approved Thursday was among Duke, Nucor Steel Indiana, a group of industrial customers and the Indiana Office of Utility Consumer Counselor. It resolves claims that Duke mismanaged the project, which also was the subject of an ethics scandal involving Duke and Indiana regulators.

In its order, the commission found that several advocacy groups that didn’t sign the settlement had not proved their claims of fraud, concealment or gross mismanagement of the project.

“While the planning and construction of (Edwardsport) has been less than ideal,” Thursday’s order said, “the evidence offered … does not reach the level of gross mismanagement.”

The commission added that the plant “remains needed.”

Citizens Action Coalition, a critic of the project, insisted customers will still pay more for the power plant than they should.

Duke’s ratepayers “had nothing to do with the massive cost overruns, the countless delays in schedule, the incompetence of Duke Energy to manage their own project … and shouldn’t have to pay for any of the costs associated with those issues,” Executive Director Kerwin Olson said by email.

Indiana’s former utility commission chairman, David Lott Hardy, faces trial on charges he secretly met with Duke executives about cost overruns at the plant.

Duke’s former No. 2 executive, Jim Turner, resigned after private email exchanges with Hardy were disclosed.