Dominion Virginia Power defends coal price forecasts, nuclear plans

Contrary to the claims of environmental groups, Dominion Virginia Power’s forecasts for dropping prices for Central Appalachia coal over the 2012-2015 timeframe are reasonable and a result of significant analysis by the company, the utility said in Dec. 16 testimony filed at the Virginia State Corporation Commission.

The testimony was a series of responses by Dominion Virginia Power to criticisms lodged by other parties within an ongoing integrated resource plan case begun in September. Parties to the case include MeadWestvaco Corp., the state Attorney General, the Division of Consumer Counsel, and also the Chesapeake Climate Action Network, Appalachian Voices, and the Virginia Chapter of the Sierra Club, which are collectively known as the “Environmental Respondents.” Other parties to the case include the Electric Power Supply Association and Dowell Limited Partnership.

The Central Appalachia coal price projections in the IRP are consistent with the U.S. Energy Information Administration’s price trends for CAPP coal, the utility said. “The declining coal price forecast in the 2012 through 2015 timeframe partially reflects a merging of market prices used for the early portion of the forecast to ICF’s fundamental coal price forecast which begins in mid year 2014.”

ICF International is a consulting firm that issues coal price forecasts often used by power companies in cases like this. Dominion Virginia Power, a unit of Dominion Resources (NYSE:D), gets much of its coal from the nearby CAPP region of southern West Virginia, southwest Virginia and eastern Kentucky.

“ICF’s fundamental forecast for coal prices and output used in the IRP analysis reflect an integrated analytical approach considering both demand- and supply-side issues; as such, the relationship of price and production are directly considered,” the utility added. “Specifically with regards to CAPP prices in the 2012 to 2015 period, there is an anticipated decline in power sector demand for high cost, low sulfur CAPP coal due to anticipated installations of scrubbers and anticipated coal generation facility retirements in response to the Hazardous Air Pollutants Maximum Achievable Control Technology Rule which requires generation facilities to have a compliance or retirement decision made by year-end 2014. Many coal plants, after installing scrubbers, are able to switch to higher sulfur, higher heat content Northern Appalachian coal, or lower cost Illinois Basin coal. As a result of the decreased demand, higher cost coal mines in CAPP are expected to shut down. Thus, as demand shifts away from CAPP coal in the 2012-2015 period, CAPP prices are expected to fall given that production will be sourced from the most economic locations . Over time, as CAPP prices decrease to levels more in with other coal source options, demand for CAPP coal is expected to stabilize, and prices to remain flat before increasing in the mid- to long- term due to the effects of lower productivity .”

Between 2000 and 2010, CAPP coal prices have increased and production decreased, however, there has been significant volatility in prices in this period, with single-year price changes of plus or minus $100/ton. These price changes are not highly correlated to historical production levels as suggested by Environmental Respondents, since other fundamental market factors contribute heavily to influence prices from year to year as well, Dominion said.

A market factor that Dominion didn’t name is that CAPP produces a lot of metallurgical-grade coal, some of which moves into the steam market when met coal prices are low. But in the last few years, export met coal demand has skyrocketed, though with a slump in the late 2008-early 2010 period due to the worldwide recession, and CAPP coal prices have been on a corresponding roller coaster ride during that period.

The EIA Annual Energy Outlook 2011 forecast for CAPP coal (both low and medium sulfur) follows a similar trajectory to that used in the resource plan, Dominion noted. The CAPP prices for EIA’s medium sulfur coal, which represents 0.61-1 .67 lb/MMBtu of sulfur, decline from about $59/ton in 2012 to about $53/ton in 2015, in 2009 dollars. Once the prices are adjusted to nominal dollars using an inflation assumption consistent with Dominion’s resource plan, the CAPP coal prices decline 4.3% between 2012 and 2015.

“Accordingly, Environmental Respondents’ concerns over the Company’s CAPP coal forecast are misplaced and do not warrant disapproval of the Company’s Plan or the convening of an evidentiary hearing,” Dominion added.

Dominion also responded to the criticism that it’s not doing enough to develop renewable energy sources. Dominion said it has separately filed for approval with the commission for the conversion of three small coal burning plants to use biomass for a total of 153 MW of new renewable capacity. Also under construction is approximately 59 MW of biomass capacity at the Virginia City Hybrid Energy Center, a coal-fired plant due on-line in 2012 that will fire up to 20% biomass.

Another point of defense was a plan to add new nuclear capacity through North Anna Unit 3. “With respect to North Anna 3, the Plan’s analysis is reasonable, particularly considering the delay in the modeled commercial operation date of North Anna 3,” the utility said. “The Company has not committed to under-take construction of North Anna 3. Nuclear power is an important component of the Company’s plan to achieve fuel diversity, stable long-term customer electric rates, system reliability and low greenhouse gas emissions, consistent with the provision of [Virginia state code] that the Company ‘identify a portfolio of electric generation supply resources…that reduces the risks associated with over-reliance any particular fuel….’”

With that state mandate in mind, the company did not consider any alternative plans that lacked new nuclear capacity. However, it has opted to slow the development of the third reactor and for purposes of the resource plan, North Anna 3 currently has a projected commercial operation date of 2022.

A Consumer Counsel concern about planning for transmission projects is moot since Dominion said it has no plans for any major transmission projects. “The transmission investments included in the 2011 Plan are all reliability and maintenance-related, making such a discussion unnecessary,” the utility said. “While none of the Company’s transmission investment referenced by this Plan includes the costs of proposed transmission projects that are planned for economic purposes or ‘market efficiency projects,’ it is possible that future Plans could include the costs of such projects if PJM designated constructing and owning or financing responsibility of one or more market efficiency projects to the Company. If this occurs, the Company will separately identify these projects in future Plans.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.