Duke Energy Indiana approved to buy gas plant, delayed on coal unit conversion

Duke Energy Indiana was on Dec. 28 granted by Indiana regulators a Certificate of Public Convenience and Necessity (CPCN) to acquire a 62.5% ownership interest in the gas-fired Vermillion plant but regulators didn’t at this point approve a plan to convert Gallagher units 1 and 3 to natural gas.

The Indiana Utility Regulatory Commission had in September 2010 approved the installation of dry sorbent injection systems to control SO2 emissions at Gallagher units 2 and 4. The now-completed DSI installations, and the shutdown or conversion to natural gas of Gallagher 1 and 3, were mandated under a 2009 consent decree that Duke Energy Indiana worked out with the U.S. Environmental Protection Agency in a New Source Review case. Duke Energy Indiana is a unit of Duke Energy (NYSE:DUK).

The utility applied in September 2010 at the commission for the CPCN on the gas conversions at Gallagher units 1 and 3. As part of the consent decree, the company agreed to retire or convert Gallagher units 1 and 3 to run on natural gas. The units can operate until they are either retired or converted to natural gas. If the company decides to convert these units, the conversion must occur by Dec. 31, 2012. If the company elects to retire these units, the decision to do so must be made by Jan, 1, 2012, and the retirement must occur by Feb. 1, 2012.

Without reaching a final decision on the issue, the commission on Dec. 28 declined to issue a CPCN for the Gallagher units 1 and 3 gas conversion at this time. It said that Duke Indiana needs to report to the commission within five business days after the Vermillion plant purchase closes. If the transaction does not close, Duke can then request issuance of a CPCN for the Gallagher units 1 and 3 gas conversion.

Gallagher is located on the Ohio River near New Albany, Ind., and was constructed in the late 1950s and early 1960s. The station consists of four nominal 150-MW (gross) coal-fired units with a station rated net capacity of 560 MW. With the gas conversion at Gallagher units 1 and 3, replacement of burners and igniters will be necessary, and the boiler casing will require additional bracing. The consent decree with EPA also requires the addition of a flue gas recirculation system, which will reduce NOx emissions from the units.

A significant portion of the gas conversion project at Gallagher involves installation of a 19.5-mile, high-pressure gas pipeline that will interconnect with a Texas Gas Transmission Co. interstate pipeline on the Kentucky side of the Ohio River. The overall estimate for the Gallagher conversion, including the natural gas pipeline, is about $71m. This amount does not include allowance for funds used during construction (AFUDC). Duke said this cost estimate was compiled by experienced Duke Energy project engineers working together with Sargent & Lundy LLC.

Vermillion a cheaper option, for now

Duke Energy Indiana testified that it generally expects that the O&M cost of the converted units would be comparable to the costs of other peaking units with low capacity factors (less than 10%). The operating cost will depend mostly upon the cost to obtain natural gas. On a $/kW basis, the Gallagher gas conversion is approximately $263/kW compared to the Vermillion purchase at $170/kW, Duke told the commission. The Gallagher conversion remains a relatively low cost capacity option, however, and is less expensive than the bids received in a market solicitation. But there isn’t a need for both the Vermillion plant and the Gallagher conversion in the near term. Given the potential of more retirements due to pending draft environmental regulations and the low price per kW for the Gallagher conversion, inclusion of both projects could make sense even if it results in a surplus reserve margin for a few years, Duke said.

The utility described the Vermillion plant as essentially a sister station to its Madison plant. Vermillion is connected to Duke Energy Indiana’s transmission system, and is located within the Midwest Independent System Operator footprint. As of May 1, 2011, Duke Vermillion, a wholly owned subsidiary of Duke Energy Ohio and an affiliate of Duke Energy Indiana, assumed ownership of 75% of each Vermillion unit with the remaining 25% interest owned by the Wabash Valley Power Association. Duke Energy Indiana and Wabash Valley propose to purchase Duke Vermillion’s undivided 75% ownership interest in the assets associated with the plant, with the final ownership shares of the entire plant to be 62.5% for Duke Energy Indiana and 37.5% for Wabash Valley.

Duke Energy Indiana testified that the Vermillion facility has access to two interstate gas transportation pipelines, Midwestern Pipeline Co. through a Texas Eastern Transmission lateral, and, as a backup, Panhandle Eastern Pipeline Co. through an Indiana Gas Co. lateral, for delivery and parking services for the facility. The utility said it expected that the company will utilize ProLiance Energy LLC for gas purchases for Vermillion, as it does for a number of other gas-fired units.

“Here, Duke Indiana originally sought a CPCN to convert Gallagher Units 1 and 3 to gas fired boilers,” the commission noted in its Dec. 28 decision. “However, during the course of this proceeding, Duke Indiana became aware of the opportunity to purchase a portion of the Vermillion generating station, and modified its Petition to request a CPCN to complete the purchase. Because we approve Duke Indiana’s request for a CPCN to purchase a portion of the Vermillion plant, we need not address its request for a CPCN to convert the Gallagher Units to gas-fired generation.”

The commission found that Duke Energy Indiana’s negotiated purchase price for its overall 62.5% share, representing 400 MW of capacity, at the Vermillion facility is $68m, excluding carrying costs and transaction costs. The commission also granted Wabash Valley a CPCN to acquire an additional 12.5% ownership interest in the Vermillion plant.

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.