Since the last investor update in November 2011 by Public Service Enterprise Group (NYSE:PEG), the market price for natural gas has declined more sharply than the cost of coal, widening the cost of operating PSEG’s coal units versus its gas units by about $8 per megawatt hour.
Caroline Dorsa, PSEG’s Executive Vice President and CFO, added during a Feb. 23 earnings call that the company would need to see an increase in the price of gas of about $2 per mmBTU, or a decline in the cost of coal, to correct the economic differential in dispatching its gas fleet versus its coal fleet. “Keep in mind that this gas price change is from today’s levels, so it is really a snapshot at a point in time and not a forecast of the long-term differential, nor does it reflect seasonality that we would expect to see,” Dorsa added. “But it is in fact exactly these market dynamics, which frankly makes us pleased to have the largest fleet of combined cycle gas units that operate in PJM.”
In a December 2011 investor presentation, PSEG said gas-fired units start to back down its coal units when gas is at or below $4-4.50/mmBtu. Market prices are well below that right now.
Dorsa, in answering an analyst question about future fuel costs, said different coals demand different prices. “[K]eep in mind you’ve got different types of coal, you’ve got the Adaro coal for Bridgeport Harbor in the high $40s and you’ve got the other types of met coal that we use in Hudson and Mercer, that’s mid-$40s, and then you’ve got the $20s…for Keystone and Conemaugh.” Dorsa didn’t say how those costs were measured, but a slide in the December 2011 investor presentation shows that PSEG measures these figures in $/MWh.
Bridgeport Harbor is a plant in Connecticut that takes ultra-low-sulfur – and therefore expensive – coal from Indonesia via coal supplier Adaro. Hudson and Mercer in New Jersey, due to boiler constraints, take a fairly expensive coal that normally sells in the high-priced metallurgical coal market. PSEG owns small stakes in the Keystone and Conemaugh plants in Pennsylvania that take pretty cheap high-sulfur coal from nearby mines, thus slashing transportation expenses to get this coal from mine to plant.
Ralph Izzo, Chairman, President and CEO of PSEG, said that emissions control projects alrwady undertaken positioned the company well for the future. “The delay in the implementation of the Cross-State Air Pollution Rule, often referred to as CSAPR, along with lower prices for natural gas has had a negative impact on power prices since the start of the year,” he added. “We don’t believe current power prices fully reflect the impact of the cost of meeting new environmental requirements and we would expect over time to see a response in the marketplace. We believe the progress we have made on our operational, capital investment and financial goals will take us through this period of low power prices and provide for sustainable growth in value over the long term.”
At its PSEG Power unit, the parent company reported that coal costs were $31m in the fourth quarter of 2011, down sharply from $78m in the year-ago quarter. PSEG Power’s coal costs in all of 2011 were $302m, down from $405m in 2010.
A slide presentation from the earnings call indicates that PSEG has made money on re-selling excess coal at Bridgeport Harbor.