The Indiana Utility Regulatory Commission is currently reviewing a Jan. 18 application by Citizens Thermal Energy for approval of a conversion of the coal-fired Perry K plant in Indianapolis to firing natural gas.
The application is from the Board of Directors for Utilities of the Department of Public Utilities of the city of Indianapolis, acting in its capacity as trustee of a public charitable trust for the provision of energy services, d/b/a Citizens Thermal Energy. Citizens is asking the commission to: approve the implementation of a rate adjustment tracking provision that will allow the utility to track the operating and maintenance cost savings and capital and financing costs that will result from the conversion of coal-fired and oil-fired boilers at Perry K to burn natural gas; make certain findings related to the conversion plan; and grant it any other necessary relief.
The steam utility’s customers are supplied with steam generated from two sources: a waste-to-energy plant owned and operated by Covanta Indianapolis Inc.; and the Perry K plant. Perry K generates about 50% of the steam sold by Citizens. About 76% of the steam generated by the Perry K plant is produced using boilers fueled with coal, about 23% using boilers fueled with natural gas and less than 1% using boilers fueled with No. 2 fuel oil.
“Increasingly stringent environmental regulations affecting the use of coal and fuel oil at the Perry K plant present significant challenges for the steam utility related to the capital costs that will be required to comply with such regulations and in turn the upward pressure such costs will have on the steam utility’s rates,” said the application. “Additionally, the use of coal to produce steam at the Perry K plant results in increased operating and maintenance costs when compared to use of natural gas to produce steam. Petitioner has determined that converting two of the boilers at the Perry K plant that use coal and the two boilers that use fuel oil to burn natural gas will result in significant cost savings for the steam utility and its customers, create substantial environmental benefits for the city of Indianapolis and is in the public interest.”
Citizens estimated the capital costs that will be incurred to complete the gas conversion will be substantially less than the capital costs that would be required to modify Perry K’s coal-fired boilers in order to achieve compliance with environmental regulations. Replacing coal with natural gas will increase fuel cost, but overall this is the cheapest plan, Citizens added.
Citizens fielded several 2011 offers for emissions equipment
On March 6, Citizens filed 296 pages of work papers with the commission in this case. The work papers include a July 2011 proposal from Amerex Environmental Technology for installation of emissions controls on the Perry K plant. The Amerex proposal covered a secondary electrostatic precipitator (ESP) on Boiler #12; the ESP handling the combined flows from Boilers #15 and #16; and dry sorbent injection with Trona and activated carbon injection with powder activated carbon for both Boiler #12 and Boilers #15/16.
Also in the work papers are June 2011 proposals from equipment suppliers Lodge Cottrell Inc. and its sister company, Nol-Tec Systems Inc., for a roughly similar series of environmental controls at Perry K.
The various companies making offers, including Southern Environmental Inc. and Siemens Environmental Systems & Services, were responding to a request for proposals from Burns & McDonnell, a consultant working for Citizens. The proposals made by these companies are a pretty good rundown of the state-of-the-art on environmental controls offered by those companies.
Citizens has contract in hand for its final coal
In a separate case, filed with the commission on Feb. 15, Citizens outlined its situation under the commission’s fuel adjustment clause (FAC) mechanism. Providing testimony on coal supply for Perry K was Robert Purdue, Director of Thermal Operations for Citizens Energy Group.
Purdue noted that Citizens has a contract with an unnamed producer to provide coal over a three-year term, which ends on Dec. 31, 2013. For calendar years 2010 through 2013, the quantity of coal to be delivered to Citizens will be 175,000 tons, plus or minus 10%.
Transportation of coal to the Perry K plant is provided by Indiana Southern Railroad (ISSR) or Indiana Rail Road (INRD), and CSX Transportation. Effective Jan. 1, 2011, the coal supplier notified Citizens that the coal supply for 2011 would be supplied by the Bear Run mine, which is served by INRD. INRD transportation pricing, using a CSX pricing mechanism effective Jan. 1, 2012, was $9.23 per ton. However, the coal supplier reserves the right to supply coal from alternate sources that are served by ISSR.
Citizens purchases about 175,000 tons of coal per year, which has decreased the past couple of years from 230,000 tons. Citizens isn’t a big coal consumer that can demand better coal prices based on purchasing volume, but Purdue said Citizens has negotiated competitive coal procurement contracts that provide the best terms and conditions possible under the circumstances.
“The spot coal price for Illinois Basin Coal as of January 27, 2012 was $62/ton for 2.5 lb sulfur coal and the lookout price for calendar year 2012 is estimated to be $62/ton, which reflects the changes in the market of compliance coal contracts expiring and being renewed by other users,” Purdue testified. “Therefore, our current contract price of $53.56 per ton of coal reaffirms the opinion set forth in my testimony that Citizens has negotiated a competitive coal contract for its customers through December 2013. On January 1, 2013, Citizens will experience an increase of 3% as part of the current coal contract.”
Notable is that while Purdue didn’t name the contracted coal supplier, the Bear Run strip mine in Indiana, which is on the INRD, is a Peabody Energy (NYSE:BTU) operation.
Citizens to patch up and eventually sell its coal cars
A recent issue is that in 2010 the Federal Railroad Administration put into play tighter inspection procedures for rail cars. “The inspections now include repairing minor issues that, in the past, were not considered by the inspector for repairs,” Purdue noted. “The inspector has the ability to order rail cars out of service until these minor defects are corrected. The steam plant has a very small storage yard and taking rail cars out of service creates an issue with the coal tonnage that can be delivered each week.”
Purdue said Citizens took a proactive approach to these issues and ordered its rail car repair vendor to abate the minor issues while the rail cars were in between shipments. In addition, about 22 of its 54 rail cars’ fleet life cycles end December 31, 2012. Rule 88 of the Association of American Railroads (AAR) sets standards at which owners can extend the life cycle of those rail cars. Citizens had an engineering study completed by our rail car repair vendor and the study indicated we could spend an average of $4,000 per car versus a total replacement cost of over $80,000 per car and extend the life of these cars through year 2022.
The cars, of course, won’t be needed after the conversion of Perry K to natural gas. “We will continue to have a need for these cars until the spring of 2014, so we must show the AAR that we are working to meet the new standards,” Purdue said. “Our plan since 2011 is to make the minimum changes to the cars while meeting the intent of the AAR standards. Post gas conversion our plan is to sell all of the railcars for more than scrap pricing and in order for us to get the top dollar for these cars they must meet the current AAR standards. All proceeds from the sale of the coal cars will be credited to future FAC adjustments.”