The use of high-sulfur coal will increase in 2012 at Louisville Gas and Electric (LG&E) and Kentucky Utilities (KU) due to the installation of SO2 scrubbers at KU’s E.W. Brown plant, said parent PPL Corp. (NYSE:PPL) in its Feb. 28 annual Form 10-K report.
In 2012 and beyond, LG&E and KU may also purchase certain quantities of ultra-low sulfur content coal from Wyoming for blending at the 732-MW Trimble County Unit 2, the Form 10-K added. Coal is expected to be the predominant fuel used by LG&E and KU for baseload generation for the foreseeable future, with natural gas and oil being used for intermediate and peaking capacity and flame stabilization in coal-fired boilers. For their existing units, LG&E and KU expect for the foreseeable future to purchase most of their coal from western Kentucky, southern Indiana, southern Illinois and Ohio.
LG&E is a regulated utility engaged in the generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky. As of the end of 2011, LG&E owned 3,352 MW of electric power generation capacity and, subject to certain regulatory approvals, is implementing capital projects at certain of its existing generation facilities to provide 483 MW of additional generating capacity by 2016. LG&E also anticipates retiring 563 MW of coal-fired capacity by the end of 2015 to meet certain environmental regulations. LG&E and KU jointly dispatch their generation units with the lowest cost generation used to serve their retail native load.
KU is a regulated utility engaged in the generation, transmission, distribution and sale of electricity in Kentucky, Virginia and Tennessee. As of the end of 2011, KU owned 4,833 MW of electric power generation capacity and, subject to certain regulatory approvals, is implementing capital projects at certain of its existing generation facilities to provide 652 MW of additional generating capacity by 2016. KU also anticipates retiring 234 MW of coal-fired capacity by the end of 2015 to meet certain environmental regulations.
The plants that LG&E and KU plan to retire by the end of 2015 are Cane Run Units 4-6 (563 MW), Green River (163 MW) and Tyrone (71 MW).
Besides the regulated LG&E and KU operations in Kentucky, PPL also uses coal at unregulated operations in Pennsylvania and Montana. PPL EnergyPlus acts as agent for PPL Generation to procure that coal.
During 2011, PPL Generation purchased 7.1 million tons of coal for its wholly-owned Pennsylvania plants, the 1,515-MW Montour and 1,445-MW Brunner Island facilities, under short-term and long-term contracts. Contracts currently in place are expected to provide 7.9 million tons of coal in 2012. The amount of coal in inventory varies from time to time depending on market conditions and plant operations. PPL Generation, through PPL EnergyPlus, has agreements in place that will provide more than 31 million tons of PPL Generation’s projected annual coal needs for the Pennsylvania power plants from 2012 through 2018.
A PPL Generation subsidiary also owns a 12.34% interest in the Keystone coal plant and a 16.25% interest in the Conemaugh coal plant, both located in Pennsylvania. PPL Generation owns a 12.34% interest in Keystone Fuels LLC and a 16.25% interest in Conemaugh Fuels LLC. The Keystone plant contracts with Keystone Fuels for its coal requirements, which provided 4.4 million tons of coal to the Keystone plant in 2011. The Conemaugh plant requirements are purchased under contract from Conemaugh Fuels, which provided 4.5 million tons of coal to the Conemaugh plant in 2011.
All PPL Generation coal plants in Pennsylvania have scrubbers installed, allowing the flexibility to buy high-sulfur coal from relatively nearby mines in Northern Appalachia.
PPL Montana has a 50% leasehold interest in Colstrip Units 1-2, and a 30% leasehold interest in Colstrip Unit 3, all of which are fired by coal. NorthWestern Corp. owns a 30% leasehold interest in Colstrip Unit 4. PPL Montana and NorthWestern have a sharing agreement to govern each party’s responsibilities regarding the operation of Colstrip Units 3 and 4, and each party is responsible for 15% of the respective operating and construction costs, regardless of whether a particular cost is specified to Colstrip Unit 3 or 4. However, each party is responsible for its own fuel-related costs.
PPL Montana, along with the other owners, is party to contracts to purchase 100% of its coal requirements. PPL Montana, along with the other owners, has a long-term purchase and supply agreement with the current supplier for Colstrip Units 1-2, which provides these units 100% of their coal requirements through December 2014, and at least 85% of such requirements from January 2015 through December 2019. The coal supply contract for Unit 3’s requirements is in effect through December 2019.
Coal supply contracts are in place to purchase low-sulfur coal for PPL Montana’s small Corette plant. The contracts covered 100% of the plant’s coal requirements in 2011, and similar contracts are in place to supply 100% of the expected coal requirements through 2012.
EPA rule has varying impacts on PPL plants in East
A factor impacting many of the coal-fired power plants in the eastern U.S. is the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule (CSAPR), which was designed to replace the Clean Air Interstate Rule (CAIR). But CSAPR, due to go into effect Jan. 1, has been stayed by a federal appeals court pending oral arguments this spring on numerous appeals of that rule. The appeals court left CAIR in place while the CSAPR appeals are argued.
“With respect to the Kentucky coal-fired generating plants, the stay of the CSAPR will initially only impact the unit dispatch order,” PPL said in the Form 10-K. “With the return of the CAIR and the Kentucky companies’ significant number of sulfur dioxide allowances, those units will be dispatched with lower operating cost, but slightly higher sulfur dioxide and nitrogen oxide emissions. However, a key component of the court’s final decision, even if the CSAPR is upheld, will be whether the ruling delays the implementation of the CSAPR by one year for both Phases I and II, or instead still requires the significant sulfur dioxide and nitrogen oxide reductions associated with Phase II to begin in 2014. LG&E’s and KU’s CSAPR compliance strategy is based on over-compliance during Phase I to generate allowances sufficient to cover the expected shortage during the first two years of Phase II (2014 and 2015) when additional pollution control equipment will be installed. Should Phase I of the CSAPR be shortened to one year, it will be more difficult and costly to provide enough excess allowances in one year to meet the shortage projected for 2014 and 2015.”
On the other hand, PPL’s Pennsylvania coal plants can meet both the CAIR and the proposed CSAPR SO2 emission requirements with the existing scrubbers that went in-service in 2008 and 2009. For NOx, under both the CAIR and the proposed CSAPR, PPL would need to buy allowances or make operational changes, the cost of which is not anticipated to be significant.
In June 2011, in order to achieve compliance with new and pending EPA regulations, LG&E and KU filed environmental compliance plans with the Kentucky Public Service Commission (KPSC) requesting approval to install environmental upgrades for certain coal plants and for recovery of the expected $2.5bn in associated capital costs, as well as operating expenses incurred. In November 2011, LG&E and KU filed a unanimous settlement agreement with the KPSC. In December 2011, LG&E and KU received commission approval for the environmental compliance plans. The KPSC order approved the terms of the November 2011 settlement and authorized the installation of environmental upgrades at certain plants during 2012-2016 representing approximate capital costs of $2.3bn.
The KPSC order also noted KU’s consent to defer the requested approval for certain environmental upgrades at the E.W. Brown coal plant, which represented about $200m in capital costs. KU retained the right to operate and dispatch the E.W. Brown plant in accordance with applicable environmental standards and the right to request approval of the deferred projects and related costs in future regulatory proceedings.