In 2011, South Carolina Electric & Gas (SCE&G) consumed 4,929,754 tons of coal in the production of electricity for its customers, down 6.7% or 356,402 tons from 2010, said Michael Shinn, employed by SCANA Services Inc. as General Manager of the Coal and Oil Procurement Department.
Shinn manages the purchase and delivery of coal, No. 2 fuel oil and SO2 scrubber limestone on behalf of SCE&G and as agent for South Carolina Generating Co. (GENCO). These are units of SCANA Corp. (NYSE:SCG).
In March 22 testimony filed at the South Carolina Public Service Commission in a fuel rate case, Shinn noted that under normal market conditions, SCE&G seeks to have long-term coal purchases represent approximately 75% to 80% of projected system demand. Spot purchases provide a mechanism to manage inventories and react to short-term changes in the marketplace, and generally represent 20% to 25% of projected system demand.
In the review period for this fuel case (calendar year 2011), demand for energy vacillated greatly and was above normal due to a colder than normal winter and warmer than normal summer, but then shifted to below normal demand during the closing months of the year. In addition, natural gas prices remained at very competitive rates for much of the year making it the fuel of choice for economic dispatch in many circumstances.
During the review period, the company took delivery of 3,942,393 tons of coal under long-term agreements and about 835,536 tons of coal through spot purchases. Long-term agreements in 2011 provided 82.51% of the requirement for the company’s five coal-fired stations and GENCO’s Williams station, while spot purchases accounted for the remaining 17.49%.
For the current period of January 2012-December 2012, the company has long-term contracts with seven suppliers for the delivery of 3.4 million tons of coal. This represents about 68% of SCE&G’s expected total coal receipts for 2012. The coal purchased under these contracts ranges in quality from 12,300 to 12,700 Btu/lb and sulfur contents from 0.75% to 1.6%. Most of these contracts are for an initial period of two years with some options to renew.
Looking forward into 2013, the company has long-term contracts with three suppliers totaling about 2 million tons of coal. This quantity represents about 61% of SCE&G’s expected total coal receipts for 2013.
“During 2012, the Company will continue to carefully evaluate its need for coal in future periods,” Shinn testified. “In 2012, we anticipate that SCE&G will increase its commitments for coal supply under long-term contracts for 2013 and beyond.”
Coal prices down a bit lately due to gas competition, other factors
During the review period, coal prices have been relatively stable to slightly decreasing. Those prices have been influenced by global demand, environmental regulations, other regulatory requirements, weather patterns and pricing of competitive fuels, Shinn noted.
In 2011, CSX Transportation remained the primary rail transporter of coal for SCE&G. While the CSX contract rates remained relatively stable during 2011, these rates are subject to quarterly adjustments according to indices published by the American Association of Railroads. SCE&G took delivery of approximately 4.8 million tons of coal under this rail contract during 2011, representing 100% of the company’s total receipts of coal.
Norfolk Southern Railway, the other major eastern U.S. railroad, has only one delivery point in SCE&G’s service territory. This delivery point is at the Wateree plant and could account for nearly one-third of the company’s need for coal deliveries in some years. However, in 2011 SCE&G was unable to use NS due to minimum transportation requirements under the CSX contract.
Imported coal too pricey for right now
Right now, international market prices for coal make it uneconomical for SCE&G to import coal, Shinn pointed out. Because the prices for coal in international markets reflect strong demand in these markets for coal, the growing trend is for coal from the U.S. to be exported. For example, CSX reported that it transported for export 42 million tons of coal in 2011 and expects a similar trend in 2012. Five years ago the amount of export coal shipped by CSX was only 12 million to 13 million tons. As exports of domestic coal into foreign markets grow, pressure will also increase on domestic coal prices over time, Shinn said.
Notwithstanding the growing demand in foreign markets, SCE&G’s coal prices for the forecasted period are expected to remain stable or trend downward slightly due to projections that it may increase spot coal purchases at prices below SCEG’s long-term contract prices. For example, over the past 12 months, the price per ton of Central Appalachian coal decreased from $75 on Jan. 31, 2011, to $68.25 on Dec. 31, 2011, about a 10% decrease. Spot coal prices have further moderated in early 2012, decreasing to around $60 per ton. “While we do not expect any further substantial reduction in prices in 2012, we do believe spot prices will remain favorable and relatively stable,” Shinn noted.
Even with the increase in coal exports to European as well as Asian markets, the increased use of natural gas for power generation and decreased industrial demand will continue to force U.S. coal companies to reduce production to conform to overall reduced demand for coal as an energy source, Shinn said. Other factors that continue to affect coal production include a dwindling coal reserve base, greater regulation by the U.S. Environmental Protection Agency and the U.S. Mine Safety and Health Administration, the redeployment of capital dollars to metallurgical coal mines versus steam coal mines, the ability to borrow money for recapitalization of mines in general and the inability of mining companies to acquire new mining permits. These factors will continue to put upward pressure on coal production costs during 2012 and beyond.
Off-spec coal bought in 2011, Illinois Basin test in 2012
SCE&G continues to expand its coal specifications by purchasing coal of lower quality where practical and acceptable to a coal-burning plant. During 2011, SCE&G took delivery of 908,874 tons with contracted Btu/lb values less than its traditional specs. A major portion of this coal was blended and consumed at the Cope plant.
SCE&G is further evaluating the fuel flexibility for all of its coal-fired plants. This evaluation considers fuels from different regions of the U.S. and South America with multiple sulfur, ash and Btu/lb levels. Currently, transportation rates, and in some cases original plant design, make coal from other basins non-competitive with Central Appalachia due in large part to significant differences in coal qualities that could impact plant operations.
In 2012, SCE&G will test burn an Illinois Basin coal blend at Cope to gauge the impact on operational costs and plant reliability. Although coal from the Illinois Basin does not meet SCE&G’s system coal quality specs, this coal could yield a very competitive delivered cost per million Btu when compared to Central Appalachian coals, if the test burns demonstrate that operational costs and reliability are not adversely impacted, Shinn reported.
In 2009, the company initiated legal action against several unnamed coal suppliers for non-performance, Shinn said. The company’s claims against all suppliers but one have either been settled or litigated before the American Arbitration Association. The one unresolved case is scheduled to be heard, subject to any scheduling delays that may arise, later this year before the American Arbitration Association. Net benefits received as a result of resolved claims were applied to reduce fuel costs when the benefits were realized.
That last remaining coal contract tussle is apparently with CONSOL Energy (NYSE:CNX), which reported in its Feb. 10 annual Form 10-K filing: “South Carolina Electric & Gas Company (SCE&G), a utility, has demanded arbitration, seeking [$36m] in damages against CONSOL of Kentucky and CONSOL Energy Sales Company, both wholly owned subsidiaries of CONSOL Energy. SCE&G claims it suffered damages in obtaining cover coal to replace coal which was not delivered in 2008 under a coal sales agreement. CONSOL Energy counterclaimed against SCE&G for [$9.4m] for terminating coal shipments under the sales agreement which SCE&G had agreed could be made up in 2009. A hearing on the claims is scheduled for April 30, 2012.”
SCANA’s Feb. 29 annual Form 10-K report gave these fuels and capacities for all plants involving coal:
- McMeekin, coal/gas, 250 MW;
- Canadys, coal/gas, 385 MW;
- Wateree, coal, 684 MW;
- Williams, coal, 605 MW;
- Cope, coal, 415 MW;
- Kapstone, biomass/coal, 85 MW;
- and Urquhart, mostly oil and gas but with a 95-MW Unit 3 that fires coal.
At Kapstone, SCE&G receives shaft horsepower from Kapstone Charleston Kraft LLC, a biomass/coal cogeneration facility, to operate SCE&G’s generator.