The Zeeland gas-fired power plant of Consumers Energy, bought a few years ago, has gone from a peaking plant to a baseload plant in part because of cheap natural gas that is also currently forcing some of the utility’s coal-fired facilities into cycling mode, said CMS Energy (NYSE: CMS) officials on an April 26 earnings call.
John Russell, President and CEO of CMS Energy, said about the impacts of cheap gas: “We’ve even seen at times that…the combined cycle is dispatched ahead of coal. But even peaking, even the simple cycle has dispatched some coal in some certain timeframes. So we’re seeing that as an advantage that we have with the gas plants. A disadvantage is that we’re really cycling the coal plants a lot more than we have in the past and right now some of the coal plants are out of market. So it kind of fell in line with the strategy that we’ve had to take some of these older units and mothball them in the next couple of years anyway.”
Tom Webb, Executive Vice President and CFO, said that a downside of the cheap gas prices is that coal inventories are a little high, but on the other hand overall fuel costs are dropping sharply.
Russell said the company is comfortable and confident that the decision to mothball seven of the company’s smaller coal units in Michigan and maybe ultimately retire them is the right move. “The big five coal plants, the work that we’ve done already makes sense because they are competitive,” he added. “Although as I said earlier, we’re moving them around a little bit, cycling them a little bit more than we have in the past.”
Another reason to keep the big five coal units going with new capital investment is that by around 2015, when competitors have shut coal-fired generation due to factors like new environmental regulations, “what we’re going to see is capacity prices rise, gas prices begin to trickle up at that point and at that point we believe that these highly efficient coal plants will be in the money,” Russell said. “The decision we’ve made to put full environmental controls on the big five coal units makes sense in the short term and the long term, and mothballing the small seven makes sense in the short term and the long term.”
In answer to an analyst question, the CMS officials gave some recent capacity factors for coal units. Campbell Unit 1 had about a 68% capacity factor in the first quarter. Campbell Unit 3 came in at about 50% in the first quarter of this year, down from 77% in the year-ago quarter. Russell noted that Campbell Unit 3 is a big, very efficient unit that normally runs a lot and that there was an outage in the first quarter of this year that drove down its capacity factor. The two Karn coal units came in at around 35% and 50% in the first quarter. The Zeeland gas plant came in at about 71% in the first quarter of this year, up sharply from 27% in the year-ago quarter.
Said Webb about capacity factors: “I’d say that the big coal units on the west side of the state were around 70-plus percent and what you’re seeing now if I kind of average them out and think about some changes, well Campbell 1 was running at about 68%. So you can see that transition. But the big deal is to see the shift on the gas side. Because remember even though they’re big coal units, they’re still big efficient baseload units. Zeeland going from 27% capacity factor in the first quarter of last year up to 71% in the first quarter of this year. That’s probably the best indicator for you to see what we’re looking at.”
Consumers Energy announced in December 2011 the cancellation of an 830-MW clean coal plant project near Bay City and an update of its air quality control plans, which include the anticipated suspension of seven smaller units in 2015. The utility also said it plans to continue to make substantial environmental investments at its five major coal-fired units. The utility said it didn’t anticipate operating the seven targeted coal units past Jan. 1, 2015. However, the utility also said that market conditions and the final form and timing of federal and state environmental regulations could lead it to adjust its plans for those units. The targeted coal units are: three at J.R. Whiting, two at B.C. Cobb and two at the Karn/Weadock complex.