In March, to address PJM‘s preliminary reliability concerns related to coal plant retirements, FirstEnergy (NYSE: FE) filed an application proposing about 800 MW of new combustion turbine peaking generation to be installed at its existing Eastlake plant in Ohio.
It is FirstEnergy’s intent to offer these units into PJM’s capacity auction during the week of May 7. If they clear the auction, FirstEnergy would begin construction efforts to meet a targeted in-service date of spring 2015, said FirstEnergy President and CEO Anthony Alexander during a May 1 earnings call.
Alexander pointed out that the company announced plans earlier this year to retire units at nine of its older coal-fired plants by Sept. 1 as a result of the new U.S. Environmental Protection Agency Mercury and Air Toxics Standards (MATS) and other environmental regulations. This includes units at six competitive plants in Ohio and Pennsylvania and three regulated plants (Albright, Rivesville and Willow Island) in West Virginia.
As part of this process, PJM conducted a review to determine the impacts these coal retirements could have on system reliability. That is when FirstEnergy offered the 800-MW of peaking capacity at Eastlake.
“In addition, to bridge the ATSI region to early 2015, PJM’s current planning assumption is for reliability must run arrangements, or RMRs, for Eastlake units 1 through 3, Lake Shore unit 18 and Ashtabula unit 5,” Alexander said. “This involves a total of 885 MWs, which will help ensure reliable electric service for the Cleveland region. We anticipate that the RMR arrangements will be structured so that PJM will compensate us to keep the units available for operation through early 2015. At that time, we plan to go forward with retiring those units. In addition to the RMRs and the new combustion turbine generation at Eastlake, our transmission group, working with PJM, has identified a number of transmission projects that can be implemented over the next several years and are expected to also improve reliability in the ATSI zone. While we do not have final estimates for the cost of these transmission projects, we are currently projecting a capital spend of between $700m and $900m over the next four to five years. We expect to earn a return on these transmission investments from the time we begin construction.”
The remaining competitive units slated for retirement, Eastlake units 4-5, Bay Shore units 2-4, Armstrong and R. Paul Smith are expected to be retired as planned by Sept. 1 of this year. The three West Virginia plants included in these announcements are regulated and the company’s Monongahela Power unit has provided the West Virginia Public Service Commission with information regarding the plant deactivations. FirstEnergy also still anticipates deactivating these units by Sept. 1.
Alexander emphasized that FirstEnergy cannot and will not predict the pricing outcome of the upcoming PJM auction. “We believe the actions we are taking, building 800 MWs of combustion turbine capacity at Eastlake and the transmission reliability projects will benefit the region,” he added.
As for MATS compliance at the remaining coal fleet, FirstEnergy has recently identified lower cost solutions, allowing it to cut anticipated expenditures roughly in half, from $2bn to $3bn in the original estimate, down to $1.3bn to $1.7bn. “As we continue to find alternative approaches to meeting these requirements, including the possibility of co-firing certain units with natural gas, I can say that we are now comfortable with the lower end of the revised range,” Alexander added. “We expect to finalize our plans later this year, and we will continue our efforts to further reduce these costs if possible.”
Warm weather chills power generation
Executive Vice President and CFO Mark Clark noted during the earnings call that nationally, this was the fourth warmest winter in the last 117 years and the warmest month of March since 1950. “We certainly experienced the same conditions in our region, where heating degree days were 25% below 2011 levels and 22% below normal,” Clark said. “In fact, when we look at the impact of abnormal weather on our company as a whole, including all 10 utility companies and generation sales, the cumulative impact was $0.12 per share this quarter.”
Generation output from the company’s ongoing competitive fleet, which excludes those units it plans to retire or deactivate, decreased by 2.4 million megawatt hours or 13% compared to the first quarter of 2011, reflecting lower demand and soft power prices, Clark noted. Nuclear output increased due to the absence of any refueling outage in the first quarter.
“This was offset by a lower output from our supercritical fossil generation and lower utilization of our subcritical fleet, which continues to be impacted by low natural gas prices,” Clark added about coal-fired capacity. “While our coal inventory increased with the decline of fossil output, we also took advantage of certain market opportunities to build our inventory above what we would consider typical levels for this time of year. This had a negative impact on cash in the first quarter, which we expect to reverse over the remainder of the year.”
During the question-and-answer session, Alexander expanded on the decision to add to coal inventory in the first quarter. “We had some opportunities to build up our coal inventory in the first quarter,” he said. “Those opportunities are no longer there and we will be reversing that and actually burning down our inventory over the last nine months of the year. And on a cash basis, we expect to end about where we thought at the beginning of the year. So cash to cash, it’s about even. We just took advantage of some opportunities and we’re pleased where we are. But a little long from where we would normally be, but nothing out of the norm.”
Clark, also in answer to a question, expanded a bit on the reduced MATS compliance spending estimate. “We are pushing very hard at looking at all of the options that are available to us,” he said. “I think the first analysis was essentially a capital solution. The second analysis is what can we do to drive capital cost out and improve the overall operation of the plant. So for example, investigating using natural gas as a co-firing vehicle, obviously it reduces the amount of emissions you have to treat and improves the overall efficiency of the equipment that is already on many of our large facilities. So we’re just continuing to push hard on the engineering and the alternatives that might be available to continue to operate the fleet inside the EPA requirements, but with the least amount of capital as possible.”