Wisconsin Energy Corp. (NYSE: WEC), the parent of We Energies, is projecting a burn of just under 9 million tons of coal this year versus 10.7 million tons in 2011, with this reduction to be carried out by maximizing the use of storage and working with coal suppliers to defer, buy out or renegotiate several existing contracts.
“Natural gas will take up the slack,” said Wisconsin Energy Chairman, President and CEO Gale Klappa during a May 1 earnings call. “Our natural gas burn is expected to nearly double from 28.5 Bcf last year to 50 Bcf this year. In fact, our natural gas units at Port Washington operated at about a 60% capacity factor in the first quarter of this year. The Port Washington units are essentially now being dispatched in the MISO market as baseload units. So overall, I believe we’re well positioned to adjust as the markets for coal and natural gas continue to evolve and for calendar year 2012, we expect to fully recover our fuel costs.”
Natural gas prices are at extremely low levels, Klappa pointed out. At this point, spot prices are about $2.35/mmBtu and forward prices for the summer are in the $2.35 to $2.55/mmBtu range. This is clearly influencing locational marginal prices in the MISO market, he added.
“But over the years, the key to successfully serving customers at competitive prices has been fuel diversity, and fuel diversity was the major focus of our Power the Future plan,” Klappa said. “You may remember that the plan called for the retirement of nearly 600 MWs of older, less efficient coal-fired capacity. At the same time, the new capacity that we added was almost equally balanced between natural gas and coal. Of the approximately 2,200 MWs that we built in the past decade, 1,090 MWs was natural gas fired combined cycle capacity and 1,056 MWs was highly efficient pulverized coal capacity.”
Klappa added: “Another important point. About 80% of the coal that we use is Powder River Basin sub-bituminous coal. Although the new Oak Creek expansion units are currently fueled with bituminous coal, we’re seeking the flexibility to burn blends of bituminous and sub-bituminous coal there in the future.” Those two new coal units at Oak Creek are called the Elm Road plant.
On the construction front, Wisconsin Energy has two major projects underway, a 50-MW biomass plant in northern Wisconsin and the air quality control upgrade at the original Oak Creek coal units. “We’re making excellent progress on the biomass plant in northern Wisconsin,” Klappa noted. “We’ve already topped out the structural steel for the boiler and the steel structure for the turbine and fuel storage buildings are now 90% complete. Construction of the cooling tower is underway as well as excavation work for the auxiliary boiler. As I’ve noted before, the biomass plant will help us diversify our portfolio of renewable energy… Our investment in the biomass plant is expected to total between $245 million and $255 million excluding allowance for funds used during construction. We’re on schedule and on budget to meet the completion date by the end of 2013.”
The biomass project and the Glacier Hills Wind Park that the company completed late last year are key components that will help it meet Wisconsin’s renewable portfolio standard for the year 2015. The standard calls for an increase in the amount of electricity delivered from renewable sources from 5% in 2010 to 10% in 2015 at a statewide level.
Two Oak Creek projects done, two more nearly there
The company is in the last stages of completing the air quality control upgrade for the older coal-fired units at Oak Creek site, which is also the site of the two new Elm Road coal units. The four older units at Oak Creek are still among the most efficient baseload units in the Midwest.
“So the economic solution for our customers was to invest approximately $900 million, including allowance for funds used during construction for the installation of wet scrubbers and selective catalytic reduction facilities,” Klappa noted. “This is the second largest construction project in the company’s history and I’m pleased to report that the wet scrubber and the selective catalytic reduction equipment for Units 5 and 6 at Oak Creek were placed into commercial service on March 3. This state-of-the-art equipment is performing well. It’s performing as we expected and we’re meeting or exceeding all of the applicable emission standards. For Units 7 and 8 at Oak Creek, we’re now focused on initial tuning and testing of the new air quality controls. We’re targeting an in-service date for the Unit 7 and 8 controls later this summer and we remain on budget for the project.”
Answering an analyst question, Klappa talked a bit more about fuel costs and how to handle them. “What is baked into our guidance now for the remainder of the year is an assumption that we will fully recover our fuel costs,” he said. “There won’t be any reduction of earnings from a lack of recovery of fuel cost. And as we mentioned in the prepared remarks related to our coal deliveries and our coal costs, we had a variety of initiatives underway ranging from planned burns to turn back of coal to some buyouts. Allen, I know we have ongoing discussions with the coal companies.”
Allen Leverett, President and CEO of We Generation, picked up the answer from there and pointed to the plan to cut coal burn from about 10.7 million tons last year to just under 9 million this year. “We’ll certainly try to pick the mix of those things that are best from an economic standpoint for our customers,” he said about ways to cut the coal take. “My view right now is that we would be more heavily weighted to doing the defer buyout renegotiate route for existing contracts as opposed to the planned burn route or storage route. But we’ll just have to see kind of where the numbers take us. When we say planned burn though, what we mean by that is you basically would target a number of tons that you would want to burn and then given where we are right now, or at least where we’re forecasted to be with location and marginal prices, we would actually discount our offer in the market. So we would discount the offer that we would put in for that unit when we put it in to MISO into the day ahead market so that we’d get enough run time to burn through much coal. So you’d actually be discounting, if you will, your offer price in order to achieve a certain level of burn.”