The dramatic change in natural gas prices since the beginning of 2012 has materially reduced the amount of coal being consumed by Progress Energy Carolinas (PEC) and Duke Energy Carolinas (DEC), thus impacting a commitment by the two companies to reduce their fuel costs by a total of $650m in the five years following their merger.
“Current forecasts of natural gas prices do not indicate any material change in the relative prices of coal and natural gas in the near term,” wrote Alexander (Sasha) Weintraub, Vice President-Fuels and Power Optimization for PEC. “Therefore, over the next several years, PEC’s and DEC’s coal consumption is expected to remain at the current relatively low levels. This reduced use of coal materially impacts DEC’s forecasted ability to achieve the $183.9 million in coal blending savings during the first five years after the merger.”
Testimony from Weintraub was filed June 4 at the South Carolina Public Service Commission as part of a review begun last year of the merger plan. A merger review is also ongoing at the North Carolina Utilities Commission. PEC is a unit of Progress Energy (NYSE: PGN), while DEC is part of Duke Energy (NYSE: DUK).
As a result of this coal versus natural gas change, the utilities have agreed that if they can demonstrate that they are unable to achieve the $650m of system fuel savings during the first five years following the close of the merger because the change in natural gas prices has significantly reduced their consumption of coal at the three generating plants designated for coal blending and therefore impaired their ability to achieve the coal blending savings, the time period allowed for PEC and DEC to achieve the $650m in savings will be extended 18 months.
“PEC and DEC are still committed to using their best efforts to provide their South Carolina retail customers their pro rata share of $650 million in system fuel savings during the first five years following the closing of the merger: however, given certain changes that have occurred in the fuels market since the hearing, I must provide the Commission additional information regarding the commitment,” Weintraub wrote. “When DEC and PEC made the savings commitment to the Commission during the hearing in December we did not discuss in detail the assumptions underlying the forecasted savings upon which the commitment was based. One of the key assumptions supporting the savings forecast was that the relative prices of natural gas and coal would not materially change. This was a key assumption because $184 million of the $650 million of savings was based upon DEC burning more non-traditional coal at its Marshall, Belews Creek and Allen coal plants as a part of a coal blending initiative.”
The coal blending initiative would basically involve the blending of other coals, like those out of the Illinois Basin and Northern Appalachia, with the Central Appalachia coals those plants were designed to burn.
At the time of the December 2011 hearing, no one foresaw the dramatic decrease in natural gas prices that has occurred in 2012 or that natural gas prices would be forecasted to remain at very low levels for the next several years, Weintraub added. This reduction in natural gas prices has resulted in natural gas fired generation being less expensive than coal fired generation. If this situation persists, then following the merger DEC will not be burning enough coal at its Marshall, Belews Creek, and Allen plants to achieve the forecasted savings of $184m.
“This is not a bad turn of events because DEC’s and PEC’s South Carolina customers are benefitting and will benefit from these low natural gas prices,” Weintraub added. “The problem, if there is one, is the changes in the fuel markets are reducing the savings DEC can achieve from coal blending. Either way DEC’s and PEC’s customers realize significant savings, they will just be achieved in a manner not originally contemplated. Thus, consistent with the North Carolina Supplemental Agreement, DEC and PEC need an additional eighteen months to achieve the $650 million in system savings if DEC is unable to burn as much coal as was originally forecasted.”
Also, on June 12, the companies filed with the South Carolina commission a revised Joint Dispatch Agreement that covers how the post-merger dispatch of the power plants of the companies will be handled.