Detroit Edison defends the inclusion of coal in its energy mix

In their “relentless opposition” to coal-fired generation, the Michigan Environmental Council (MEC) and Natural Resources Defense Council (NRDC) have mistakenly claimed that coal prices are only projected to go up over the next five years, said Detroit Edison in a July 10 brief filed at the Michigan Public Service Commission.

Detroit Edison, a unit of DTE Energy (NYSE: DTE), has been engaged in a Power Supply Cost Recovery (PSCR) case at the commission since last September. In its July 10 brief, it was responding to various comments on that plan offered by commission staff, the Michigan Attorney General, the Michigan Community Action Agency Association (MCAAA), and the Michigan Environmental Council and Natural Resources Defense Council (collectively known as MEC/NRDC).

“MEC/NRDC asserts that Detroit Edison has failed to prove that its 5-year forecast is reasonable and prudent,” said the Detroit Edison brief. “However, MEC/NRDC effectively concedes that Detroit Edison’s 2012 PSCR costs are reasonable as it fails to contest any 2012 PSCR costs. The basis for MEC/NRDC’s disagreement with Detroit Edison’s 5-year forecast is its convenient contention that the cost of coal is projected to increase for the foreseeable future during the 5-year forecast while the price of natural gas is expected to ‘plummet’ during the same time period. For reasons more fully discussed below, including MEC/NRDC’s relentless opposition to coal-fired generation at any cost, and their East Coast consultant’s lack of experience with fossil fueled generation in MISO, neither contention regarding future projections for the cost of coal nor the price of natural gas is credible.”

A Detroit Edison witness explained in his direct testimony that the future total coal expense in the 2012 PSCR Plan was calculated using a combination of existing coal contract prices and projected future coal prices (for 2012-2014). In general, the projection used for the 2012 PSCR Plan shows total coal expense increasing slowly only from 2011 to 2014 after which the projected total coal expense drops to lower levels from 2014 to 2016. “Thus, MEC/NRDC’s assertions concerning the magnitude of coal expense and the relative economics of natural gas (which fails to acknowledge the capital costs of constructing new gas-fired generation) is overstated and without substantive merit,” Detroit Edison said.

The U.S. Energy Information Administration’s Annual Energy Outlook issued in April 2011 contained coal pricing and forecasts for 2008 through 2035 for a Reference Case and 57 other cases, all with different economic assumptions, the utility noted. The Reference Case had some mine mouth coal prices decreasing from 2014 to 2015 and 2016, and some prices increasing. A similar mix of increasing or decreasing prices can be seen by studying the data in the various cases as shown in the EIA’s 2011 AEO. “As shown by the varying projections made by one of the leading expert agencies in the energy market (EIA’s 2011 AEO), there is no consensus around coal mine mouth prices increasing in 2015 and 2016,” said Detroit Edison. “Therefore, MEC/NRDC’s projection of a price increase during the 5-year forecast period is just one of many possible future outcomes in coal prices, but it is really nothing more than opinion and conjecture to support such a projection.”

MEC/NRDC’s contention that natural gas prices will “plummet” during the 5-year forecast period is also meritless, Detroit Edison said. A utility witness has testified that there are a variety of considerations to evaluate when analyzing generation pricing, none of which will remain static, and a hasty decision based on one or two variables that some argue are “long term” would not be prudent and is essentially a “bet” on those components. To illustrate the uncertainty in the natural gas market, just a little over one year ago, an MEC/NRDC witness testified, “The natural gas prices are expected to resume to $5 to $6 per MMBTU price range by 2012,” Detroit Edison pointed out.

Detroit Edison says there is less risk in broad fuel mix

Coal, including coal from different coal-producing areas, is part of a broad mix of fuels needed for generation, said the utility. Detroit Edison uses coal, natural gas (which has been a relatively higher-cost peaking fuel for decades), No. 2 oil, No. 6 oil, used oil, coke oven gas, and nuclear as well as renewable energy sources like solar and wind.

Present gas prices are now one-third to one-half of the amount projected by the MEC/NRDC witness, thereby underscoring his “poor record” of predicting future natural gas prices, the utility said. “The fact of the matter is that Detroit Edison’s coal plants respond to wholesale power market conditions within their operational capabilities,” the utility wrote. “To the extent that gas prices and/or other factors drive wholesale power market prices down, Detroit Edison’s coal plants economically reduce operation based on these market drivers. Detroit Edison is diversifying its generation portfolio further toward renewables as a result of Act 295 and participation in the MISO market is providing access, to some degree, to the presently lower natural gas prices. Detroit Edison is operating and forecasting reasonably and prudently based on existing native generation sources, laws and market circumstances, especially in light of the fact that MISO currently has substantial excess capacity.”

Coal is purchased typically on a multi-year rolling basis, whereby the current year has most of the forecasted coal needs purchased through long-term contracts by the beginning of the year, and future years have a declining amount of coal purchased, the utility pointed out. Each year, some of the contracts expire and new contracts are executed for future years. In addition, shorter term contracts are used in the current year to complete the coal purchase requirements, providing the flexibility to respond to changing unit generation and varying coal blends. “This flexibility has been very beneficial to Detroit Edison customers this year as the Company has taken advantage of procuring and utilizing a less expensive higher sulfur eastern coal in place of a mid-sulfur eastern coal, which also allowed Detroit Edison to increase the proportion of even lower cost low sulfur western coal at some units,” the company added.

As for gas, Detroit Edison’s Greenwood plant recently burned spot market gas at a price of approximately $2.50 per MMBtu. Some amount of inventory is maintained, but if the market conditions warranted a large use of the company’s gas- and oil-burning capability for generation, there would need to be purchases in the current year to replace that inventory, the utility wrote. Coke oven gas is also available when provided by EES Coke Battery LLC to the River Rouge power plant and is priced at a discount to that month’s coal expense at River Rouge.

Detroit Edison says coal plant retirements a constantly moving picture

MEC/NRDC’s assertion that “Detroit Edison’s inertial approach stands in stark contrast as to how other utilities are responding to changes in the electricity market” is simply not credible, said the utility. In fact, MEC/NRDC fails to point out the uncertainty behind the other utilities’ announced coal retirements, said the utility.

For example, over 5,500 MW of the other utilities’ announced coal-fired unit retirements, which were caused in large part by new U.S. Environmental Protection Agency air rules, were retracted as of March, including the W. C. Beckjord plant that MEC/NRDC cites as an announced retirement, the utility noted. “Utilities continue to evaluate the potential need to retire coal-fired generating units due in large part to the uncertainty around the EPA rules,” said Detroit Edison.

The utility said it has put forth a reasonable 5-year PSCR plan in light of substantial uncertainty in the electric marketplace. Due to the great amount of uncertainty around important variables such as EPA rules, wholesale market rules, fuel prices and renewable energy mandates (for example, MEC supports expanding Michigan renewable energy mandates from 10% by 2015 to 25% by 2025), long-term generating unit plans are also uncertain. When the company files its 2013 PSCR Plan, Detroit Edison said it may very well have different projections based on many of the changing circumstances that MEC/NRDC points out.

REF coal program gets another utility defense

The AG, MEC/NRDC, and MCAAA assert that the commission should either disallow or modify inclusion of Detroit Edison’s reduced emission fuel (REF) costs in the PSCR Plan. However, commission staff supports Detroit Edison’s inclusion of the REF costs as presented in the company’s 2012 PSCR Plan. The intervenors’ collective objections are without merit, the utility said. “Therefore, Detroit Edison’s REF costs are not only properly included in the Company’s PSCR Plan, but also reasonable and prudent and the [administrative law judge] should recommend, and the Commission should approve the Company’s inclusion of the REF costs as presented in its 2012 PSCR Plan.”

REF is coal that has been treated with chemical additives to reduce emissions of certain pollutants, including mercury, when it is burned. Detroit Edison turns over stockpile coal to non-regulated sister companies for this treatment, then buys it back, which has raised questions about whether Detroit Edison ratepayers are paying a fair price for this service. REF is being consumed at St. Clair Units 1-4 and 6, with a targeted annual REF consumption of about 1.8 million tons. REF is continuing to be tested at the Belle River plant. The company’s PSCR forecast assumes both units at Belle River begin consuming REF fulltime in 2015. REF has been successfully tested at the giant Monroe plant. Based on these tests, Monroe has been consuming REF at all four units since November 2011.

The REF business arrangements at the St. Clair and Belle River power plants allow Detroit Edison customers to receive cost reductions through their base rates without increasing costs to PSCR customers since the REF adder at St. Clair and Belle River will never exceed the environmental benefit realized by the customer, Detroit Edison said. The REF business arrangement at Monroe allows Detroit Edison customers to receive cost reductions through their base rates while PSCR customers realize lower cost through the Coal Fee Rate paid by the Monroe Fuels Co. and the value of reduced NOx, SO2 and mercury emissions. In all instances, Detroit Edison’s customers benefit without assuming any technology, tax or capital risk, the utility said. The tax risk aspect is related to the fact that REF coal can qualify for federal tax credits.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.