Indiana Michigan projects higher coal costs in the October 2012-March 2013 period

The Rockport power plant’s scheduled tonnages of coal during the forecast period from October 2012 through March 2013 will be supplied primarily by two agreements with the Peabody COALSALES LLC unit of Peabody Energy (NYSE: BTU) that have been in place for several years.

The overall forecasted weighted average delivered cost of coal for Rockport from all sources during the period of October 2012 through March 2013 is projected to be $40.93/ton or 228.28 cents/MMBtu, said Charles West, Manager, Fuel Procurement, in the Fuel, Emissions and Logistics Department for American Electric Power Service Corp. (AEPSC), a subsidiary of American Electric Power (NYSE: AEP). July 26 testimony from West was filed with the Indiana Utility Regulatory Commission in I&M’s latest fuel cost adjustment case.

Tanners Creek 1-3’s scheduled supply of coal during the forecast period from October 2012 through March 2013 will be supplied primarily by the long-term coal contract with Argus LLC. Deliveries under the Argus agreement began in 2008. The overall forecasted weighted average delivered cost of coal for TC 1-3 from all sources during the period of October 2012 through March 2013 is projected to be $62.21/ton or 259.20 cents/mmBtu.

TC 4’s deliveries during the forecast period from October 2012 through March 2013 will be supplied primarily by the Peabody COALSALES long-term coal contract that began in 1989. The overall forecasted weighted average delivered cost of coal for TC 4 from all sources during the period October 2012 through March 2013 is projected to be $50.84 or 266.52 cents/mmBtu.

Additional coal requirements for both plants that are not already committed will be purchased, as necessary, to fulfill any remaining supply requirements.

West’s testimony provides a comparison of the forecasted December 2011 through May 2012 delivered coal costs to actual deliveries, comment on current coal market conditions, addresses I&M’s coal delivery forecast for the period covering October 2012 through March 2013 and summarizes I&M’s long-term supply agreements.

Rockport, located in Spencer County, Ind., consists of two 1,300-MW coal units. SO2 emissions at Rockport are limited by the New Source Performance Standard to 1.2 lbs SO2/MMBtu. The coal supply for Rockport currently uses a blend of Powder River Basin (PRB) coal from Wyoming and low-sulfur bituminous coal from Colorado and eastern sources.

Tanners Creek is located in Dearborn County Ind., and consists of four coal units with a total nominal capacity of 995 MW. As a result of the different air emissions standards, as well as differences in boiler designs, the coal for TC 1-3 and TC 4 varies. Units 1-3 are limited to emissions of 1.2 lbs SO2/MMBtu while Unit 4 is held to a 1.2% sulfur standard on an annual basis. The fuel requirements of TC 1-3 will be met by bituminous coals from Colorado and eastern sources. TC 4, similar to Rockport, uses a blend of PRB coal from Wyoming and high-sulfur bituminous coal from eastern sources.

Coal costs in the December 2011-May 2012 period higher than projected

For the reconciliation period of December 2011 to May 2012, I&M’s delivered cost of coal was $38.29/ton or 202.42 cents/MMBtu. This represents a change of 2.40% and 0.57% compared to the forecast, respectively.

  • During the reconciliation period, the overall weighted average delivered cost of coal for the Rockport plant from all sources was forecasted to be $34.88/ton or 196.19 cents/MMBtu. The actual delivered cost was $36.03/ton or 195.79 cents/MMBtu.
  • For TC 1-3 the overall weighted average delivered cost of coal from all sources was forecasted to be $62.45/ton or 260.10 cents/MMBtu. TC 1-3’s actual delivered cost was $67.07/ton or 283.27 cents/MMBtu.
  • For TC 4 the overall weighted average delivered cost of coal from all sources was forecasted to be $43.94/ton or 226.54 cents/MMBtu. TC 4’s actual delivered cost was $43.27/ton or 219.87 cents/MMBtu.

TC 1-3 coal consumption early in 2011 was higher than forecasted, West noted. This resulted in an inventory level below the established target level. Additional coal deliveries were scheduled in early 2012 to allow the plant to build inventory to the target level. I&M did not deliver coal to TC 4 in April and May 2012 because of a planned outage of the plant and unloader. During the reconciliation period, the planned plant outage time was greater than had been forecasted.

Mild winter, cheap gas and EPA regulation throw coal into turmoil

As for the overall coal market, West reported: “The unstable economy continues to provide challenges for predicting coal consumption and has had a significant impact on coal procurement. However, weather, natural gas prices, and environmental impositions have had the largest impact on the cost of coal for I&M during the review period. A very mild winter at the end of 2011 and early in 2012 resulted in a decline in total electricity generation across the United States. This reduction in demand, along with the notable decrease in natural gas prices, led to a significant decrease in coal consumption across the U.S. In fact, coal consumption in the first quarter 2012 was the lowest since the second quarter 1988 (EIA Quarterly Coal Report: January-March 2012).”

In addition, the U.S. Environmental Protection Agency in July 2011 released the Cross-State Air Pollution Rule (CSAPR). Under the rule, reductions in emissions were to begin as early as Jan. 1, 2012. Then, in December 2011, a federal appeals court issued a stay of the CSAPR, which, at a minimum, delayed implementation of the rules. The court has not yet rendered its decision. While coal suppliers have started to cut production to meet the reduced levels of demand, all of the factors above have contributed to lower coal prices, particularly in the PRB, West added.

AEPSC has been in the negotiation process with western railroad suppliers for rail services from the Wyoming PRB to the Cook Coal Terminal in Metropolis, Ill. This coal is used at both Rockport and Tanners Creek. The current contract with the Union Pacific is to expire at the end of 2012 with new rates effective January 2013. “While AEPSC is working diligently to secure the lowest rate possible for continued reliable service, the current rates are significantly below market pricing and the overall delivered cost of coal for I&M will increase,” West wrote. “An estimate of this increase in transportation costs is reflected in the forecast beginning with January 2013.”

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.