IPL plans tentative $606m emissions spend at ‘Big Five’ units

The total capital cost of a new series of air emissions projects at the “Big Five” coal units of Indianapolis Power & Light is estimated right now at about $606m, which includes $496m at the four Petersburg units and $110m at Harding Street Unit 7.

That’s according to detailed testimony that IPL, a unit of AES Corp. (NYSE: AES), filed Sept. 26 at the Indiana Utility Regulatory Commission. IPL had outlined these new emissions projects in bare detail in initial, Aug. 31 testimony to open this case.

The summer-rated capacity of the Petersburg units is 1,752 MW and it is 427 MW for Harding Street Unit 7. The Mercury and Air Toxics Standards (MATS) compliance cost equates to $283/kW of installed costs at Petersburg and $258/kW at Harding Street Unit 7.

Among those filing testimony was IPL Senior Vice President, Power Supply Kevin Crawford. He said these new emissions controls are needed to comply with various environmental regulations, including the U.S. Environmental Protection Agency’s MATS rule governing mercury, non-mercury metal hazardous air pollutants (HAPs) and acid gas HAPs. To comply, IPL wants to:

  • install and operate a Pulse Air Fabric Filter System (baghouse) on Units 2 and 3 at Petersburg;
  • upgrade the electrostatic precipitators on Unit 7 at Harding Street and Petersburg Units 1, 3 and 4;
  • and install other environmental controls and monitoring equipment including activated carbon injection (ACI), sorbent injection (SI), flue gas desulfurization (FGD) system upgrades and continuous emission monitoring (CEMS) equipment.

IPL refers this as the “Compliance Project.” IPL will enter into an engineering, procurement and construction (EPC) contract with a third-party, Crawford noted. IPL will manage the EPC contractor, under a firm price contract basis, using established engineering, procurement and construction management (EPCM) processes. That EPCM process will include a construction executive council and a project management team headed by a steering committee.

In this case, consultant Sargent & Lundy (S&L) prepared a cost estimate to accompany its compliance analysis and recommendation. Burns & McDonnell has prepared the second independent project cost estimate. A third independent engineering firm, US Nels Inc., was also contracted to develop an initial cost estimate for the Petersburg 2 baghouse. Each of these initial cost estimates were necessarily limited to pre-defined work scopes. The US Nels work was undertaken prior to the adoption of the final MATS rule.

IPL’s analysis of the estimated cost of the compliance project to date includes all identified costs as well as projected costs for engineering items still under review, Crawford added. At this time, IPL expects the cost to total about $606.1m. This estimate does not include any demolition costs, which are estimated by S&L at $7.8m. Also, this estimate does not include Allowance For Funds Used During Construction (AFUDC). This “order of magnitude” estimate reflects the costs analysis already undertaken and includes a contingency of about $27m to reflect an estimate of potential costs that will likely arise as work proceeds.

IPL, together with Black & Veatch, has reviewed responses to IPL’s EPC request for proposals (RFP) and has requested three entities to provide firm bids for the Compliance Project. Once the firm bids have been assessed and engineering items currently under review further analyzed, IPL will provide supplemental testimony, Crawford wrote.

Big Five units run hard and compete well with gas-fired power

Another IPL official supplying Sept. 26 testimony was James Ayers, IPL’s Director of Corporate Planning and Analysis. He said IPL has four generating stations, three of which encompass eleven coal-fired units that fall under the Utility MATS regulations. This includes five larger scrubbed units (the Big Five) – Petersburg Units 1-4 and Harding Street Unit 7 (HS Unit 7). There are also six smaller unscrubbed units (the “Small Six”) – two at Harding Street and four at Eagle Valley. All of IPL’s coal-fired units must comply with the MATS rule, be converted to natural gas, or retired.

The Small Six are the oldest, smallest, least efficient, and highest cost units in IPL’s fleet. The Big Five on the other hand are IPL’s largest, youngest, and most efficient units. Together, they comprise 2,179 MW of baseload generation. They have all been fully scrubbed for SO2, three have selective catalytic reduction (SCR) technology to control NOx and have been identified as the long term baseload core of IPL’s generating fleet. In addition, these controls also assist in the removal of MATS-regulated emissions – including acid gases (HCl), mercury (Hg) and particular matter (PM).

The four Petersburg units and Harding Street Unit 7 all average well over 70% capacity factors and are expected to remain high utilization generating assets. Recently, with natural gas prices forecast to remain low relative to historic levels and other forms of fossil generation, comparisons to efficient gas-fired generation (combined-cycle gas turbine or CCGT) can also make sense, Ayers wrote.

Efficient gas-fired generation is not strictly baseload, especially in the Midwest Independent System Operator (MISO) region where their projected dispatch costs are greater than IPL’s Big Five units. However, while a direct comparison to a CCGT is not perfect, it does provide a good benchmark or threshold to see if a more detailed evaluation is necessary. In addition, a CCGT was identified in IPL’s 2011 integrated resource plan (IRP) as the eventual replacement generation for IPL’s small coal-fired units. Using cost estimates from the CERA 2012 Report, the installed cost of new gas-fired CCGT is estimated at $1,330/kW in 2012 dollars. Adjustments would be needed for the CCGT’s higher fuel/dispatch costs, versus the Big Five’s higher O&M and future environmental retrofit costs.

IPL did the Big Five evaluation in two ways. First, it performed a base case present value of revenue requirements (PVRR) analysis to see if controlling for MATS would make economic sense under expected base case forecast conditions, and then secondly, a stress test scenario analysis to validate the results and provide input into the investment decision. Both of these analyses were performed on a comparative breakeven cost basis, whereby the breakeven MATS plus other future environmental capital costs were derived based on comparative baseload generation, and then compared to the projected compliance projects costs.

For the evaluation, IPL identified the lower capital cost CCGT as replacement generation for MATS control project comparative purposes. The initial base case analysis was performed on a $/kW comparison basis. The goal was to assess IPL’s MATS compliance project using a breakeven decision-based comparison and not to precisely define the PVRR for any plan.

This analysis was performed by working backwards from a CCGT cost point to derive an equivalent breakeven MATS plus other future environmental capital investment cost threshold such that controlling for MATS or building a CCGT would be economically (PVRR) equivalent. And then compare the future projected life cycle environmental costs, including MATS compliance, to the breakeven CCGT-based threshold from a decision analysis perspective. The base case analysis was done using a 25-year PVRR model commencing in 2015, comparing Petersburg station life cycle to a CCGT and reflecting IPL’s most recent internal, CERA (CERA 2012 Report) and Ventyx (Ventyx 2012 Spring Reference Case) base case modeling assumptions, Ayers wrote.

Coal’s dispatch advantage over natural gas has been historically large. From the 2012 CERA Report, the advantage, pre-recession, pre-shale gas from 2006-2008 versus a CCGT was over $30/MWH. Even efficient CCGT generation historically could not effectively compete in this region. But with the improved economics of fracking technology used to access shale gas, and the resulting additional supply of gas in the market, future margin spreads at this level would not be expected for some time.

“Clearly efficient gas-fired generation, at its lower capital and O&M costs now represents an attractive resource versus other new generation sources, including coal,” Ayers explained. “But long term, gas-fired generation still is not forecast to overcome existing coal’s (including IPL’s Big Five) superior dispatch advantage in the Midwest. Using a production cost differential based on CERA’s 2012 Report, comparing spark and dark spreads, IPL’s coal-fired units with comparable heat rates and access to low cost Indiana coal reserves, would expect to realize a reduced, but still sizeable $11.25/MWH average market dispatch premium over efficient gas-fired generation in Indiana by 2014 and through the end of the CERA forecast period (2016). While this is far less than the $30/MWH energy margins cited above, it still represents a significant margin and asset value advantage for scrubbed baseload coal generation.” In addition, this margin advantage is forecast to widen, Ayers said.

The CERA dispatch spreads were based on a gas price forecast of $4.83 to $5.00/mmBtu for Indiana delivery for 2015-2016. By comparison, for this same period Ventyx identified a slightly lower $4.47 to $4.73/mmBtu and AEO2012 a slightly higher $4.96 to $5.04/mmBtu (adjusted from real 2010$ and Indiana delivery basis difference) natural gas forecast. Overall, this represents a fairly tight consensus and is also consistent with NYMEX Natural Gas Forwards, Ayers noted.

Ventyx also provided a longer term gas forecast and identified a real price escalation of about 2.25% for natural gas from 2015 through 2036, compared to 0.80% real growth for IPL’s Illinois Basin coal supply over the same period. Thus, the fuel cost dispatch advantage of coal versus gas is expected to re-widen going forward at about 1.45% annually in real terms and 3.95% nominally. Correspondingly, IPL’s Big Five dispatch advantage is expected to grow as well from the $11.25/MWH (2014-2016) forecast spread.

IPL could spend $2bn on Petersburg and still break even

The base case Petersburg total environmental breakeven capital cost on a full present value of revenue requirements basis using base case assumptions is $1,160/kW, or about $2bn, Ayers wrote. This base case result indicates that IPL could economically spend as much as $2bn at Petersburg station versus replacing the plant with efficient gas-fired generation, he added.

The cost of the Compliance Project for Petersburg is currently at about $496m. With the added MATS controls, the Petersburg Station will be in compliance for both MATS (PM, Hg, HCl) and the CSAPR (NOx, SO2). The MATS compliance cost equates to $283/kW of installed costs, based on 1,752 MW of summer-rated capacity at Petersburg. The MATS compliance cost by itself is about 20% of the replacement installed cost of new gas-fired generation. Additional environmental requirements, in total, that may potentially impact the plant’s life cycle costs are not projected to be as large as the MATS-related costs, and are also, with the exception of the water discharge permit needs, projected to be incurred later than the MATS costs. IPL’s preliminary internal estimate of such compliance costs total $391m for Petersburg. Adding this future cost, the total forecast life cycle capital costs would be about $887m, or $506/kW.

“While certainly not insignificant, the total future life cycle environmental costs including MATS and all future Other Environmental costs, is significantly less (over 50% less) than the $1,160/kW breakeven capital cost compared with new replacement gas-fired generation,” Ayers noted.

Harding Street Unit 7 also better than CCGT by wide margin

Harding Street Unit 7 is 39 years old with a remaining useful life targeted at over 20 years. It is fully scrubbed for SO2, has an SCR for NOx control and sorbent injection for SO3 and future Hg control. S&L found that HS Unit 7 would not require a baghouse for MATS compliance. The Compliance Project plan for HS Unit 7 is limited to an electrostatic precipitator (ESP) upgrade and ACI technology at a cost of about $110m.

With the added controls, HS Unit 7 will be in compliance for both MATS (PM, Hg, HCl), the Clean Air Interstate Rule (CAIR) and expected CSAPR (NOx, SO2). The summer-rated capacity of HS Unit 7 is 427 MW. These costs translate into $258/kW installed MATS compliance costs or about 20% of replacement new intermediate/base gas-fired generation.

Additional future environmental requirements potentially impacting HS Unit 7’s life cycle costs are relatively small, at about $42m, resulting in $152m or $356/kW total life cycle environmental costs, and about 25% of replacement CCGT costs. Based on the earlier Petersburg plant breakeven results and this lower relative cost comparison, the MATS control plan at HS Unit 7 is clearly economic and no further evaluation was performed, Ayers wrote.

Cheap local coal offsets higher post-project dispatch costs

The dispatch costs of the Big Five units will increase due to these new controls. “However, with the identified MATS control plan, the Big Five Units will continue to burn lower cost high sulfur (and unconstrained Hg) coal in close proximity to the plant keeping dispatch costs lower,” Ayers added. “Thus dispatch costs will not be increased for any coal sourcing restrictions.”

“However, other MATS control operating costs will increase dispatch costs,” Ayers said. “For Petersburg Units 2 and 3, that will be equipped with baghouses, the dispatch cost is expected to be lower than the Petersburg generating units not receiving baghouses. HS Unit 7, which already employs sorbent injection technology for SO3 control will also be impacted less by the MATS requirements. While the dispatch costs of the Big Five Units will increase, especially for the two non-baghoused Petersburg units, they should remain very competitive in the region. Because the MATS Rule impacts all utility coal-fired generation, dispatch costs will likely be increasing for a large number of coal-fired units in the region. In the MISO region, dominated by coal-fired generation, power prices would likely increase as well. Regionally then, it is expected that IPL’s Big Five will continue to dispatch as baseload generation, similar to their historic dispatch levels.”

Eagle Valley may be shut by MATS compliance deadline

The Small Six is comprised of four coal-fired units at Eagle Valley and two coal-fired units at Harding Street. These units range from 43 MW to 106 MW of summer-rated capacity. They range in age from 51 years to 63 years and are at or approaching the end of their respective planned operating lives. These units have no SO2 controls, limited NOx controls, and burn costly low-sulfur coal. In addition, lower gas prices have already made dispatch of these units in the MISO market less competitive, Ayers said.

S&L determined that IPL’s smaller unscrubbed coal-fired units would require additional controls to comply with Hg, PM, and HCl MATS rule standards. The shorter remaining life and reduced dispatch value do not support additional investment to maintain these assets as coal-fired units. These units are being evaluated separately and more broadly looking at all options on a remaining life cycle basis. The disposition of the small six units does not impact or alter the compliance plan for the Big Five.

“While no final decision has been made on these units, current analysis indicates that it is likely that the Eagle Valley plant will be fully retired ahead of MATS rule implementation,” Ayers said. “Harding Street Units 5 and 6 may be retired or repowered as gas-fired peakers. IPL will seek any necessary approvals from the Commission before proceeding with a compliance or repowering plan for any of the Small Six.” The MATS compliance deadline is April 2015.

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.