With its natural gas-fired power plants running full out lately, and gas prices picking up, American Electric Power (NYSE: AEP) is seeing less coal-to-gas switching potential for the future.
Brian Tierney, AEP Chief Financial Officer and Executive Vice President, said during an Oct. 24 earnings call that the company’s coal capacity factors have decreased on a quarterly and year-to-date basis as its natural gas capacity factors have increased. “Overall, our generation from natural gas has increased approximately 50% year-to-date,” he noted.
For AEP’s combined-cycle units in the eastern U.S., the increase in capacity factors and generation is even more pronounced. With the addition of the Dresden generation facility in Ohio in February to the Waterford (Ohio) and Lawrenceburg (Indiana) plants, the East combined-cycle generation has increased 114% for the third quarter and 160% for the year-to-date period. Gas prices had plunged to less than $2/mmBtu earlier this year, picking back up into the mid $3 mmBtu range now.
“With year-to-date capacity factors for these plants approaching 70% and with the recent increases in the forward natural gas prices, the ability to realize incremental coal-to-gas switching within our Eastern fleet is minimal,” Tierney added. “Because of the hot weather, our coal units were in more in the third quarter than in the second quarter and our coal inventory went from 48 days at the end of the second quarter to 45 days at the end of the third quarter. Our target is 35 to 40 days. Our coal needs for 2012 are fully hedged and our needs for 2013 are about 92% hedged, with many units fully hedged.”
In the third quarter of 2011, AEP East coal capacity ran at a 67.3% capacity factor, falling to 55.8% in the third quarter of this year. The combined-cycle capacity in the East ran at a 37.6% capacity factor in the third quarter of last year, then at 62% in the third quarter of this year.
In answer to an analyst question, Nicholas Akins, the company’s CEO and President, said the capacity factors of the gas units are actually starting to drop. “The coal capacity is picking back up,” he added. “For us, you get in that gas price of $3 to $3.25 per MMBtu, you’re going to start that switch back to coal. I think for other utilities, it’s hard. But because our mines were located close to the plants and coal comes in by the river and we have pretty advantageous contracts, it certainly helps us keep that switchover price lower.”
Akins noted that while natural gas prices have gone up slightly lately, but when you look at next year, the forward strip is still pretty low. “And you’ll still see coal consumption,” he added. “But I think you’ll still see a conservative amount of gas consumption as well. And it also depends on whether the economy comes back the way it should to fill in the valleys.”