The Beckjord and Hutchings power plants are among the coal units targeted for shutdown by various affiliates of AES Corp. (NYSE: AES), largely due to new U.S. Environmental Protection Agency air rules.
In July 2011, Duke Energy (NYSE: DUK), co-owner with the Dayton Power and Light unit of AES at the Beckjord Unit 6 facility, a 414 MW power plant, filed a Long-term Forecast Report with the Public Utilities Commission of Ohio (PUCO). The report indicated that Duke Energy plans to cease production at Beckjord, including the jointly-owned Unit 6, in December 2014, said AES in its Nov. 7 Form 10-Q financial report.
“This was followed by a notification by Duke Energy to PJM, dated February 1, 2012, of a planned April 1, 2015 deactivation of this unit,” said the Form 10-Q about Beckjord. “With respect to DP&L’s Hutchings Station, a six unit coal-fired power plant with 365 MW of total capacity, DP&L has notified PJM that it intends to deactivate Hutchings Station’s Units 1 and 2 by 2015 and that Unit 4, currently out of service due to equipment failure, would not be available for service any time earlier than 2014. The decision to deactivate Units 1 and 2 has been made because these two units are not equipped with the advanced environmental control technologies needed to comply with the [Maximum Achievable Control Technology (MACT)] standards and the cost of compliance with the MACT standards or conversion to natural gas for these units would likely exceed the expected return. DP&L is still studying the option of converting two or more of Hutchings Station’s Units 3-6 to natural gas in order to comply with environmental requirements.”
The combination of existing and expected environmental regulations, including the Utility MACT, also make it likely that the Indianapolis Power & Light unit of AES will temporarily or permanently retire several of its existing, primarily coal-fired, smaller and older generating units within the next several years, the Form 10-Q added. “These units are not equipped with the advanced environmental control technologies needed to comply with existing and expected regulations, and collectively make up less than 15% of IPL’s net electricity generation over the past five years,” AES said. “IPL is continuing to evaluate options for replacing this generation.”
During the third quarter, IPL filed a petition and a request for a Certificate of Public Convenience and Necessity (CPCN) in the amount of $606m of capital spend on clean coal technology to comply with the Utility MACT. These filings detail the controls IPL plans to add to each of its “Big Five” baseload units, which are all four units at Petersburg and Harding Street Unit 7. IPL is seeking and expects to recover through its environmental rate adjustment mechanism all operating and capital expenditures related to compliance. However, there can be no assurance that IPL will be successful in that regard, the Form 10-Q noted. Recovery of these costs is expected through an Indiana statute, which allows for 100% recovery of qualifying costs through a rate adjustment mechanism.
The Indiana CPCN application covers plans 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, sorbent injection, flue gas desulfurization system upgrades and continuous emission monitoring equipment.
AES says ongoing court cases involving air rules make for uncertainty
Several lawsuits challenging the Utility MACT rule have been filed and consolidated into a single proceeding before the U.S. Court of Appeals for the D.C. Circuit. On June 28, the D.C. Circuit issued an order granting a motion to sever and expedite challenges to emissions standards for new units under the Utility MACT, with oral argument to be scheduled after Sept. 27. On July 20, the EPA announced its decision to stay the standards under the Utility MACT rule with respect to new sources for approximately three months, so it can reconsider those standards. “We cannot predict the outcome of this litigation,” the Form 10-Q said. “The aggregate capital costs, other expenditures or operational restrictions necessary to comply with the rule cannot be specified at this time. The Company anticipates that the rule may have a material impact on the Company’s business, financial condition and results of operations.”
AES also noted that a three-judge panel of the D.C. Circuit in August threw out EPA’s Cross-State Air Pollution Rule (CSAPR). Starting in 2012, the CSAPR would have required significant reductions in SO2 and NOx emissions from covered sources, such as power plants, in many states in which subsidiaries of the company operate. Once fully implemented in 2014, the rule would require additional SO2 emission reductions of 73% and additional NOx reductions of 54% from 2005 levels, the Form 10-Q said. When the appeals court vacated the CSAPR, it left the older Clean Air Interstate Rule (CAIR) in its place.
“The Company’s subsidiaries will continue to meet their CAIR requirements by virtue of existing pollution control equipment combined with the purchase of emission allowances, when needed,” the Form 10-Q said. “On October 5, 2012, EPA, several states and cities, as well as environmental and health organizations, filed petitions with the D.C. Circuit Court requesting a rehearing of the case by all of the judges of the D.C. Circuit. As of November 2, 2012, the D.C. Circuit Court has not yet ruled on the petitions for rehearing.”
AES outlines issues with coal-fired capacity in the U.S.
In other developments related to AES capacity in the U.S.:
- On June 29, the Public Service Commission of New York approved the sale of Somerset and Cayuga, two coal-fired plants in New York, to the bondholders for about $240m. The plants were owned by AES Eastern Energy LP, which had filed for bankruptcy protection under Chapter 11 in the U.S. Bankruptcy Court in December 2011 and, effective that date, had been deconsolidated from the parent company’s consolidated financial statements due to the loss of control.
- “[T]he Company’s North American businesses continue to face pressure as a result of low natural gas prices, the marginal price setting fuel in most North America markets,” said the Form 10-Q. “This has affected the results of certain of our coal-fired plants in the region, including our coal-fired generating assets within our utility businesses, like IPL, which benefit from high wholesale power prices in periods where our available generation exceeds our captive load obligations. At DPL, where retail competition exists, our coal-fired generating assets do not benefit from the captive load offset and, as such, are subject to greater sensitivity to changes in power prices. Businesses that have a [Power Purchase Agreement (PPA)] in place, but purchase fuel at market prices or under short term contracts may not be fully hedged against changes in either power or fuel prices.”
- In 2011, AES Deepwater was idled to mitigate operating risks caused by high fuel costs and other competitive pressures. Although the Deepwater unit was restarted during the second quarter of 2012 to capture potential summer price volatility, it shut down again early in the fourth quarter of 2012. “We currently plan to operate the unit again to capture the 2013 potential summer price volatility, although the long-term economic viability of the business is uncertain,” said the Form 10-Q. AES Deepwater is a 155-MW, petroleum coke-fired cogeneration plant located in Pasadena, Texas, on the Houston Ship Channel.
- “Our coal-fired business in Hawaii faces uncertainty beyond 2013 when the fuel price supporting the PPA is no longer fixed,” the Form 10-Q warned. AES Hawaii owns a 180-MW, topping-cycle cogeneration QF on the island of Oahu, which consists of two circulating-fluidized-bed boilers and one steam turbine. It supplies electricity to Hawaiian Electric under a long-term PPA and provides steam to an unaffiliated oil refinery.