Consumers Energy reports no luck getting coal contract flexibility

Consumers Energy has tried to work more flexibility on coal volumes into its coal contracts due to the increasingly cyclical use of its coal units due to new environmental regulations, but with little luck so far.

Posted to the Michigan Public Service Commission website on Nov. 2 was the transcript of an Oct. 18 hearing where several Consumers Energy officials testified as part of a power supply cost recovery proceeding, which began in September 2011 and is reaching its final stage. In each instance in the filing, several previous briefs from each witness was followed by the actual transcripts from that witness at the hearing.

Brian Gallaway, Director of Fossil Fuel Supply in the Energy Supply Operations Department at Consumers, was asked about his prior testimony about largely failed efforts to increase coal contract language flexibility.

“Well, obviously I can’t tell you verbatim what the language is,” Gallaway said. “But we have attempted to put language in the contracts which do allow us some flexibility in our coal supply arrangements if, due to certain regulations that come in, that maybe force us to change the dispatch of a coal unit or shut down a coal unit or whatever. But to date we haven’t been successful in doing that.”

He added: “The Company…as far as environmental regulations has been attempting to talk more to suppliers about the ability to put in that type of language. Because our coal supplies have gone down, demand has gone down, we have not entered into as many coal contracts. For that reason we haven’t been able to get the language in.” He noted there is one coal agreement with some flexible language. “But the one agreement is with, I’ll say, a nontypical provider, because they, in addition to the coal supply itself, they also provide delivery of the coal. So it’s not the same as the other arrangements.”

In 2011, Consumers Energy terminated four of five agreements for eastern U.S. bituminous coal. It has been trying due to cheap power prices and competition from cheap gas-fired generation in the Midwest ISO region to maximize use of low-sulfur, cheaper Powder River Basin coal. But that low-Btu coal, when used at a 100% level in the coal units, which can be done on a technical basis, also causes a unit derate because not enough of this coal be shoved in fast enough to keep up the unit’s full generating capacity. Thus the utility’s general desire to use eastern bituminous coal at some level as a blender to keep up the Btu content of the PRB coal being fired.

Asked why Consumers didn’t terminate the fifth eastern agreement, Gallaway said: “Our projections still show that we need eastern coal. There are still times that we’ll be burning eastern coal. The amount of coal that we have under that contract pretty much matched what we were projecting our demand to be for eastern coal.”

Consumers can use ‘overfire’ fuels to help some coal units

Richard Blumenstock, Director of Electric Sourcing & Transactions at Consumers, described in detail how the Consumers coal units have at times lately sat idle due to competition from cheap gas-fired generation in the MISO market. He said, though, that he doesn’t expect any coal unit idle time during the rest of 2012.

Blumenstock noted that the coal units are often offered into the MISO market on a must run basis. “We will operate our coal plants…over long periods using the must-run designation in the MISO market, and there are hours where the market price is less than our cost of production. But overall, I will say that there are hours when the cost of production is over market, but the Company carefully evaluates the operating outlook for the coal plants and makes sure that over the period in which we must run the units, the units do produce a positive net energy value, or over time they receive more revenue than expense.”

He added: “When our forecasts show that the cost of production is going to be over market for extended periods, we will not put the unit on line with a must-run offer, we will make it available to the MISO with an economic offer.”

Blumenstock said that the utility primarily uses three offer types in the MISO market; unavailable, which reflects an outage; economic; and must run. “The times that we offer an economic and must run, between those two, it’s 98 percent of the time we offer must run, a small percentage of the time, we offer economic.”

Blumensotck also described how Consumers will use “overfire” operation, basically injecting coal or oil into a unit, to make up the derate from using 100% or near 100% PRB coal. All of the units except those at the Campbell plant can use overfire fuel. The Cobb units can use natural gas for overfire operations, with the rest able to burn just oil.

“We want to offer the capacity of our units, full capacity when we can, so when we can’t offer full capacity because we’re burning 100-percent western coal, we will offer incremental capacity using overfire fuel at a higher cost, as you have noted; but the only time that that would get selected is if MISO deems it should be selected,” Blumenstock said. “We wouldn’t run the oil if the prices didn’t support it and MISO didn’t ask us to use the oil.”

Consumers Energy is a unit of CMS Energy (NYSE: CMS).

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.