Otter Tail says splitting its system due to Hoot Lake a bad idea

If Otter Tail Power wants to operate its coal-fired Hoot Lake plant beyond 2015, it may have to go the very inefficient route of splitting its system into pieces in order to avoid any directives against the plant coming out of the Minnesota Public Utilities Commission (MPUC).

That was one of the points that Otter Tail made in a Nov. 27 filing with the Minnesota commission in a series of answers to questions posed by the Midwest Large Energy Consumers group in an ongoing Baseload Diversification Study case.

One question asked the utility to discuss the impact to choosing a diversification plan other than its recommended plan related to the continued operation of Hoot Lake and its impact on Otter Tail’s ability to continue with a single system for all of its jurisdictions.

“A determination other than that recommended, may or may not have an impact to the operation of Hoot Lake Plant,” the utility answered. “For example, if a determination is made in Minnesota that would discontinue the use of Hoot Lake Plant earlier than recommended, the plant may still continue to operate to serve Otter Tail’s customers in the Dakotas. For background, Otter Tail has about one half of its load in Minnesota and the other half in North Dakota and South Dakota. The result of the MPUC order on the future of Hoot Lake Plant in this proceeding will need to be considered as well as determinations made by the North Dakota [Public Service Commission] and South Dakota [Public Utilities Commission] before a final decision on operation of the plant can be made by the company.”

The company added: “As indicated, Otter Tail has historically operated its resources as a single system that functions to serve its customers in Minnesota and the Dakotas. This has been possible because there have been no material differences among the states as to what resources Otter Tail should use to serve its customers. If the Commissions in Otter Tail’s three jurisdictions were to make materially different determinations as to what resources should be used (in particular in this case, whether Hoot Lake Plant should be used after 2015) it may result in Otter Tail having to ‘split’ its system for operational purposes to accommodate each jurisdiction’s determination, thereafter serving customers in differing states from differing resource portfolios. Otter Tail has concerns that such a ‘splitting’ of system resources would not be in our customers’ interests and that it would significantly increase the cost of service in all states, especially those costs related to system operations, administration, resource planning, accounting, recovery, rate design, etc. To avoid these unnecessary increases to the cost of service, it is in Otter Tail’s customers’ best interests to continue to operate Otter Tail as a single integrated system allowing them to take advantage of economies of scope and scale.”

In answer to another question, Otter Tail reported strong annual capacity factors over the 2002-2011 period for Hoot Lake, with Unit 2 having a capacity factor of 82.9% in 2002 and 72.5% in 2011, and Unit 3 having a capacity factor of 73% in 2002 and 71.6% in 2011. Information about coal prices in the 2002-2011 period at Hoot Lake was redacted from the public version of the filing.

Otter Tail wants to hold on to Hoot Lake until 2020

Otter Tail Power  is recommending to the Minnesota commission the approval of “Scenario 2020 – Expected Retirement” for Hoot Lake, which includes a $10m expenditure on upgraded emissions equipment and continued operation as a coal facility until 2020. A baseload diversification study that Otter Tail filed with the commission on Oct. 3 said the recommended scenario will delay the need for major spending in the near term. Otter Tail Power is a unit of Otter Tail Corp. (NASDAQ: OTTR).

“Given the volatility of natural gas prices and the uncertainty of CO2 legislation or regulation, customers should benefit from a plan that minimizes capital expenditures for constructing a new natural gas unit until decision makers have more natural gas price history and information about environmental regulations, particularly for CO2,” Otter Tail argued in the study. “Likely even a bigger reason for recommending to continue with the expected 2020 retirement scenario is that Scenario 2020 – Expected Retirement minimizes costs to customers for Hoot Lake Plant at a time when they will see large rate increases due to required environmental upgrades already underway at Big Stone Plant.”

An alternative option would be to retire Hoot Lake in 2015 to avoid the costs of complying with the new Mercury and Air Toxics Standards (MATS) and replace it with natural gas-fired capacity.

Hoot Lake’s two operating coal units, Unit 2 (60 MW) and Unit 3 (80 MW), came online in 1959 and 1964, respectively, and produce about 20% of Otter Tail Power’s generation. Both units burn low-sulfur western subbituminous coal. Both were retrofitted in 1972 with precipitators that remove more than 98% of the fly ash. MATS, finalized in December 2011 by the U.S. Environmental Protection Agency, requires that these precipitators be upgraded by 2015. Both units also include low-NOx burners that cut NOx emissions by about 60%.

Otter Tail Power has a contract with Cloud Peak Energy Resources LLC for sub-bituminous coal through Dec. 31, 2012, for the Hoot Lake plant that provided for all of the plant’s coal needs in 2008-2011 and is expected to provide for all the plant’s coal needs in 2012. Included in this Cloud Peak contract is the ability to carry forward tons to future years to better match the coal needs within a given year, Otter Tail noted in an Aug. 31 filing with the Minnesota commission.

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.