Xcel Energy estimates power replacement costs for Sherco 3

Northern States Power, a unit of Xcel Energy (XEL), on Nov. 7 provided the Minnesota Public Utilities Commission some numbers, which were partially redacted from the public version of that filing, on the costs to buy replacement power for the coal-fired Sherburne County (Sherco) Unit 3.

The 884-MW unit went off-line due to mechanical problems in November 2011. “Following the return of components from off-site repair facilities, and as on-site repairs are completed, unit restoration and reassembly will occur,” said the report. “We anticipate the majority of reassembly activities to occur between mid-December 2012 and early March 2013. Reassembly will be followed by systems start-up, commissioning and testing to verify operational readiness prior to unit restart and return to service. While many repair and restoration activities have yet to be completed, and the preliminary schedule could change, our restoration plan targets Sherco 3 returning to service sometime around the end of the first quarter of 2013.”

The outage at Sherco 3 has required the company to replace that generation with other resources, either by dispatching other NSP units or purchasing in the Midwest ISO energy market. “Xcel Energy offers our baseload coal units, including Sherco 3, in the MISO market as ‘Must Run’ facilities,” the company noted. “This means that regardless of whether or not the cost to run the unit exceeds the MISO market locational marginal price (LMP), it is assumed the unit will be online at some level at all times. This is because baseload units like Sherco 3 (and our nuclear plants) are not designed to be entirely removed from service once they are on-line, and there are limitations on how much we can change the output of an individual generator between hours without potentially damaging the unit. We manage the output of the units to take advantage of lower cost replacement energy when possible, while seeking to avoid higher O&M costs or unplanned outages (and resulting replacement energy costs) that could occur if the baseload units are forced to run in a manner inconsistent with their design parameters.”

NSP calculates it replacement energy cost for the Must Run units by taking the difference between the MISO hourly LMP price and the average hourly cost it takes to run the unit at the expected load for that hour. “Historically, we reported zero outage costs in cases where our costs to run the specific unit would have exceeded the LMP price,” the utility added. “In other words, we did not take a credit when LMP prices were below the cost of the specific unit and the Company was actually saving costs to ratepayers by having the unit offline. For example if a unit cost $15/Mwh and the LMP for that hour was $10/Mwh, there would technically be a $5/Mwh benefit to our ratepayers by not running the unit. However, instead of recognizing it as a $5/Mwh credit when calculating our replacement energy costs for that hour, we assigned a benefit of zero.”

NSP changes its cost estimate methodology

In order to better align forecasts and actual costs, as well estimate the real impact to ratepayers, NSP said it has now changed its calculation methodology for estimating replacement power costs resulting from an outage. “We will now recognize the cost credits in these situations as we believe this is the correct way to calculate the true replacement power costs. For example, in hours where the MISO LMP was below the production cost at Sherco 3, we will reflect the energy cost savings resulting from the fact Sherco 3 was entirely off-line. To implement this revision, we will need to revise its future monthly FCA reports, which calculate outage costs. We also plan to file revised calculations of outage costs for July 2011 to June 2012 in our 2011-12 AAA report filed September 1, 2012, to reflect the new methodology; and updated calculations in each our monthly FCA report dockets filed since July 1, 2012.

The total estimated outage costs for the November 2011-March 2013 period are $23.2m. “The majority of the costs associated with the Sherco 3 outage occurred in May through August 2012,” NSP noted. “These costs were higher than we originally forecasted due to high loads from the unusually hot summer weather and the associated higher LMP prices. In the months of November 2011 through April 2012, where our monthly Sherco 3 unit costs would have exceeded the monthly MISO LMP price, use of the more correct replacement cost estimation process results in a [redacted] benefit to ratepayers rather than a zero cost impact. We note that the current replacement power cost estimate for September 2012 to March 2013 is subject to change, based upon natural gas commodity fuel and MISO electricity market conditions.”

Westmoreland Coal (NASDAQ: WLB) said in its Nov. 8 quarterly Form 10-Q report about the impact of this outage on the company: “In November 2011, an explosion and subsequent fire occurred at Unit 3 of Xcel Energy’s Sherburne County Generating Station, or Unit 3, which is the largest customer of our Absaloka Mine. Xcel indicated that Unit 3 will be offline for an extended period while Xcel investigates the source of the explosion and the extent of the damage. The current estimate is that Unit 3 will be back online by the end of the first quarter of 2013. Westmoreland Resources, Inc., or WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and submitted a notice of loss to its insurance carriers. Our insurance carriers have accepted liability under the policy for the business interruption claim and we have started to receive cash proceeds. We recognize income as business interruption losses are incurred and reimbursement is virtually assured and have recognized $3.3 million and $11.9 million of income for the three and nine months ended September 30, 2012, respectively.”

Sherco is a three-unit, 2,400-MW plant. It burns low-sulfur Western coal from mines in Montana and Wyoming. The plant normally burns 30,000 tons of coal every day (three trainloads) and more than 9 million tons a year. A plant co-owner is the Southern Minnesota Municipal Power Agency (SMMPA), which owns a 41% share of Sherco 3. 

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.