Duke Energy Indiana has had zero luck since last fall in cutting its bloated coal inventories, which have been caused by relatively low coal burn triggered by factors like cheap gas-fired generation and mild weather.
Brett Phipps, employed as Director, Fuel Procurement of Progress Energy Carolinas, a utility affiliate of Duke Energy Indiana (DEI), supplied Jan. 29 testimony at the Indiana Utility Regulatory Commission as part of DEI’s latest fuel cost review case. These are subsidiaries of Duke Energy (NYSE: DUK).
As noted in testimony of fuels official Elliott Batson Jr., who normally writes this Indiana fuel testimony, which was filed with the Indiana commission in October 2012, DEI’s coal inventories as of Oct. 3, 2012, were approximately 3,255,000 tons (or 53 days of coal supply at a full load burn rate per day) across the system. “As of January 18, 2013, coal inventories were approximately 3,228,000 tons (or 53 days of coal supply),” Phipps noted. “Duke Energy Indiana still expects coal inventories to increase through 2013 because of existing contractual commitments.”
The Gibson, Wabash River, Cayuga and Edwardsport IGCC coal plants are supplied with coal under long-term agreements. “Gallagher Station will be supplied by spot purchases throughout 2013 depending on how much the Gallagher station units operate,” Phipps noted.
For the twelve-month period ended Nov. 30, 2012, DEI purchased a total of about 11.8 million tons of coal (under both long- and short-term contracts) at an approximate average cost of $2.75/mmBtu. The delivered cost of coal purchased under long-term commitments averaged $2.75/mmBtu and made up 99.6% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $3.10/mmBtu.
Phipps reports that broader coal markets still in the doldrums
Published prices for U.S. coal markets have not changed significantly since the last fuel proceeding, Phipps noted. “High-sulfur Illinois basin coal prices remain in the upper $30s to mid $40s per ton for 2013 delivery,” he added. “Central Appalachia coal prices remain in the low to mid $60s for 2013 delivery. The northern Appalachia and Powder River coal basin market prices continue to be depressed. The biggest drivers for these flat coal market prices are low natural gas prices and published reports of surplus amounts of coal inventories in stockpiles at most U.S. power plants.”
Near term, the utility sees: the continued decline in U.S. steam coal supplies; a slumping global coal market; low natural gas prices; “healthy” utility coal inventories (unhealthy for the coal industry); and volatile power prices. “Coal markets are likely to be relatively stable in the near term; however, looking forward, we see potential for market volatility as market uncertainties continue and coal suppliers continue to cut production and bring supply into balance with demand,” Phipps wrote.
Duke Energy Indiana continues to evaluate a host of options in order to effectively manage the growing coal inventories. The company has entered into a short-term storage agreement with one unnamed supplier to store coal at the supplier’s mine facilities and began storing coal at this location during September 2012. The company has also shaped and compacted the Gibson Remote Pile adjacent to Gibson station for receipt of additional coal for storage and continues to actively explore options to resell surplus coal into the market, Phipps explained.
Since early 2012, DEI has also been using a price “decrement,” which is basically a method to factor the costs of the bloated coal inventories and contractual coal buying commitments into the bid price for its coal-fired power on the Midwest ISO system. The coal units have dispatched more because of that, but obviously only enough to keep up with ongoing coal deliveries and not enough to eat into the inventories.
“However, due to continued weak coal market conditions, resell opportunities will continue to be extremely difficult in the near term,” Phipps noted. “The Company will continue to closely monitor its anticipated coal requirements and inventories and take every action available to cost effectively control coal inventories in the least cost-impact manner for customers.”
Phipps outlines gas supply changes at Duke Energy Indiana
Duke Energy Indiana, Phipps reported, has several contracts related to the purchase, transportation, balancing, and parking of natural gas for its generating stations, including the following:
- two interruptible transportation contracts, an enhanced interruptible contract, along with a parking agreement with Panhandle Eastern Pipeline Co. for natural gas transportation primarily from the mid-continent region (Kansas and Oklahoma) to the pipeline interconnection with the Indiana Gas Co. system (part of Vectren) near Montezuma, Ind., for gas delivery to Cayuga CT and Noblesville Stations (directly off interconnection);
- an interruptible transportation contract, and a balancing agreement with Texas Eastern Pipeline Co. for natural gas transportation and balancing;
- an interruptible rate transportation contract with Vectren for natural gas transportation from the Panhandle Eastern pipeline to the Cayuga CT site; and
- one firm transportation contract along with a parking contract with Midwestern Pipeline Co. for gas delivery and parking services for the Wheatland, Vermillion and Edwardsport IGCC facilities. The Edwardsport IGCC plant, which will eventually be fired with syngas from coal, continues to burn natural gas for processes necessary for startup testing such as auxiliary boiler operation as well as supporting test generation from the facility. Starting on Oct. 1, 2012, through negotiations with the pipeline company, the monthly reservation fee for the Midwestern contract dropped, resulting in customer savings of approximately $342,000 annually, Phipps noted.
The utility primarily utilizes Sequent Energy Management LP to schedule and procure natural gas consumed at Madison Generation Station and NJR Energy Services for natural gas consumed at Wheatland, Cayuga CT, Noblesville, Vermillion, Henry County and the Edwardsport IGCC. Prior to Dec. 1, 2012, Duke Energy Indiana utilized ProLiance Energy LLC to serve these facilities. Through discussions with other suppliers, Duke Energy Indiana was able to execute an agreement with NJR Energy Services which will reduce overall fuel costs. The reduction is associated with lower costs of the fuel management agreement and sharing of any savings from capacity optimization, Phipps wrote.
The price the company paid for delivered natural gas at its gas-fired stations increased slightly but stayed at relatively low levels during the period of September through November 2012 with a range of delivered daily gas prices between a low of about $2.63/mmBtu in September to a high of $4.25/mmBtu in late November, Phipps reported.
Notable is that the rough rule of thumb is that coal starts to get competitive with gas, depending on various locational and other factors, at between $3/mmBtu and $4/mmBtu gas prices. So the high end of the range ($4.25) Phipps outlined was pretty positive for coal, while the $2.63/mmBtu low end meant that gas was eating coal’s lunch during that period.