Coal is expected to be the predominant fuel used by Louisville Gas and Electric and Kentucky Utilities for baseload generation for the foreseeable future, but natural gas will play a more significant role starting in 2015 when Cane Run Unit 7 is expected to be placed into operation.
This unit is expected to be used for baseload generation, said LG&E and KU parent PPL Corp. (NYSE: PPL) in its Feb. 28 annual Form 10-K report. Natural gas and oil will continue to be used for intermediate and peaking capacity and flame stabilization in coal-fired boilers, PPL added. To enhance the reliability of natural gas supply, LG&E and KU have secured long-term pipeline capacity on the interstate pipeline serving the new combined cycle unit and six simple cycle combustion turbine units.
For their existing units, LG&E and KU expect for the foreseeable future to purchase most of their coal from western Kentucky, southern Indiana, southern Illinois and Ohio. The use of high-sulfur coal increased during 2012 due to the installation of SO2 scrubbers and a sulfuric acid mist mitigation system at KU’s E.W. Brown plant. In 2013 and beyond, LG&E and KU may purchase certain quantities of ultra-low sulfur content coal from Wyoming for blending at Trimble County Unit 2.
PPL EnergyPlus acts as agent for PPL Generation to procure and optimize its various fuels. During 2012, PPL Generation purchased 5.6 million tons of coal required for its wholly owned Pennsylvania plants under short-term and long-term contracts. The amount of coal in inventory varies from time to time depending on market conditions and plant operations. PPL Generation, through PPL EnergyPlus, has agreements that will provide more than 23 million tons of PPL Generation’s projected coal needs for the Pennsylvania power plants from 2013 through 2018.
A PPL Generation subsidiary owns a 12.34% interest in the Keystone plant and a 16.25% interest in the Conemaugh plant, both in Pennsylvania. The Keystone plant contracts with Keystone Fuels LLC for its coal requirements, which provided 4.3 million tons of coal to the Keystone plant in 2012. The Conemaugh plant requirements are purchased under contract from Conemaugh Fuels LLC, which provided 4.1 million tons of coal to the Conemaugh plant in 2012.
All PPL Generation coal plants within Pennsylvania are equipped with scrubbers, which use limestone in their operations. Acting as agent for PPL Generation, PPL EnergyPlus has entered into contracts with limestone suppliers that will provide for those plants’ limestone requirements through 2014. During 2012, 382,000 tons of limestone were delivered to Brunner Island and Montour under these contracts.
Corette coal plant in Montana to be idled in 2015
PPL Montana has a 50% leasehold interest in Colstrip Units 1 and 2, and a 30% leasehold interest in Colstrip Unit 3. NorthWestern owns a 30% interest in Colstrip Unit 4. Each party is responsible for its own coal costs. PPL Montana, along with the other Colstrip owners, is party to contracts to purchase 100% of its coal needs with defined coal quality characteristics and specifications. PPL Montana, along with the other Colstrip Units 1 and 2 owner, has a long-term purchase and supply agreement with the current supplier for Units 1 and 2, which provides these units 100% of their coal needs through December 2014, and at least 85% of requirements from January 2015 through December 2019. PPL Montana, along with the other Colstrip Units 3 and 4 owners, has a long-term coal supply contract for Units 3 and 4, which provides these units 100% of coal requirements through December 2019.
Coal supply contracts are in place to purchase low-sulfur coal with defined quality characteristics and specifications for PPL Montana’s Corette plant. The contracts covered 100% of the plant’s coal needs in 2012 and similar contracts are in place to supply 100% of the expected coal requirements through 2014.
In September 2012, PPL announced its intention, beginning in April 2015, to place its Corette plant in Montana in long-term reserve status, suspending the plant’s operation due to expected market conditions and the costs to comply with the Mercury and Air Toxics Standards (MATS).
To comply with primarily air-related environmental requirements, PPL’s forecast for capital expenditures reflects a best estimate projection of spending that may be required within the next five years. Such projections are $1.1bn for LG&E, $1.2bn for KU and $246m for PPL Energy Supply. Actual costs (including capital, allowance purchases and operational modifications) may be significantly lower or higher depending on the final requirements and market conditions.
Coal capacity factors plunge in Pennsylvania, Montana
Unregulated gross energy margins associated with PPL Energy Supply’s competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other costs. Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the expanded domestic shale gas production.
As a result of these factors, PPL Energy Supply has experienced a shift in the dispatching of its competitive generation from coal-fired to combined-cycle gas-fired generation.
- The Pennsylvania coal plants had a depressed average capacity factor of 69% in 2012, down from an average of 87% in the 2009-2011 period.
- The Montana coal plants had a 67% capacity factor average in 2012, down from 89% in 2009-2011.
- The combined-cycle gas plants, on the other hand, had a 98% average capacity factor in 2012, up from 72% in 2009-2011.
This reduction in coal-fired generation output resulted in a surplus of coal inventory at certain of PPL Energy Supply’s Pennsylvania plants. To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $29m in 2012 to reduce its 2012 and 2013 contracted coal deliveries. PPL Energy Supply will continue to manage its coal inventory to mitigate the financial impact and physical implications of an oversupply; however, no additional coal contract modifications are expected at this time.
PPL Energy Supply’s coal plants are:
- Montour, 1,518 MW, Pennsylvania;
- Brunner Island, 1,455 MW, Pennsylvania;
- Colstrip 1-2, 614 MW total, PPL controls 50% of that, Montana;
- Colstrip 3, 740 MW, PPL controls 30%;
- Conemaugh, 1,749 MW, PPL controls 16.25%, Pennsylvania;
- Keystone, 1,714 MW, PPL controls 12.34%, Pennsylvania; and
- Corette, 153 MW, Montana.
Coal retirements, emissions spending on tap at Kentucky subsidiaries
LG&E and KU project $2.3bn of capital investment over the next five years to satisfy certain of environmental requirements. These requirements have resulted in LG&E and KU Energy LLC’s (LKE) anticipated retirement of five coal-fired units with a combined summer capacity rating of 726 MW by 2015. KU retired the 71 MW unit at the Tyrone plant in February 2013. Also, in 2012 KU recorded a $25m pre-tax impairment of its Electric Energy investment as a result of environmental regulations and low energy prices. Electric Energy owns and operates a coal-fired plant and a natural gas facility in southern Illinois. KU has a 20% ownership interest in Electric Energy.
The LG&E and KU coal units are:
- Ghent, 1,932 MW (net);
- Mill Creek, 1,472 MW (net);
- E.W. Brown Units 1-3, 684 MW (net);
- Cane Run Units 4-6 (expected to be retired by end of 2015), 563 MW (net);
- Trimble County Unit 1, 511 MW (net);
- Trimble County Unit 2, 732 MW (net);
- Green River (expected to be retired by end of 2015), 163 MW (net); and
- Tyrone (just retired), 71 MW.
LG&E and KU also control 2.5% stakes in each of the Clifty Creek (1,304 MW) and Kyger Creek (1,086 MW) coal plants of Ohio Valley Electric.
In September 2011, LG&E and KU filed an application with the Kentucky Public Service Commission requesting approval to build Cane Run Unit 7. In May 2012, the KPSC issued an order approving the request. LG&E and KU commenced preliminary construction in the third quarter of 2012 and construction is expected to be completed by May 2015. The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600m. In addition to the construction of this combined-cycle gas unit at the Cane Run station, LG&E and KU continue to assess future capacity needs. As a part of the assessment, LG&E and KU issued a request for proposals in September 2012 for up to 700 MW of capacity beginning as early as 2015.
PPL plants have emissions control needs under various air rules
PPL said it is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved Environmental Cost Recovery (ECR) plans to install additional controls at some of its Kentucky plants. PPL is evaluating chemical additive systems for mercury control at Brunner Island in Pennsylvania, and modifications to existing controls at Colstrip in Montana for improved particulate matter reductions.
In August 2012, a federal appeals court vacated and remanded the Cross-State Air Pollution Rule (CSAPR) back to the EPA for further rulemaking, leaving the Clean Air Interstate Rule (CAIR) in its place, pending further EPA action. PPL plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases. The court’s August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions, PPL noted.
The EPA signed its final Federal Implementation Plan (FIP) under the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 and 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 and 4), and tighter emission limits for Corette (which are not based on additional controls). The cost of any additional controls for Colstrip Units 1 and 2, if required, could be significant. PPL expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015.
The company’s Kentucky fossil-fueled plants can meet the CAIR SO2 emission requirements by utilizing SO2 allowances, including banked allowances. To meet NOx standards, under the CAIR, the Kentucky companies will need to buy allowances and/or make operational changes. LG&E and KU do not currently anticipate that the costs of meeting these CAIR requirements or standards will be significant.
PPL Energy Supply’s Pennsylvania fossil-fueled generating plants can meet the CAIR SO2 emission requirements with the existing scrubbers that were placed in service in 2008 and 2009. To meet NOx standards, under the CAIR, PPL Energy Supply will need to buy allowances and/or make operational changes, the costs of which are not anticipated to be significant.