Driven largely by low natural gas prices, power market prices seen by Kentucky Utilities (KU) fell during a November 2010-October 2012 review period, said Charles Schram, Director-Energy Planning, Analysis, and Forecasting for LG&E and KU Services Co., which provides services to Louisville Gas and Electric (LG&E) and KU.
Testimony from Schram was filed March 1 on behalf of KU at the Kentucky Public Service Commission as part of a twice-yearly fuel review case. Besides a review of fuel buying for the May-October 2012 period, the report also covered some issues for the broader November 2010-October 2012 period.
The average electric power price during the period November 2010-October 2012 was $39.72/MWh, cormpared to $42.52/MWh during the previous two-year period (November 2008-October 2010). These lower prices were driven largely by lower natural gas prices, which averaged $3.42/MMBtu during the period November 2010-October 2012, compared to $4.32/MMBtu during the previous two-year period.
“Lower market prices for electricity would potentially result in a greater volume of hourly economy electricity purchases,” Schram noted. “However, the Companies benefited from the addition of low cost generation from [the coal-fired] Trimble County Unit 2 beginning in January 2011. As a result, despite somewhat lower market prices for electricity, hourly economy purchase volumes were reduced by approximately 30% during the period November 1, 2010 through October 31, 2012, compared to the previous two-year period.”
Low natural gas prices and a low economic growth rate continue to result in relatively weak wholesale power prices, Schram noted. “KU continues to look for opportunities to purchase hourly power from the wholesale market when the cost is lower than its own resources and when import of this power is supported by adequate transmission availability and other operational parameters,” he added.
KU does not expect changes in the wholesale power market in the next two years which would significantly affect its power procurement practices. Natural gas continues to set marginal electricity prices in the region. Shale gas supplies are expected to continue to be a growing part of the U.S. gas supply. Most forecasters continue to believe that gas prices will avoid sustained periods of volatility given the demonstrated responsiveness of new shale gas supplies, Schram said.
He noted that KU is currently evaluating the results of its recent Request for Proposals (RFP) for capacity and energy. “This process enables the Company to thoroughly evaluate the availability and cost of shorter and longer-term market resources to meet customers’ energy needs,” he said. “The RFP enables the Company to thoroughly review market opportunities as part of ensuring effective strategies for producing and securing energy for native load customers.”
Dotson says Illinois Basin coal doing relatively well right now
Also supplying March 1 testimony was Mike Dotson, Manager of LG&E/KU Fuels for LG&E and KU Services. During the two-year review period, KU conducted five written coal supply solicitations and two oral coal supply solicitations in the competitive marketplace.
“With the slowdown in the U.S and global economy it has been a difficult year for the coal market: weak demand, highly competitive natural gas prices and record consumer stockpiles resulting from mild weather have forced many producers to cut supply,” Dotson noted. “With the slowdown in the market and export demand, coal suppliers have been pushing for delivery under their current contracts.”
Dotson also pointed out the impacts of tougher U.S. Mine Safety and Health Administration efforts at coal mines. “There have been a number of new mine safety rules and regulations and an increase in enforcement activity and policies,” he said. “These have resulted in additional costs to mine and supply coal, loss in mine output, delays in obtaining approvals of mining plans and delays in permitting. [A] number of KU Contract suppliers are seeking to recover their cost increases under the New Impositions Section in KU’s contracts. In addition, the mining industry is having difficulty with and experiencing delays in obtaining the necessary environmental permits for their mining operations. This is resulting in mines having to cut production or stop mining in areas altogether while they wait on permits.”
KU continues to work with its suppliers on deliveries and make-up of force majeure events. In one case, however, KU is in litigation with Smoky Mountain Coal / Resources Sales as related to non-deliveries of coal during 2008 and 2009, Dotson reported. The filing shows that in that case KU and LG&E jointly seek to recover damages arising from the non-delivery of 1,019,829 tons of coal. The coal company plaintiffs seek to have the Webster County, Ky., Circuit Court interpret the force majeure provision in the agreement and to recover the amount of payments withheld by KU and LG&E to offset their claim for damages. Plaintiffs claim the force majeure provision should be interpreted in such a way that KU is not entitled to any more deliveries of coal pursuant to the agreement. KU disagrees and withheld certain payments, as permitted under the agreement and demands that the plaintiffs resume deliveries as required under the Agreement. This case is in the discovery phase and a trial is presently set to begin on June 17, 2013.
Dotson said KU is working to diversify its sources of supply, obtaining high-sulfur coal from Western Kentucky, Indiana, Illinois, Ohio and West Virginia. Dotston pointed out that the Central Appalachian Region has experienced the majority of the recent mine closures. “The region is experiencing thinning coal seams and costly permitting delays which result in rising production cost,” he said. “As a result, the Central Appalachian region is losing more production and market share as buyers switch to lower cost Illinois Basin coal, especially with less reliance on lower-sulfur coal over time. The Illinois Basin coal demand will continue to grow over the next several years. Its relatively inexpensive and abundant reserves, favorable location and the continued construction of scrubbers in the East will increase the demand for this kind of coal. The majority of the coal KU uses is supplied from the Illinois Basin.”
KU outlines contracts, buys a lot of coal from Alliance and Armstrong
The March 1 filing also contained details on coal contracts and coal buying. It showed a projected KU need for coal of 9.14 million tons in 2013 and 9.26 million tons in 2014. Note that LG&E made its own filing on March 1, also buys coal through Dotson and his department, and it shares coal with KU. But this story is focused just on KU.
Coal is for the E.W. Brown, Ghent, Green River, Tyrone and Trimble County facilities. These facilities as of the end of October 2012 had 1.55 million tons of coal in inventory, which is 43 days at full burn and just within a 23-44-day target range. The highest inventory was at Trimble County, at 58 days, with the lowest at the little-used Tyrone plant, at nine days.
Some of KU’s major, ongoing coal contracts are with:
- Alliance Coal, source is River View mine in western Kentucky, expires the end of 2015, calls for 2 million tons per year in the 2011-2015 period;
- Alliance Coal, sourced from Hopkins / Warrior / Webster County operations in western Kentucky, expires end of 2016, calls for 3 million tons per year in 2012-2016 period;
- Armstrong Coal, sourced from various western Kentucky mines, expires end of 2016, calls for 2.1 million tons per year in 2011-2015 period, then 900,000 tons in 2016;
- Armstrong Coal, various mines in western Kentucky, expires end of 2016, calls for 1.25 million tons per year in 2011-2013 period, then 750,000 tons per year in 2014-2016;
- Armstrong Coal, various western Kentucky mines, expires end of 2013, calls for 200,000 tons in 2013;
- Armstrong Coal, various western Kentucky mines, expires end of 2015, calls for 500,000 tons in 2013 and 1 million tons per year in 2014-2015 period;
- Oxford Mining Co.-Kentucky LLC, western Kentucky mines, expires end of 2013, calls for 400,000 tons in 2012 and 600,000 tons in 2013;
- Patriot Coal Sales, various western Kentucky mines, expires end of 2013, calls for 1.25 million tons per year in 2012-2013 period.
- Peabody COALSALES, various Indiana mines, expires end of 2014, calls for 1.5 million tons per year in 2012-2014 period;
- Solar Sources, various mines in Indiana, expires end of 2013, calls for 300,000 tons in 2012 and 400,000 tons in 2013; and
- Triad Mining, Log Creek operation in Indiana, expires end of 2014, calls for 700,000 tons per year in 2012-2014 period.