Appalachian Power had projected a total coal burn of 10.8 million tons in 2012, but due to factors like cheap competing natural gas that burn came in at only 8.3 million tons last year.
Those are among the facts that survived heavy redacting that officials of American Electric Power (NYSE: AEP) wrote for an April 1 filing with the West Virginia Public Service Commission. The filing opened the annual Expanded Net Energy Cost (ENEC) case for APCo and Wheeling Power. Wheeling Power owns no generating capacity, so it doesn’t factor much into the ENEC case.
The projected coal consumption for a July 2013-June 2014 Forecast Period is redacted from the filing, but indications are it won’t be much better than that in 2012. Coal consumption is 2012 was 8.3 million tons at an average delivered cost of $66.20/ton, against a projection for 2012 of 10.8 million tons at $68.12/ton.
Factoring into the future planning of these companies is the planned transfer, by the end of 2013, of 1,647-MW of coal-fired capacity to APCo from another AEP subsidiary. That transfer is now pending before the West Virginia commission in a separate docket. The assets proposed to be transferred are a 50% undivided interest in Ohio Power’s Mitchell generating station in northern West Virginia and Ohio Power’s current two-thirds interest in Unit 3 of the Amos generating station in southern West Virginia.
Richard Riley, employed by American Electric Power Service Corp. (AEPSC) as a Staff Financial Analyst Coordinator, testified that fuel expense is projected to increase in the July 2013-June 2014 Forecast Period versus calendar year 2012 because of a 5,724 GWH increase in fossil generation. Out of the total increase in fossil generation, 4,916 GWH is projected to occur during the six months ending June 30, 2014. The AEP Pool Agreement, a longstanding deal for AEP subsidiaries to share power, is no longer expected to be in place during this period.
APCo is projected to generate a total of 28,264 GWH during the entire Forecast Period. A partial offset to the effect of the volume increase is an expected decrease in the average cost of fossil fuel consumed, which was $27.38/MWH in 2012 and is projected to be $26.99/MWH in the Forecast Period.
During the six months ending June 30, 2014, APCo’s ownership of the Mitchell generation station is expected to produce 2,430 GWH with a total fuel cost of $65.6m. During this period, APCo’s additional two-thirds ownership of Amos Unit 3 is also expected to produce 1,284 GWH with a total fuel cost of $34.7m.
An increase in projected energy purchases will augment the generation expected to be received from APCo’s ownership of the Mitchell Plant of 2,430 GWH and the additional generation from Amos Unit 3 of 1,926 GWH. Together, these sources of energy will essentially replace a portion of the primary energy that APCo will no longer receive from the Pool. As a point of reference, APCo received 8,135 GWH of Pool energy during the six months ended June 30, 2012.
Coal market did get a little better in the last half of 2012
Charles West, employed by AEPSC in the Fuel, Emissions & Logistics Group as Manager, Fuel Procurement, noted that the release by the U.S. Environmental Protection Agency of the Cross-State Air Pollution Rule (CSAPR) in July 2011 contributed to a destabilization of the coal market in the second half of 2011. A court-ordered stay of that rule in December 2011, followed by a mild winter and a subsequent decrease in natural gas prices, led to a dramatic decrease in demand for coal-fired generation early in 2012, West added.
“As prices fell and coal stockpiles began to increase, coal suppliers initiated cutbacks in production and increased coal exports,” West wrote. “The result of these efforts, along with a mild recovery of natural gas prices later in the year, was a partial re-stabilization of the market in the second half of 2012.”
An August 2012 ruling by a federal appeals court to throw out CSAPR simply calls for the EPA to continue administering the Clean Air Interstate Rule until a replacement rule is promulgated. “Other EPA rules, like the Mercury and Air Toxics Standards, will contribute to the closure of non-compliant coal-fired power plants upon implementation in 2015,” West said. “It is uncertain what the overall impact of these developments may be on the coal market as a whole.”
During 2012, when APCo consumed less coal than during 2011 and less coal than forecasted for 2012, the average cost of coal on a per-ton basis was slightly higher than 2011 but lower than the 2012 forecast. The recent market conditions had little effect on the price that APCo paid in 2012 because a majority of the projected needs were already under contract and the reduced consumption all but eliminated any spot coal needs, West pointed out.
The redacted coal forecast reflects the coal needs of APCo’s share of the Mitchell plant in 2014 including the high-sulfur requirements from the existing coal supply agreement which also supplies coal to facilities other than the Mitchell plant, West wrote. “Discussions with the counter-party are still underway as to the quantitative scope of the contract that will transfer with the Mitchell Plant,” he added.
U.S. Energy Information Administration data shows that in January of this year, CONSOL Energy (NYSE: CNX) had the only long-term contract, expiring in December 2021, to supply the Mitchell plant, with coal moving out of the nearby McElroy longwall mine, which works the high-sulfur Pittsburgh seam. Short-term suppliers to Mitchell in January included Central Coal, Peabody COALTRADE and S.M.& J.
APCo currently has twelve long-term contracts with ten vendors that will be in effect as of July 1, 2013, or are forecast to begin delivering coal within the Forecast Period. These contracts have various expiration dates, tonnages, and prices. Of these twelve long-term agreements, four are scheduled to expire by the end of the Forecast Period.
In addition to the long-term contracts, APCo had ten short-term agreements that either previously supplied coal, are currently supplying coal, or are scheduled to supply coal to APCo during the Forecast Period.
The Mitchell plant currently has one long-term contract with a vendor already supplying coal to APCo. The Mitchell plant also has one coal supply agreement that includes spot tonnage for 2013 with fixed-price option tonnage (at the purchaser’s unilateral option exercisable by July of the year prior) for years 2014 and 2015. This tonnage is currently priced above market and is therefore not included in the forecasted tonnage.
APCo has either executed or amended three short-term agreements to receive coal during the Forecast Period. One of the three agreements is for the receipt of coal in 2012, and one is for coal in 2013, while the remaining agreement is for coal in 2014. APCo did not enter into any long-term agreements in the last year not presented in the last ENEC proceeding.
APCo is planning to procure more coal during the Forecast Period, but, under the current dynamic market conditions, the exact amount of additional coal needed is not clear, West noted.
Over the spring and summer of 2011, APCo’s inventory of low-sulfur coal reached below-target inventory levels at some plants. Consequently, APCo entered into agreements, both short and long-term, to purchase additional low sulfur coal. As a result, the inventory of low-sulfur coal was returned to levels much closer to target by the end of 2011. In 2012, because of the reduction in demand for coal-fired generation, APCo experienced an increase in the inventory of low-sulfur coal. High-sulfur coal inventories have generally decreased throughout 2012 and remained at or slightly below target levels.