For the twelve-month period ended Feb. 28, Duke Energy Indiana bought about 11.8 million tons of coal (under both long- and short-term contract commitments) at an approximate average cost of $2.77/MMBtu.
The delivered cost of coal purchased under long-term commitments averaged $2.771/MMBtu and made up 99.81% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.74/MMBtu.
That is according to fuel adjustment clause testimony filed April 25 at the Indiana Utility Regulatory Commission written by Brett Phipps, Director of Fuel Procurement for Progress Energy Carolinas, a utility affiliate of Duke Energy Indiana. The ultimate parent of these companies is Duke Energy (NYSE: DUK).
For comparison, the utility reported about this time last year that for the twelve-month period ended Feb. 29, 2012, the company bought about 12.4 million tons of coal at an average cost of $2.55/mmBtu. The delivered cost of coal bought under long-term commitments averaged $2.54/mmBtu and made up greater than 98% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.65/mmBtu.
Comparing the figures from the two years, Duke Energy Indiana’s coal purchases fell from 12.4 million tons in the prior period, to 11.8 million tons in the latest period, while its coal costs went up.
Phipps noted in the April 25 testimony that the Gibson, Wabash River, Cayuga and Edwardsport IGCC stations are supplied by long-term coal agreements. Gallagher Station will be supplied by spot purchases throughout 2013 depending on how much the plant’s units actually operate.
“Published prices for U.S. coal markets have not changed significantly since the last fuel proceeding,” Phipps reported. “The following are price indications for 2013 delivery for the different coal producing regions; High-sulfur Illinois basin coal prices remain in the upper $30’s to mid $40’s per ton; Central Appalachia coal prices remain in the low to mid $60’s; Northern Appalachia coal prices are in the upper $50’s and Powder River Basin coal prices are approximately $10 per ton. Market drivers for these prices are low natural gas prices and published reports of surplus coal inventories in stockpile at most U.S. power plants.”
In the near term, Duke sees: lower demand for U.S. steam coal supplies; continued interest in exporting to the global coal market; natural gas prices will remain low as compared to historical values, but have increased slightly since the last fuel review case; “healthy” utility coal inventories (which is 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 noted.
Coal inventories remain a stubborn issue due to low burn, coal contract commitments
Duke Energy Indiana’s coal inventories as of Jan. 18 were about 3,228,000 tons (or 53 days at a full load burn rate per day) across the system. As of April 15, coal inventories were around 3,306,000 tons (or 54 days of supply). “Duke Energy Indiana still expects coal inventories will continue to increase because of existing contractual commitments,” Phipps added.
The utility is evaluating a host of options in order to effectively manage the growing inventories. It has entered into a short-term storage agreement with one supplier to store coal at the supplier’s mine facilities and began storing coal at this location last September. The company has also shaped and compacted the Gibson Remote Pile adjacent to the Gibson station for receipt of additional coal for storage and continues to actively explore options to resell surplus coal into the market.
“However, due to continued weak coal market conditions, resell opportunities will continue to be extremely difficult in the near term,” Phipps noted.
Spot natural gas prices are dynamic, volatile and can change significantly day to day based on market fundamental drivers, Phipps wrote. The price that Duke Energy Indiana paid for delivered natural gas at its gas-fired stations increased slightly but stayed at relatively low levels during the December 2012-February 2013 period with a range of delivered daily gas prices between a low of $3.11/MMBtu in early January to a high of $5.15/MMBtu in late January.
The rule of thumb in the coal industry is that Powder River Basin coal starts to get competitive with gas at about $3/MMBtu, other coals like those from the Illinois Basin (where Duke Energy Indiana gets most of its coal) start to compete with gas in the $3-$4/MMBtu range, and costly Central Appalachia coal starts to compete well north of $4/MMBtu.