Dominion Virginia Power in the past year has seen broad increases in costs for coal and natural gas, said Gregory Workman, the Director-Fuels at Virginia Electric and Power d/b/a as Dominion Virginia Power.
Dominion Virginia Power, a unit of Dominion Resources (NYSE: D), on May 2 filed a fuel cost increase request at the Virginia State Corporation Commission.
Since March 2012, the monthly closing prices for prompt month purchases of coal, oil, and natural gas have changed as follows, Workman noted:
- Coal (ICAP United Central Appalachia 1.6# Prompt), March 2012 ($59.50/ton), March 2013 ($64/ton);
- Oil (No. 6, 1% sulfur – A.E. Bruggemann Prompt), March 2012 ($59.50/barrel), March 2013 ($64/barrel);
- No. 2 Oil (NYMEX Heating Oil Prompt), March 2012 ($3.19/gallon), March 2013 ($2.92/gallon);
- Natural gas (Platts Henry Hub), March 2012 ($2.44/dth), March 2013 ($4.03/dth).
Natural gas production continues to grow due to the continued development of the shale gas market, Workman noted. According to the U.S. Energy Information Administration, U.S. natural gas production grew over 5% in 2012 compared to the previous year. Natural gas demand also strengthened during 2012 and contributed to the increased natural gas price. Due to the close relationship between natural gas and electricity prices, power prices have also increased.
With a lower demand for coal in the U.S., many producers have idled or shut down production, which is an important consideration for future coal prices and is something that the company is monitoring very closely, Workman added.
He said the company has procured coal for the Virginia City Hybrid Energy Center (VCHEC) facility in southwest Virginia. The new plant was placed into commercial operation in July 2012. The plant is capable of burning lower quality coal as well as biomass. The company has contracted for the vast majority of VCHEC’s expected fuel needs for 2013.
Dominion lining up biomass for former and current coal plants
The company currently procures approximately 650,000 tons of wood chips and wood derivative products per year to fuel 100% of the needs at the Pittsylvania Power Station. With the Virginia commission’s approval to convert the Altavista, Hopewell, and Southampton stations from coal to biomass, Dominion has contracted with biomass aggregators (MeadWestvaco and Enviva) for deliveries of wood to these four biomass plants. MeadWestvaco started supplying the company’s biomass requirements for Altavista in April 2013, and it is anticipated that it will start supplying the biomass requirements for Pittsylvania in June 2013. Enviva is expected to supply the biomass requirements to Hopewell and Southampton, which are expected to start receiving biomass fuel in July 2013 and September 2013, respectively. In addition, the company has begun procuring biomass on a spot basis for the VCHEC facility.
The projected increase in system fuel expenses for the 2013-2014 fuel year is driven by several factors. Forward commodity prices for coal, natural gas, and power have risen versus last year’s forecast. Over 90% of the projected fuel factor increase is attributable to the impact of higher commodity prices. Natural gas prices have increased by 40% over the historically low prices in last year’s filing, from a forecasted $3/MMBtu for the July 2012-June 2013 fuel year to a forecasted $4.20/MMBtu for the current period. Forward power prices are approximately 15% higher than last year’s fuel case, while coal prices have risen slightly by 4%.
The increase in system fuel expense is also attributable to the additional nuclear refueling outage scheduled to occur during the current period. Three refueling outages are required in the current period, compared to two during the prior period, testified Fred Wood III, Senior Vice President-Financial Management for Dominion Generation.
For projection purposes, three distinct coal product price projections for the July 2013-June 2014 period based on market quotes are reported. Specifically, coal price data are obtained from United Power, a division of ICAP United, which is a primary source for coal pricing in the industry. Each of the three coals can be burned in various Dominion power plants, which include Chesapeake, Yorktown and Mt. Storm.
- The first product quote is a Central Appalachia coal with a 12,500 Btu/lb heating value and 1.6 lb/MMBtu SO2 content obtained using the CSX Transportation railway system. This coal has a projected price of $65.50/ton in July 2013, rising to $68.25/ton in June 2014.
- The second product quote has the same specs out of Central Appalachia, but is delivered using Norfolk Southern rail. This coal is projected at $68.65/ton in July 2013, rising to $70.95/ton in June 2014.
- The final product quote is a Northern Appalachian coal with a 13,000 Btu/lb heating value and 3.5 lb/MMBtu SO2 content with Monongahela Railway origins. This coal is projected at $61.50/ton in July 2013, rising to $62.25/ton by June 2014.