Billy Jack Gregg, testifying for the West Virginia Consumer Advocate Division, told the state Public Service Commission on June 18 that Appalachian Power (APCo) has better options than acquiring coal-fired capacity.
APCo is asking the PSC to let it acquire 1,667 MW of capacity from its deregulated affiliate, AEP Generating Co., which is another subsidiary of American Electric Power (NYSE: AEP). This capacity consists of the remaining two-thirds of Amos Unit 3 (867 MW) and 50% of the Mitchell plant (800 MW). APCo currently owns Amos Units 1 and 2, both of which are 800 MW units, and has a one-third ownership interest in Amos Unit 3. APCo currently has no ownership interest in the Mitchell plant, which consists of two 800-MW units. Under the proposed transaction, APCo would acquire an undivided 50% share of both Mitchell units, for a total of 800 MW.
Asked by the commission if it is “wise” for APCo to acquire these plant stakes, Gregg responded: “No. Currently APCo has 2,033 MW of generating capacity at Amos with scrubbers with limitations on the sulfur content of coal that can be burned. This has resulted in high and potentially volatile coal prices for APCo and its customers. This existing Amos capacity will represent 33% of APCo’s total capacity after the retirement of the sub-critical units at the end of 2014. If the proposed acquisition is approved, the amount of APCo capacity with limited scrubbing capability will rise to 3,700 MW, or approximately 48% of APCo’s total capacity. I believe this course of action would be inherently risky and would lock APCo and its customers into higher and more volatile coal prices for the long term.”
If APCo were to buy a stake in one of the plants, Gregg said they are so similar that he would have no preference about which one. “However, as previously stated, I recommend that the Commission only approve the acquisition of one plant,” he added.
Currently, APCo owns or has the right to about 7,327 MW of capacity. But that will be reduced with the planned closure of the companies’ sub-critical coal plants at the end of 2014, and the conversion of the Clinch River coal plant in Virginia to natural gas.
APCo and its sister utility Wheeling Power have historically acquired any capacity shortfall from the AEP power pool. However, the AEP power pool will cease to exist at the end of 2013. From January 2014 through May 2015, APCo and the other AEP operating companies will jointly operate under a so-called “bridge agreement.” From June 2015 until May 2017, APCo will operate under a “power coordination agreement” among the regulated AEP operating companies, Gregg noted. APCo’s capacity supply arrangements after this date have yet to be determined.
Both plants are similar; including that problem sulfur limit for the scrubbers
Both plants are located within West Virginia: the Mitchell plant in Marshall County and the Amos plant in Putnam County. Both plants have long track records within the AEP power supply portfolios. Both plants contain super-critical coal-fired units. Both plants are approximately 40 years old. Both plants contain two 800 MW generating units which are virtually identical in design. In addition, Amos contains a 1,300 MW unit which is virtually identical to the 1,300 MW unit at the single-unit Mountaineer plant.
“As with other coal-fired units in the region, the capacity factors of all the units have declined over time as gas-fired generators have run more as a result of lower natural gas prices,” Gregg wrote. “However, in looking at the more recent averages, it appears that the Amos units have consistently had lower capacity factors than Mitchell, with Amos 3 having the lowest. As discussed below, this is primarily a function of Amos 3’s higher dispatch costs.”
Gregg then got into a heavily redacted section that offered details of the coal supplies for each plant. Both plants have scrubbers which allow the burning of high-sulfur coal. However, because of limitations on the scrubbers at each plant, both plants must continue to burn low-sulfur coal. As a result, both plants have a variety of high and low-sulfur coal suppliers.
- The nearby CONSOL Energy (NYSE: CNX) McElroy and Shoemaker mines are the major high-sulfur coal suppliers for the Mitchell plant, while Amos’ high-sulfur coal is supplied by Ohio Valley Coal’s Powhatan No. 6 mine (through coal sales company American Energy) and CONSOL’s Shoemaker mine. All of these mines are longwall-equipped operations working the high-sulfur Pittsburgh seam.
- Mitchell’s low-sulfur coal comes primarily from S. M. & J. Inc. and Southern Coal Sales, while Amos receives low-sulfur coal from a number of suppliers.
Both of these plants were retrofitted with scrubbers during the last decade. Mitchell’s scrubbers went into operation in 2007. Amos’ scrubbers went into operation over a three-year period ending in 2011. Both plants dispose of solid waste produced by the scrubbers and other environmental controls in nearby landfills, and Mitchell conveys a portion of its scrubber by-product to a nearby wallboard manufacturer, Gregg reported.
Sulfur limit is due to boiler slagging problems on very high-sulfur coal
The scrubbers at both plants are designed to handle coal with a sulfur content of no more than 4.5 pounds of sulfur/mmBtu of heat input. In order to meet this limitation both plants must burn an approximate 50-50 blend of high-sulfur and low-sulfur coal and must maintain separate high- and low-sulfur coal stockpiles. Based on AEP’s response to a question, it appears the boilers of the 800-MW units at Amos and Mitchell cannot maintain temperature sufficient to prevent slagging when the sulfur content of the coal burned exceeds 4.5 lbs of sulfur, Gregg said.
Even though the 1,300-MW Unit 3 at Amos does not have that problem, AEP decided to install a scrubber on Unit 3 that had the same sulfur limitations as the scrubbers for the 800-MW units, i.e., 4.5 pounds of sulfur. APCo’s Mountaineer plant also has a 1,300 MW unit, but its scrubber can handle coal with a sulfur content up to 7.5 lbs/mmBtu.
“While there are operational impacts that come from having to manage and maintain two separate types of coal supplies, the main impact of the scrubber limitation is cost,” said Gregg. “The fact that the scrubbers at Amos and Mitchell cannot handle coal with higher sulfur content has resulted in higher fuel costs for those plants. These higher costs stem from the fact that low-sulfur coal is higher in cost and lower in Btu content than high-sulfur coal. In addition, most low-sulfur coal must be delivered by rail, which carries a higher transportation cost.”
This low- and high-sulfur price differential is likely to continue, Gregg added. “Most of the cutbacks in coal production in the last two years have occurred in the central Appalachian region which is the source of the low-sulfur coal burned at Amos and Mitchell,” he explained. “This lower level of production not only places upward pressure on price, but renders pricing more susceptible to volatility. Even if the price of low-sulfur central Appalachian drops to low-levels for short periods, it will be susceptible to rapid increases because the thin level of uncommitted production will chase whatever market opportunities arise.”
Gregg said low-sulfur coal out of the Powder River Basin of Wyoming and Montana is not really an option because it is low in Btu content and carries a high transportation cost. “As a result, the delivered cost of PRB coal to the Amos and Mitchell plants would also be more expensive than local high-sulfur coal,” he wrote. “There would also likely be operational limitations on the absolute amount of PRB coal that could be used in the boilers of the 800 MW units.”