Enviros criticize the coal accounting, usage of Consumers Energy

The Michigan Environmental Council (MEC) and the Natural Resources Defense Council (NRDC) claim that the way Consumers Energy accounts for coal costs is driving up the cost of that coal paid for by ratepayers.

That was among the points made by the two environmental groups in a brief filed July 10 at the Michigan Public Service Commission in a power supply cost recovery (PSCR) case begun last September. The July 10 brief of Consumers didn’t directly address the complaints about coal costing and dispatch of the coal units.

Much of the MEC and NRDC focus was on the “Seven Classic” coal-fired units – Whiting 1-3, Weadock 7-8 and Cobb 4-5 – that Consumers plans to shut in April 2016 for clean-air needs.  Consumers Energy’s other coal units – Campbell 1-3 and Karn 1-2 – are referred to as the “Big 5” and are expected to remain in operation over the long term. Also, the Zeeland natural gas combined cycle (NGCC) power plant is mentioned frequently throughout the testimony.

Consumers calculates its dispatch bids for each unit based on “replacement” fuel costs, which are essentially the price of fuel on the spot market, the groups said. But the company charges PSCR customers the burned cost of the fuel – which, at least for coal units, is almost the same as the price paid to obtain the fuel on long-term contracts.

“This disparity in cost is important to this case, because the replacement coal cost that Consumers includes in bidding its coal units to the Midcontinent Independent System Operator (MISO) for daily operation is projected to be significantly lower in 2013 (50 cents or more per MMBtu at some units, according to Consumers witness [Sara] Walz) than the burned cost for coal that Consumers plans to pass on to its customers in the PSCR,” the groups said. “As a result, Consumers’ coal units are run more often, and PSCR customers are ultimately charged more, than if the units were dispatched on the basis of the same price as customers are charged for coal. This situation is true not only of the 7 Classics, but is also how Consumers bids the Big 5.”

Groups claim capacity factors for coal units are too high

The second issue related to the dispatch of these units relates to their projected utilization, the groups added. “At a high level, Consumers’ electric generating units operate when MISO dispatches them, based on bids for each unit which in turn are based on their dispatch costs. With this premise, units with lower dispatch costs should tend to generate more, and units with higher dispatch costs should tend to generate less. This use of an ascending hierarchy based on incremental operating costs is not absolute, and other factors – including the designation of coal units as ‘must-run’ – creates what are sometimes very large exceptions. A must-run designation requires that a unit run at least at its minimum capacity in all hours in which it is available, even if its operating costs are higher than the revenue received.”

In the 2012 PSCR plan case, Consumers witness Richard Blumenstock testified that the company’s standard practice is to offer all of the coal units as must-run, the groups noted. For the 2013 PSCR plan year, Consumers projects that three of the Seven Classic coal units will have significantly higher capacity factors than the Zeeland NGCC plant.

“Consumers has made this projection despite the fact that Consumers also projects a lower dispatch cost for Zeeland than for several of the Seven Classics during most of the months of 2013,” the groups said. “In other words, Consumers plans to run some of the Seven Classics more than the Zeeland plant in 2013, at a higher average PSCR cost. Consumers Energy’s methods for dispatching its natural gas and coal-fired generating units have been an issue in other recent PSCR cases, but none of those proceedings dealt with the specific shortcomings regarding Consumers’ dispatching that are evident in the present proceeding.”

The MEC and NRDC requested that the administrative law judge (ALJ) handling this case recommend that the commission direct future PSCR plans to be based on production cost modeling that uses the projected weighted average cost of the coal expected to be delivered to the plant (in other words, something closer to the burned cost), rather than a hypothetical spot market replacement cost. Also, they requested that the ALJ recommend that the commission require Consumers in the reconciliation case to quantify or estimate any additional costs to the customer resulting from the use of dispatch bids that do not reflect the full fuel cost of dispatching the units.

The projected capacity factor for the Zeeland NGCC unit is 39% in 2013, the groups said. The projected 2013 capacity factors for the Seven Classic coal units, on the other hand, are between 59% and 64%, depending on the unit. “These discrepancies are remarkable because the company projects a higher capacity factor for the Cobb 4, Whiting 3, and Whiting 2 units than for the Zeeland NGCC unit,” they added.

They recommend that Consumers be required to adjust this strategy so that the Zeeland NGCC unit is dispatched at a rate higher than is anticipated in this filing, requiring greater projected natural gas purchases and lower coal purchases. One way to accomplish this would be to disallow a portion of the company’s planned $446m in coal purchases in 2013, and to invite the company to come back in the reconciliation with a request for recovery of costs associated with a correspondingly higher natural gas burn, they said.

Consumers Energy during the course of this case did not dispute the underlying facts presented about the capacity factors and relative dispatch costs of the units in question, the groups said. Nor did the company explain why it projected some coal units to operate at a higher capacity factor than the Zeeland NGCC plant, in spite of the coal units also having a higher dispatch cost, they added.

The Consumers responses have included a statement that the commission has already addressed these issues. Also, a Consumers witness asserted that it is not within Consumers Energy’s ability to increase or decrease MISO’s utilization of a particular generating unit. Consumers also said there are other components of a unit commitment decision that affect a unit’s projected generation besides dispatch costs. And the company stated that the Production Cost Model allowed for economic dispatch of all coal units in all months of 2013 except July and August.

Consumers plans to idle ‘Classic’ seven in 2016

Consumer has received approval from the MISO to suspend operations on April 15, 2016, through April 14, 2019, of:

  • BC Cobb Units 4 (156 MW installed) and 5 (156 MW);
  • JC Weadock Units 7 (145 MW) and 8 (145 MW): and
  • JR Whiting Units 1 (101 MW), 2 (99 MW) and 3 (124 MW).

The company has said it is actively reviewing the scope, cost and requirements to repower the BC Cobb Units 4 and 5 with natural gas as a potential alternative to market capacity purchases beyond the capacity provided by the planned, 700-MW, gas-fired Thetford plant.

The coal units that would remain open are:

  • JH Campbell Units 1 (260 MW installed), 2 (347 MW) and 3 (751 MW); and
  • Dan E Karn Units 1 (255 MW) and 2 (260 MW).

All of these plants fired entirely or primarily Powder River Basin coal, with U.S. Energy Information Admimistration data showing that coal suppliers earlier this year included the Black Thunder mine of Arch Coal (NYSE: ACI), the Antelope and Spring Creek mines of Cloud Peak Energy (NYSE: CLD), and the North Antelope Rochelle mine of Peabody Energy (NYSE: BTU).

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.