The Kentucky Public Service Commission on Aug. 14 approved new power sales agreements with Kenergy Corp. that among other things should avoid a potential near term shutdown of Big Rivers Electric‘s Coleman coal plant.
On June 12, Kenergy and Big Rivers Electric jointly filed an application for approval of certain new contracts for electric service to Century Aluminum of Kentucky General Partnership (“Century Kentucky”) commencing on and after Aug. 20. The application included the applicants’ direct testimony, as well as new contracts, to replace the existing 2009 contracts with Century Kentucky. The 2009 contracts with Century Kentucky were entered into along with the July 2009 closing of Big Rivers’ unwind transaction whereby Big Rivers re-acquired operational control of its coal-fired generating plants, which had been managed by another company for several years while Big Rivers worked itself out of prior financial trouble.
The application included nine agreements, referred to as the Century Transaction Agreements, for electric service to Century Kentucky of up to 482 MW for operating the Hawesville aluminum smelter.
Century Kentucky is a subsidiary of Century Aluminum Co. Due to the nature of the smelting process, Century Kentucky requires a significant quantity of firm, reliable power in the amount of 482 MW which it consumes on a round-the-clock basis at a 98% load factor. The current annual cost of electricity at Century Kentucky is $206m, and this accounts for almost 40% of its cost to produce aluminum.
Century Aluminum could terminate the 2009 contracts at any time upon providing a 12-month written notice that it had made a business decision to cease smelting operations at Century Kentucky. In August 2012, Century Aluminum did issue such a notice that it would cease smelting operations at Century Kentucky on Aug. 20, 2013, precipitating a crisis for Big Rivers since it relies on this business for much of its load.
Following the notice, two sides commenced negotiations in September 2012 to discuss an alternative power supply arrangement. Those discussions continued into June, resulting in the Century Transaction Agreements.
With Coleman so near the Hawesville smelter, there is a near-term need for it
Big Rivers owns and operates four generating stations, including Coleman in Hancock County, Ky. Coleman consists of three coal-fired units that entered commercial operation between 1969 and 1972. With a combined net capability of 443 MW, Coleman is located next to the Century Kentucky smelter. As a result of the decision by Century Kentucky to terminate its 2009 contracts, Big Rivers will no longer have an immediate market for the 482 MW of power that up to now has been sold to Century Kentucky. Since the cost of generation produced by Coleman is among the highest on the Big Rivers’ system, Big Rivers decided to idle Coleman at least through May 2015, or until market power prices equal or exceed the generation costs at Coleman.
However, as a member of the Midcontinent Independent System Operator (MISO), Big Rivers had to submit its plan to idle Coleman for review and approval to ensure that it does not adversely impact the reliability of the regional transmission system. Subsequent to submission of Big Rivers’ plan to idle Coleman, MISO determined that its transmission system could reliably supply a firm load at Century Kentucky of only 338 MW, and that load above that level would have to be interruptible.
Due to the nature of Century Kentucky’s smelting operations, it is essential to its economic viability that it be able to operate at a firm load of 482 MW. For Century Kentucky to operate at a firm load of 482 MW, MISO has determined that Coleman must be open and available to generate power when needed for reliability purposes. Thus, MISO has designated Coleman as a System Support Resource (SSR), placing it in a must-run status. The resulting costs for having to keep the Coleman Station in a must-run status will be assessed by MISO to the transmission users that benefit from the increased reliability, and the amounts collected will be paid to Big Rivers. Under the Century Transaction Agreements, Century Kentucky has agreed to reimburse Big Rivers for the SSR costs it incurs in connection with Coleman’s SSR status.
“Century Kentucky believes that paying the additional costs associated with the must-run status of the Coleman Station would make the smelting operations uneconomical,” the PSC noted in the Aug. 14 order. “In an effort to avoid this situation, Century Kentucky is in the process of adding capacitors and protective relays at its smelter to allow it to safely withstand some level of interruption to its power supply. Due to the length of time necessary to acquire and install this additional equipment, Century Kentucky has agreed that the Coleman Station should be in SSR status and Century Kentucky will pay the resulting costs, but only through May 30, 2014. Because the costs assessed by MISO in connection with a generating facility being in SSR status include budgeted capital expenditures, Century Kentucky is unwilling to commit to paying capital expenditures beyond May 30, 2014 that will include relatively costly environmental retrofits at the Coleman Station.”
The PSC added: “As part of the agreements between the Applicants and Century Kentucky, Kenergy will reserve, and Century Kentucky will pay for, all transmission service needed to serve its load. The cost for transmission service is estimated to be $7.7 million annually. However, for the length of time that the Coleman Station is in SSR status and such costs are being paid by Century Kentucky, the cost of transmission service will be credited against the SSR costs. Although it would have been of greater benefit to retail customers if these transmission revenues had not been credited against the Coleman Station SSR costs, we recognize that the crediting will not result in any incremental costs to retail customers. Based on this finding, the Commission will approve the crediting of the transmission revenues against the Coleman Station must-run costs.”
Century Aluminum says this deal with save smelter and jobs
Century Aluminum of Kentucky, a wholly owned subsidiary of Century Aluminum (NASDAQ: CENX), announced the PSC approval in an Aug. 14 statement. While these agreements remain subject to certain conditions, as well as approvals from various third parties, they will allow for continued operation of the Hawesville smelter following the expiration of the current power contract on Aug. 19, Century noted.
The Hawesville smelter has an annualized hot metal production capacity of 252,000 metric tons of primary aluminum and employs approximately 650 people.
“We are pleased to have reached this important milestone,” said Michael Bless, President and CEO. “We are grateful for the unwavering support of regional union leadership and the community as a whole. In addition, we appreciate the Public Service Commission’s timely consideration and approval of the agreements.”
He added: “We will, per the terms of the agreement we reached in June, begin to receive market-priced power for Hawesville beginning on August 20. There are additional requirements that must be satisfied to provide for the plant’s long-term operation. Most importantly, we must agree, with the operator and regulator of the regional transmission system, on operating procedures and the installation of necessary equipment to assure the stability of the grid. These efforts will require some additional months to complete, during which time we will reimburse Big Rivers for any incremental costs associated with continued temporary operation of the Coleman Generating Station. We are now preparing to move Sebree to a similar market-priced energy arrangement when its power contract expires on January 31, 2014.” Sebree is another smelter in the region.
To allow time for the satisfaction of closing requirements and conditions, Century said it will extend the date of the plant closure cited in an April federal WARN notice from Aug. 20 to Oct. 18, during which time the company will work vigorously to bring the transaction to a final conclusion. Once all the conditions are met and approvals received, the WARN notice will be rescinded.
Big Rivers has lately been marketing Coleman and Wilson coal plants
Big Rivers Electric, in the meantime, has been exploring the sale of two coal-fired power plants to stave off a financial meltdown. Big Rivers on July 26 filed at the Kentucky PSC a 191-page “brief” that runs down the arguments of it and other parties to a long-running, controversial rate case. Big Rivers is seeking an unusually large rate hike from the PSC due to the potential loss of aluminum smelter power customers that take a very high percentage of its power production.
“Big Rivers has also explored and continues to actively explore the possibility of selling certain generation assets,” said the brief. “It is currently engaged in discussions with multiple entities about the possible sale of the Wilson Station or the Coleman Station, and it has set a price on both plants. None of the potential counterparties to these proposed transactions have refused the offers currently on the table.”
Big Rivers said it would only sell a power plant if that would provide greater benefit to the members than idling the plant. In other words, Big Rivers would consider an offer to purchase one of its plants if that offer would not result in a loss of equity (a critical part of Big Rivers’ necessary access to the capital markets) and if the price paid for the plant was high enough to fairly compensate Big Rivers’ local cooperative members.
Big Rivers said its willingness to consider selling generation assets is complementary to its ongoing efforts to market available capacity because they are both efforts aimed at providing the maximum possible benefit to Big Rivers’ members, whatever form that benefit takes.