The Illinois Pollution Control Board, in its Nov. 21 decision to grant an air break to Dynegy (NYSE: DYN) for five coal-fired power plants that Dynegy plans to buy from Ameren (NYSE: AEE), discussed an offer made from coal operator Chris Cline’s Foresight Energy to fund new emissions controls.
Foresight Energy in recent years has developed several big new longwall-equipped mines in Illinois that produce high-sulfur coal. But most coal-fired power plants in Illinois switched years ago to low-sulfur – and in many cases cheaper – coal from the Powder River Basin. Illinois plants were in the first wave of coal plants east of the Mississippi River that switched in the 1980s and 1990s to PRB coal due to the Clean Air Act. So, ironically, there is relatively little in the way of a current market in Illinois for Illinois-produced coal.
Part of the variance on the state’s Multi-Pollutant Standard (MPS) that the board agreed to transfer from Ameren to Dynegy involves a slowed flue gas desulfurization (FGD) construction program at the Newton plant. This slowed program allows Ameren, and now potentially Dynegy, to save critical funds in the near term in a depressed power market.
Foresight’s filed comment during the course of this case said that the variance should be denied because Foresight can fund timely completion of the Newton FGD project. Alternatively, Foresight said that it could acquire the plants and install the Newton FGDs itself.
Foresight believes that the Newton plant, with the scrubbers that are being installed, would produce lower SO2 emissions from burning Illinois coal (supplied by Foresight) than from burning PRB coal without the scrubbers. Installing the Newton scrubbers and switching to Illinois coal at the Coffeen, Duck Creek, and Newton stations, according to Foresight, would increase demand for Illinois coal by over 8 million tons annually and create 900 coal-mining jobs and 2,700 related jobs.
Over time, Foresight argued, using Illinois coal could also lower electricity costs for consumers. Wyoming coal has a lower heat content than Illinois coal, according to Foresight, so the delivered cost of Wyoming coal is actually higher than that of Illinois coal. Foresight claims that for this reason, it can fund completion of the Newton plant scrubber by embedding the cost in a long-term supply contract for Illinois coal, at an “attractive” price compared to that of PRB coal.
Dynegy, Ameren poked holes in the Foresight proposal
Dynegy and Ameren responded by characterizing Foresight’s proposed funding of the Newton FGD project as essentially a loan, to be repaid through “above market coal prices.” They noted, however, that Ameren Energy Generating Co.‘s (GENCO) debt covenants prohibit such a “borrowing activity,” which would, therefore, put GENCO into default.
From a commercial perspective, petitioners state that low sulfur PRB coal is still, despite the additional transportation and delivery costs as compared to Illinois coal, more economical than Illinois coal under current market conditions. To be commercially viable, petitioners add, any increased costs under Foresight’s proposal to be embedded in a coal supply contract would need to be competitive. Petitioners question how such additional costs could “improve the economics of the Newton Energy Center.” Dynegy and Ameren concluded that when the additional capital and operational expenses described above are added to the overall costs, Foresight’s proposal to fund completion of the Newton FGD project is not viable.
AER stated that at no time during the three months of negotiations between Dynegy and Ameren that culminated in the agreement for IPH to acquire the active MPS plants did Foresight seek to initiate “formal negotiations” with Ameren. More important, Ameren Energy Resources LLC (AER) added, now that that agreement is in place, negotiations with a third party to “assume Dynegy’s role in the proposed transaction” would constitute a breach of the agreement.
Dynegy and Ameren argued that although they were originally designed to operate on bituminous coal from Illinois, the boilers at the Coffeen, Newton, and Duck Creek stations have undergone equipment changes to burn low sulfur coal. These changes, along with scrubber installations at the Duck Creek and Coffeen plants, have contributed to an 87% decline in SO2 emissions from AER’s fleet since 1990.
Petitioners stated that to use Illinois coal, the boilers would require lengthy outages and significant upfront capital. Plus, the scrubbers at these three plants would require larger quantities of limestone to remove the higher sulfur content, resulting in increased expenses for annual operations and maintenance.
From an environmental perspective, AER examined the impact that converting to Illinois coal would have on NOx emissions at the Newton facility. Using low sulfur coal, the Newton Energy Center’s NOx emission rate is typically 0.10 lb/mmBtu, according to AER. However, when Newton Unit 1 used Illinois coal from 1994 to 1997, continues AER, the NOx emission rate was approximately 0.30 lbs/mmBtu.
AER states that even optimizing the existing pollution control equipment across the MPS fleet would only bring the NOx emission rate down to about 0.133 lb/mmBtu. That emissions rate, AER continues, is inadequate to maintain compliance with the MPS, absent a regulatory change or installation of NOx control equipment at either the Joppa or Newton station. According to AER, based upon early estimates for an selective catalytic reduction (SCR) system, such control equipment would cost in excess of $150m, plus $20m and a two-month outage per unit to modify the low NOx burners.
According to Dynegy and Ameren, Illinois coal would cost about 20% or $4.13 per megawatt hour more than the low sulfur coal. Financially, Ameren also said that it, and presumptively Dynegy, are obligated under several coal-supply contracts for low sulfur PRB coal, as well as multi-year rail agreements for transport. Petitioners assert that these contracts and agreements would need to be terminated to accept Foresight’s proposal, which would result in petitioners incurring significant financial penalties.
Foresight: Ameren never sought bids for Illinois coal to test the market
Foresight said in a Sept. 24 filing that after its President and CEO Michael Beyer testified at the Sept. 17 board hearing in this case, Ameren claimed it tried and failed in a test of high-sulfur Illinois coal. But Foresight said that was a small, “flawed” test at the Coffeen plant, not the Netwon plant where the scrubbers are being built, and that the test was halted just before the sale deal was worked out with Dynegy.
Foresight also said that Ameren never sought bids for Illinois coal and the transportation for that coal to the power plants, so Ameren has no good way to know what the current economics of that coal are.
The Ameren plants Dynegy wants to buy are:
- Newton, 1,215 MW;
- Joppa, 1,002 MW;
- Coffeen, 895 MW.
- E.D. Edwards, 650 MW; and
- Duck Creek, 410 MW.
Dynegy already owns coal-fired plants in Illinois: Baldwin; Havana; Hennepin; and Wood River. In November 2011, Dynegy permanently retired a fifth coal-fired plant, which was Vermilion in Vermilion County.