The Duke Energy Progress unit of Duke Energy (NYSE: DUK) reported during a fuel cost case at the North Carolina Utilities Commission that its coal burn is down and expected natural gas burn is up as the utility shuts coal capacity and works toward cleaner generation.
The commission on Nov. 25 approved the utility’s latest fuel cost case, which had been filed on June 12. The test period for purposes of this proceeding is the 12 months ended March 31, 2013.
According to Sasha Weintraub, Vice President, Fuels & Systems Optimization for Duke Energy, the company’s average delivered coal cost per ton increased less than 1.0%, from $91.04 per ton from the prior test period to $91.36 per ton in the test period. The company’s transportation costs increased approximately 3.0%, from $27.94 per ton in the period test period to $28.77 per ton in the test period.
Weintraub testified that coal markets continue to be in a state of flux due to a number of factors, including: recent U.S. Environmental Protection Agency regulations for power plants that result in utilities retiring or modifying plants, which lowers total domestic steam coal demand, and can result in some plants shifting coal sources to different basins; continuing growth in global demand for both steam and metallurgical coal, which makes coal exports increasingly attractive to U.S. coal producers; continued low gas prices combined with installation of new combined cycle generation by utilities, especially in the Southeast, which also lowers overall coal demand; and increasingly stringent safety regulations for coal mining operations, which result in higher costs and lower productivity.
Weintraub stated that due to increasingly lower power prices, the retirement of DEP coal stations, and the addition of natural gas-fueled combined cycle facilities, coal burn projections for 2013 and forward are forecasted to be lower than historical volumes. As an example of the impact, the actual coal burn for DEP’s stations in 2012 was just over 9,700,000 tons, approximately 30% less than the average coal burn over the prior five-year period of over 12,400,000 tons.
Based on the low coal burns in 2012, as well as the downward projection for coal burns in 2013 as compared to the amount of coal under contract for delivery in 2013, Duke Energy Progress expects coal inventories to be above target levels during 2013. According to Weintraub, if the company experiences mild weather and continued low purchased power prices, there likely will be further upward pressure on coal inventories. He also testified that combining coal and transportation costs, DEP projects average delivered coal costs of approximately $92.85 per ton for the billing period.
The has been considering alternatives to help mitigate coal inventory levels, including negotiating contract shipment deferrals/buy-outs and evaluating coal resell market opportunities. Due to lower coal demand for most of the U.S., however, either of these options would likely be difficult to achieve without paying additional costs to the supplier or incurring sales at potential losses.
Weintraub testified that the company’s natural gas consumption is expected to continue to increase. The company consumed approximately 91 billion cubic feet (Bcf) of natural gas in the test period, compared to approximately 72 Bcf in the prior test period. This increase was driven by the downward trend in the natural gas prices as well as the operation of the second combined cycle power block at the Richmond facilities. For the billing period, DEP’s current forecasted natural gas consumption is about 158 Bcf. This forecast is based on current natural gas prices which are forecasted to remain low.
The company’s average price of gas purchased for the test period was $5.11/MMBtu, compared to $5.49/MMBtu during the prior test period.