Kentucky Power settles on Big Sandy Unit 1 coal-to-gas conversion

Kentucky Power on Dec. 6 filed an application for a Certificate of Public Convenience and Necessity (CPCN) with the Kentucky Public Service Commission to convert Unit 1 at the Big Sandy plant from a coal-fired unit to a natural gas-fired facility.

The application was filed by this American Electric Power (NYSE: AEP) subsidiary on Dec. 6. The commission in October had approved Kentucky Power to acquire 50% (about 780 MW) of the Mitchell coal plant in West Virginia to compensate for the planned 2015 shutdown of the 800-MW Big Sandy Unit 2. Kentucky Power had lately been evaluating against responses from a request for proposals (RFP) for outside power whether to shut or convert to gas Big Sandy Unit 1.

As part of a settlement agreement, Kentucky Power agreed to file a CPCN to convert the 278-MW coal-fired Unit 1 to burn natural gas so long as the cost of the project did not exceed $60m. The CPCN seeks about $50m in conversion costs and is a least-cost option for replacing generation lost from Unit 1 when it is retired in 2015. After the natural gas conversion, Unit 1 will have a generation capacity of about 268 MW.

“Converting this unit is something we committed to do when we accepted the stipulated settlement agreement in October,” said Greg Pauley, president and chief operating officer of Kentucky Power, in a Dec. 9 statement. “We have determined that the conversion of Unit 1 is a least cost option for meeting our customers’ electricity needs. In addition, it will allow us to retain a corporate presence in Lawrence County for years to come, contributing to the employment and tax bases of the region.”

The company estimates the Big Sandy plant will continue to employ 20-30 full-time persons once the conversion is completed and approximately 130 temporary jobs at the peak of the conversion construction project. The company anticipates having the converted unit online by mid-2016.

The 2012 Mercury and Air Toxics Standards (MATS) will make the current environmental controls on Big Sandy Unit 1 insufficient to meet the applicable environmental standards. Absent an administrative extension, Big Sandy Unit 1 will no longer be able to operate as currently configured beginning May 2015.

Big Sandy Unit 1 is 278 MW (net summer rating) coal-fired subcritical generating unit located in Lawrence County, and was commissioned in 1963.

AEP said this Unit 1 conversion cheaper than the RFP alternatives

The Big Sandy Unit 1 RFP sought proposals for up to 250 MW of capacity, energy, and ancillary services (if available). The generation resources bid into the RFP were required to be a PJM generation resources and must have been capable of being on line by June 1, 2015. Generation resources bid into the proposal could be in the form of a power purchase agreement, a tolling agreement, an asset purchase agreement, or other proposal as defined in the RFP. In addition, the RFP solicited proposals for demand-side management and cost-effective energy efficiency resources. All responses to the RFP were required to be received by June 11, 2013.

The company said in the Dec. 6 application that it received both conforming and non-conforming responses to the RFP. Kentucky Power contacted non-conforming bidders in an effort to resolve the deficiencies, but in each instance the non-conforming bidders were unable to resolve those deficiencies, the utility said.

Strategist computer modeling indicated that the conversion of Big Sandy Unit 1 to natural gas, as well as the retirement of Big Sandy Unit 1 in June 2015 and its replacement with the lowest cost response to the Big Sandy Unit 1 RFP, were least cost alternatives. Although the replacement of Big Sandy Unit 1 with the lowest cost response to the Big Sandy 1 RFP was, on a 28-year cumulative present worth basis, slightly less than the conversion of Big Sandy Unit 1 to natural gas, the difference was within the “margin of error” of the modeling and thus is not material, the utility added.

The conversion of Big Sandy Unit 1 to natural gas, unlike the adoption of the lowest cost response to the Big Sandy Unit 1 RFP, would eliminate counterparty and unit condition risks that would be present in a market alternative selected from the Big Sandy Unit 1 RFP. “Further, the Commission will enjoy greater authority over the operation of a Kentucky Power-owned unit than with respect to a market purchase,” the company said. “In addition, the conversion of Big Sandy Unit 1 will permit the Company to retain a portion of its Big Sandy Plant workforce. Finally, by not retiring Big Sandy Unit 1 the Company will continue to pay ad valorem taxes to the Commonwealth and Lawrence County on the converted unit.”

Notably, Kentucky Attorney General Jack Conway has appealed the Oct. 7 decision of the commission allowing Kentucky Power to buy the 50% interest in Mitchell and shut Big Sandy Unit 2. The appeal to the Franklin Circuit Court seeks to vacate and set aside the commission’s findings on multiple legal grounds.

“The recent ruling by the Kentucky Public Service Commission approving this transaction will place more than a half a billion dollars into Kentucky Power’s rate base and will ultimately raise consumers’ electric rates by more than 20 percent,” Conway said in a Dec. 4 statement. “It will also transfer energy production to a neighboring state and leave Kentucky consumers paying the bill. That’s just not right.”

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.