Following the recent purchase of Southern California Edison’s interest in the coal-fired Four Corners Generating Station, Arizona Public Service (APS) will be continuing its evaluation of coal by examining the merits of further investment in the Cholla and Navajo coal units.
“Key to this analysis will be penetration of solar PV and its impacts on the need for operational flexibility, natural gas prices and the impacts of environmental regulations,” APS wrote in an integrated resource plan released on April 1. “Completion of analysis and a decision regarding Cholla is expected by 2016, followed by Navajo before 2019.”
Four Corners, following the recent retirement of Units 1-3, is a two-unit coal-fired plant located in northwestern New Mexico. APS operates the plant and owns 63% of the capacity. APS recently bought Southern California Edison’s (SCE) 48% interest in each of Units 4 and 5 of Four Corners, covering 739 MW of the plant’s capacity. Concurrently with the closing of the SCE transaction, BHP Billiton, the parent company of the coal supplier and operator of the mine that serves Four Corners, transferred its ownership to the Navajo Nation to own the mine and develop other energy projects.
Cholla is a four-unit, 1,027 MW plant located in northeastern Arizona near Holbrook. APS operates the plant and owns Units 1-3, and PacifiCorp owns the 380-MW Unit 4. Cholla is fueled by coal from Peabody Energy’s Lee Ranch and El Segundo mines in New Mexico.
The Navajo Generating Station (NGS) is located in northern Arizona on the Navajo Reservation near Page, and features three 750-MW coal-fired units. An electric railroad delivers coal to the plant from a mine on the Navajo and Hopi reservations at Black Mesa in northern Arizona. The plant is operated by the Salt River Project, and is owned by a partnership of five utility companies and the U.S. Bureau of Reclamation. APS owns 14% of the plant.
All three coal plants are facing regional haze mandates
All three of these plants face issues under the U.S. Environmental Protection Agency’s regional haze program. The focus of the regulations is to reduce emissions of NOx, SO2 and particulate matter (PM). Arizona’s first regional haze State Implementation Plan (SIP) covered the initial planning period extending from 2005 through 2018 and included a best available retrofit technology (BART) determination for each BART-eligible source in the state. During the next planning period, which will run from 2019 through 2028, the state of Arizona must consider man-made sources of visibility-impairing pollutants for potential Reasonable Progress controls. Sources not subject to BART in the first planning period could potentially be subject to additional emission control requirements in the second and subsequent planning periods of the program.
In December 2012, EPA issued a final BART rule for Cholla. EPA approved Arizona’s BART emission limits for SO2 and PM, but added an SO2 removal efficiency requirement of 95%. In addition, EPA disapproved Arizona’s BART determinations for NOx and promulgated a federal implementation plan (FIP) establishing a new, more stringent “bubbled” NOx emission rate applicable to the two BART-eligible Cholla units owned by APS and a third BART-eligible unit owned by PacifiCorp. In order to comply with this new rate, APS will be required to install selective catalytic reduction (SCR) on the three BART-eligible units at Cholla (Unit 1 is not BART eligible). The SCRs would necessitate additional equipment, such as economizer bypasses and dry sorbent injection (DSI) to reduce acid gas emissions from the SCR controls. APS’s total costs for these post-combustion NOx controls would be about $200m. Under the FIP, APS has five years from December 2012 to complete installation of the equipment and achieve the BART emission limit for NOx. APS believes that EPA’s final rule as it applies to Cholla is unsupported. So in February 2013, APS filed a petition for review of the final BART rule in the U.S. Court of Appeals for the Ninth Circuit. The state of Arizona and three other utilities filed similar petitions. Briefing in the case concluded on Feb. 21, and the parties are waiting for oral argument.
In August 2012, EPA issued its final BART determination for Four Corners. The rule included two compliance options. In December 2013, on behalf of itself and the Four Corners co-owners, APS notified EPA that the co-owners selected the BART alternative, which required APS to permanently shut down Four Corners Units 1-3 by Jan. 1, 2014, and install and operate SCR control technology on Units 4 and 5 by July 31, 2018. APS’s 63% share of the costs for these controls is estimated to be about $350m.
APS’s total costs for post-combustion NOx controls at Navajo could be up to $200m. EPA’s proposal includes an alternative to BART, which would provide Navajo with additional time to install the SCR technology. Under this “better-than-BART” alternative, the Navajo participants would be required to install SCR on one unit per year in 2021, 2022, and 2023. In July 2013, a group of stakeholders, including the Salt River Project, submitted to EPA two suggested alternatives to BART, which would achieve greater NOx emission reductions than EPA’s proposed BART rule. If the rule is finalized as proposed, depending on which alternate operating scenario the Navajo participants ultimately chose, the required NOx reductions could be achieved by either closing one of the three 750 MW units at Navajo or curtailing energy production across all three units such that the emission reductions are commensurate with the closure of one unit. In September 2013, EPA issued a supplemental BART proposal proposing to determine that these alternatives are “better than BART.”
As for the EPA’s Mercury and Air Toxics Standards (MATS), at Cholla, APS will have until April 2016 to comply, since the state of Arizona has granted it a one-year extension of the base April 2015 MATS compliance deadline. APS has already installed certain of the equipment necessary to meet the anticipated standards. APS currently estimates that the cost for the remaining equipment necessary to meet these standards is approximately $125m for Cholla Units 1-3. Under MATS, APS is evaluating fabric filter baghouses and scrubber upgrades for Cholla Unit 2 and installation of activated carbon injection for Cholla Units 1–3.
Two resource plan scenarios, which weren’t chosen, would sharply reduce coal
In looking at future resource needs, APS developed four portfolios, with one being the chosen baseline portfolio, and one emphasizes renewable energy development. The other two feature a lot less coal. All portfolios include the recent acquisition of SCE’s share of Four Corners Units 4 and 5, and the related retirements of Units 1-3, assume no additional coal or nuclear baseload resources are added over the course of the Planning Period and achieve compliance with the Energy Efficiency Standard. In the baseline case, coal holds at 1,932 MW of capacity, which is 24.5% of the APS energy mix.
- COAL REDUCTION PORTFOLIO – This portfolio was developed to determine the impact of reducing APS’s coal generation and to comply with the Arizona Corporation Commission (ACC) directive to evaluate the impact of retiring coal if the Four Corners transaction was consummated. It was assumed that Cholla 2 would retire April 1, 2016, at which time fabric filters and SO2 upgrades would otherwise be required to comply with the MATS rule, and Cholla 1 and 3 would retire Dec. 31, 2024 at the end of their coal contract. The PROVIEW computer model replaced the Cholla generation predominantly with gas, plus 200 MW (nameplate) of solar capacity (42 MW on peak rating). This portfolio reduces APS’s coal generation from 24.5% in 2029 in the Base Portfolio to 16.9% (1,285 MW), and accordingly reduces future carbon risk as well as the risk of increased environmental controls.
- COAL-TO-GAS CONVERSION PORTFOLIO – This portfolio was developed to evaluate the impacts of converting APS’s Cholla Units 1-3 to natural gas operation in the 2016-2017 time frame before fabric filters are required by the EPA on Unit 2, and SCR installations are required on Units 2 and 3. It satisfies ACC Decision 73884, which required APS to consider the possible conversion of existing coal generating plants to natural gas. In order to operate on natural gas, three additional costs would be incurred. First is the cost of the boiler modifications necessary to deliver and burn natural gas in the units. The second deals with the construction of a natural gas pipeline big enough to deliver gas to run the units, approximately 30 miles in length. The third cost is liquidated damages to the coal supplier as a result of not meeting contractual requirements. This portfolio reduces APS’s reliance on coal in the Base Portfolio from 24.5% in 2029 to 16.9% (1,285 MW) and accordingly reduces future carbon risk and potential additional costs from future environmental regulations.
Each of the portfolios has benefits under certain conditions, and no portfolio is the clear winner. There are many economic, environmental and risk trade-offs to be considered in the selection of APS’s 2014 resource plan. At this time, APS said it is selecting the Base Portfolio as its 2014 resource plan with slight modifications. This plan exhibits a reasonable blend of attributes when compared to the other portfolios. It is recognized that it may be beneficial to retire the Cholla plant or convert it to natural gas operation. It is also recognized that it may be beneficial under certain circumstances to increase the amount of renewable resources in the plan, depending on natural gas pricing, overall solar PV penetration and further environmental regulation. None of these options have been foreclosed at this time.