AEP readies mid-2015 shutdown of Tanners Creek coal units

The Indiana Michigan Power subsidiary of American Electric Power (NYSE: AEP) is readying for the mid-2015 shutdown of all the coal units at its Tanners Creek plant and also working on new emissions controls for the surviving Rockport coal plant.

Charles West, the Manager, Fuel Procurement in the regulated Commercial Operations Department for American Electric Power Service Corp. (AEPSC), described the coal buying situation for Indiana Michigan Power (I&M) in July 30 fuel case testimony filed at the Indiana Utility Regulatory Commission.

I&M has two coal generating stations, Rockport and Tanners Creek, that are both projected to receive coal deliveries during the fuel review period from October 2014 through March 2015.

Rockport, located in Spencer County, Ind., consists of two 1,300-MW coal-fired units. SO2 emissions at Rockport are limited by the New Source Performance Standards to 1.2 lbs of SO2 per MMBtu. Compliance with this limit is achieved by using a blend of Powder River Basin (PRB) coal from Wyoming and low-sulfur bituminous coal from eastern sources.

In order to comply with stricter U.S. Environmental Protection Agency (EPA) emissions standards, the installation of Dry Sorbent Injection (DSI) is currently underway at both Rockport units. Rockport Unit 2’s new DSI technology, which is expected to be in-service at the end of 2014, will not change the current coal blend. Rockport Unit 1’s DSI technology is not expected to be in service until after the current forecast period.

Tanners Creek is located in Dearborn County, Ind., and consists of four coal-fired units with a total nominal capacity of 995 MW. As a result of different air emissions standards, as well as differences in boiler designs, the coal supplies for Tanners Creek 1-3 (TC 1-3) and Tanners Creek 4 (TC 4) vary in order to meet the differing quality requirements of the units. For example, each unit of TC 1-3 is limited to SO2 emissions of 1.2 lbs SO2/MMBtu while TC 4 is held to a 1.2% sulfur standard on an annual basis. The fuel requirements of TC 1-3 will be met by bituminous coals from Colorado and eastern sources. TC 4, similar to Rockport, uses a blend of PRB coal from Wyoming and high-sulfur bituminous coal from eastern sources.

Because of stricter EPA emissions standards, all units of Tanners Creek are scheduled to be retired in mid 2015, West noted.

Coal costs recently fell below expectations

For the fuel case reconciliation period of December 2013 to May 2014, I&M’s delivered cost of coal was $45.84/ton or 242.44 cents/MMBtu. These results are 2.24% and 2.65% lower than the forecast, respectively.

  • During the reconciliation period, the overall weighted average delivered cost of coal for the Rockport plant from all sources was forecasted to be $45.04/ton or 245.14 cents/MMBtu. The actual delivered cost was $43.98/ton or 238.02 cents/MMBtu.
  • For TC 1-3 the overall weighted average delivered cost of coal from all sources was forecasted to be $73.02/ton or 304.27 cents/MMBtu. TC 1-3’s actual delivered cost was $81.03/ton or 324.13 cents/MMBtu.
  • For TC 4 the overall weighted average delivered cost of coal from all sources was forecasted to be $49.75/ton or 255.06 cents/MMBtu. TC 4’s actual delivered cost was $51.72/ton or 257.05 cents/MMBtu.

During 2013, low NYMEX (New York Mercantile Exchange) and CSX railroad coal pricing and reduced demand led to the closure of a significant portion of the Central Appalachian (CAPP) coal production in eastern Kentucky and southern West Virginia, West pointed out.

“The Polar Vortex events in the first quarter of 2014 led to unprecedented natural gas prices in the northeast United States setting record high power prices in PJM,” he added. “This, in turn, led to an increase in demand for coal units which when combined with the delivery reductions caused by the cold weather ultimately resulted in a reduction in utility coal inventories during the first quarter. The first quarter and early second quarter of 2014 has seen an increase in coal costs as utilities purchase coal for the upcoming summer demand. The trend for both current and future CAPP pricing appears to be increasing based on a limited supply and increased demand.

“Similarly, the forecasted cost of compliance sulfur NYMEX coal for TC 1-3 is higher due to a limited compliance coal market. As coal suppliers are using low sulfur coal to blend down the sulfur content of their coal to make a NYMEX product, the demand and price is increasing on a limited supply. PRB coal pricing has increased in recent months, although the supply is still greater than demand. In general, slight increases in PRB demand and pricing are expected as we see an increase in either demand for electricity or pricing of natural gas supply.”

EPA mandates are impacting the coal pricing situation

The U.S. Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS) are set to take effect in April 2015, which could impact the forecasted cost of coal for I&M as announced power plant shutdowns will decrease demand in some coal markets (mainly CAPP) and may result in further production declines.

In addition, the EPA in 2011 released the Cross-State Air Pollution Rule (CSAPR). Under CSAPR, reductions in emissions were to begin as early as Jan. 1, 2012. However, in December 2011, the U.S. Court of Appeals for the District of Columbia Circuit issued a stay of CSAPR which delayed the implementation of the rules set to begin January 2012. The court later, in August 2012, decided to vacate the rule and instructed the EPA to continue administering the Clean Air Interstate Rule (CAIR) pending the EPA’s promulgation of a valid replacement. The EPA appealed this decision and on April 29 of this year, the U.S. Supreme Court reversed the D.C. Circuit opinion vacating CSAPR. On June 26, the U.S. government filed a motion with the U.S. Court of Appeals for the D.C. Circuit to lift the stay of CSAPR.

“While the Court considers the motion, CAIR remains in place,” West wrote. “This regulatory uncertainty continues to contribute to, or impact, the price differential for the ultra-low sulfur PRB (0.55 lbs. S02/MMBtu).” That ultra-low-sulfur coal would potentially see higher demand, therefore pricing, under CSAPR since it would be a cheaper way to comply for some plants than installation of new emissions-control technologies.

Much of the upcoming coal will be supplied by Peabody

Rockport’s scheduled tonnages of coal during the forecast period from October 2014 through March 2015 will be supplied primarily by an agreement with the Peabody COALSALES LLC unit of Peabody Energy (NYSE: BTU) that has been in place for several years. The overall forecasted weighted average delivered cost of coal for Rockport from all sources during the period October 2014-March 2015 is projected to be $46.62/ton (254.36 cents/MMBtu).

Due to the planned retirement of the Tanners Creek plant in mid-2015, inventory levels at both TC 1-3 and TC 4 will decline during the period October 2014-March 2015. TC 1-3’s scheduled supply of coal during the forecast period of October 2014-March 2015 will be supplied primarily by short-term or spot agreements. The overall forecasted weighted average delivered cost of coal for TC 1-3 from all sources during the period of October 2014 through March 2015 is projected to be $72.48/ton (302.01 cents/MMBtu).

TC 4’s deliveries during the forecast period of October 2014-March 2015 will be supplied from the Peabody COALSALES long-term coal contract that began in 1989 and from spot coal purchases. The overall forecasted weighted average delivered cost of coal for TC 4 from all sources during the period October 2014 through March 2015 is projected to be $50.97/ton (269.96 cents/MMBtu).

Additional coal requirements that are not already committed will be purchased, as necessary, to fulfill any remaining supply requirements.

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.