Duke Energy Indiana says coal burn has been okay lately

For the twelve-month period ending Nov. 30, 2014, Duke Energy Indiana purchased approximately 13.4 million tons of coal (pursuant to both long- and short-term contract commitments) at an approximate average cost of $2.82/MMBtu.

The delivered cost of coal purchased under long-term commitments during that period averaged $2.82/ MMBtu and made up 94.7% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.77/MMBtu.

Brett Phipps, employed as Managing Director, Fuel Procurement, Duke Energy Progress, a utility affiliate of Duke Energy Indiana, supplied Jan. 30 testimony to the Indiana Utility Regulatory Commission in the latest of the utility’s twice-yearly fuel cost (FAC) cases. 

“Although published prices for U.S. coal markets have not changed significantly since the last fuel proceeding they have softened across the regions,” wrote Phipps. “The following are 2015 price indications for the different coal producing regions: High-sulfur Illinois basin coal prices are in the $30’s to low $40’s per ton; Central Appalachia coal prices are in the high $40’s; Northern Appalachia coal prices are in the low to mid $50’s; and Powder River Basin coal prices are approximately $12-13 per ton. Coal demand has lessened slightly since the last FAC mainly due to cheaper natural gas pricing and lower purchase power cost. As such, utility stockpiles have seen some growth since the last FAC.

“Coal markets are likely to be relatively stable in the near term; however, looking forward, we see potential for market volatility, due to a number of factors, including: (a) recent U.S. Environmental Protection Agency (‘EPA’) regulations for power plants that result in utilities retiring or modifying plants, which lower total domestic steam coal demand, and can result in some plants shifting coal sources to different basins; (b) softening demand in global markets for both steam and metallurgical coal, causing export opportunities to decline for U.S. coal producers; (c) increased production in the Illinois Basin and Northern Appalachian regions; (d) increased volatility in gas prices, and continued increase in gas supply combined with installation of new combine cycle (‘CC’) generation by utilities, especially in the South, which may also lower overall coal demand; (e) increasingly stringent safety regulations for mining operations, which result in higher costs and lower productivity; and (f) volatile power prices.”

As a result of the extreme weather in the beginning of 2014 and the ongoing increase in coal generation as well as other commodities and services, the railroads were in very high demand with limited resources to serve the increased demand, Phipps added. “As a result the Company did not receive all of the scheduled shipments it had requested each month to the Cayuga Station due to the increased demand for rail service across the entire rail system. The Cayuga Station inventory was well below target levels during the summer and fall months and was forecasted to decline further if the Company did not use an alternative to support Cayuga’s forecasted coal burns. In response, beginning in June 2014, the Company started to truck coal from the Wabash River Station to the Cayuga Station in order to increase inventory levels and supplement the rail performance during this FAC period. The trucking of coal from Wabash River Station to the Cayuga Station ceased on November 26, 2014 after achieving sufficient and reliable inventory levels.”

Coal inventories started going up last fall

Duke Energy Indiana’s coal inventories as of Sept. 30, 2014, were approximately 3,280,000 tons (or 52 days of coal supply at a full load burn rate per day) across the system. As of Nov. 30, 2014, coal inventories increased to approximately 3,980,000 tons (or 65 days of coal supply) due to the lower demand over the fall months. Duke Energy Indiana expects coal inventories to increase over the next quarter because of existing contractual commitments in addition to plant outages.

The company continues to evaluate the need for a coal decrement, which has been used in the past. A decrement basically allows Duke to figure the cost of not burning coal, like coal inventory costs, into its power market price offers, making coal capacity more competitive. The company continues to evaluate a host of options in order to effectively manage the growing inventories. As inventory levels dictate, the company explores options to store or defer contract coal or resell surplus coal into the market. However, due to continued weak coal market conditions, resell opportunities will continue to be extremely difficult in the near term, Phipps added.

Duke Energy Indiana currently has no coal contract reopeners. As previously noted in a prior fuel case, Duke Energy Indiana was at an impasse in negotiations regarding certain provisions within the Bear Run agreement and had exercised contract rights to pursue settlement through arbitration. Resolution through arbitration was avoided in December 2014 as the parties reached a settlement on disputed contractual issues. Phipps wrote: “The terms of the settlement were favorable to Duke Energy Indiana and its customers as compared to 2014, for example 1) the dispatch cost for 2015 decreased for Wabash River Station, Cayuga Station and Edwardsport IGCC Station on average 11.7%, 2) the contract price for 2015 will also show a savings of approximately 25% from the original 2015 contract price, and 3) the total fuel costs included in the fuel clause for 2015 were decreased by 8% of the total fuel bill.”

Phipps added: “Spot natural gas prices are dynamic, volatile and can change significantly day to day based on market fundamental drivers. The current spot price for natural gas is in the range of approximately $3.15 to $3.45 per MMBtu. For the period September 2014 through November 2014 the price the Company paid for delivered natural gas at its gas burning stations was between a low of $3.52 per MMBtu on October 28, 2014 to a high of $5.10 on November 18 and 19, 2014. In comparison, during the previous period of June 2014 to August 2014, the price the Company paid for delivered natural gas at its gas burning generation stations during this period was in a range of delivered daily gas prices between a low of $3.69 MMBtu on August 4, 2014 to a high of $5.15 per MMBtu on June 16, 2014.

“During September through November 2014, natural gas prices remained stable. The Company’s new firm transportation agreement with Panhandle Eastern for firm pipeline capacity to support the Noblesville and Cayuga CT operations began service in June 2014. This firm transportation will enhance the supply reliability by reducing the risk of gas pipeline capacity curtailments to interruptible transportation during periods of extreme weather that may require the pipeline companies to put Operational Flow Orders in place and provides a higher level of service priority.”

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.