Appalachian Power readies coal units for retirement by May 31

The Appalachian Power (APCo) unit of American Electric Power (NYSE: AEP) is managing its coal inventories carefully at several West Virginia coal-fired units that are due to be retired by May 31 of this year.

Charles F. West, employed by American Electric Power Service Corp. (AEPSC) in the regulated Commercial Operations organization as Manager, Coal Procurement, testified about coal procurement as part of a March 2 filing at the West Virginia Public Service Commission of an expanded net energy cost (ENEC) case.

During 2013, low NYMEX and CSX-origin coal pricing and reduced demand led to the closure of a significant portion of Central Appalachian (CAPP) coal production in eastern Kentucky and southern West Virginia. The extreme cold weather in the first quarter of 2014 led to very high natural gas prices in the northeast United States and record high power prices in PJM Interconnection. This contributed to a temporary increase in coal prices during the first half of 2014. The cooler summer weather reduced power demand, which led to lower gas and coal prices in the second half of 2014. “The market for Eastern bituminous coal at the end of 2014 had a much lower demand and lower pricing than has been the case for several years,” West noted.

The U.S. Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS) are set to take effect in the spring of 2015 and could also have an impact on the forecasted cost of coal as electric generating unit shutdowns will decrease demand in some coal markets (mainly CAPP) and may result in further production declines, West added.

During 2014, APCo consumed approximately 8% more coal than had been forecast. The average cost of coal in 2014 on a per-ton basis was approximately 6% lower than 2013 and approximately 7% higher than the 2014 forecast. The increase in power demand during the first quarter of 2014 led to increased use of the higher-cost generating units and a significant increase in the purchase price of coal during that period. This, along with the temporary increase in spot market CAPP coal during a period of increased use, impacted the price that APCo paid for coal consumed in 2014.

The 2014 figures are:

  • Consumption, 9,114,903 projected, 9,934,059 actual;
  • $/ton, $59.81 projected, $64.39 actual;
  • Btu/lb, 12,254 projected, 12,185 actual; and
  • $/MMBtu, 244.06 projected, 264.23 actual. 

The July 2015-June 2016 forecast of delivered fuel costs will no longer include fuel costs for APCo’s Glen Lyn, Kanawha River, Sporn Units 1 and 3, and Unit 3 of the Clinch River plants (called the “Disposition Units”). These identified plants and/or units will be retired on or before May 31,2015, as part of APCo’s compliance with the MATS rule. Units 1 and 2 of the Clinch River Plant will continue to operate as coal-fired generation, pending each unit’s conversion to natural gas. In December 2015, Clinch River Unit 1 is to be converted to natural gas, with Unit 2 following in May 2016. In all, 1,270 MW of APCo’s capacity will be retired. A natural gas pipeline is being built by Appalachian Natural Gas Distribution Co. to support the new natural gas-fired boilers at Clinch River. The nominal capacity rating for Units 1 and 2 will be a combined 480 MW after the conversion.

The forecast period for Wheeling Power (WPCo), up until recently a wires company with no generation of its own, includes 82.5% of its allocated 50% portion of the Mitchell Plant’s projected coal costs. The Mitchell Plant’s scheduled tonnages of coal during the Forecast Period will be supplied through a long-term agreement between Ohio Valley Resources and Kentucky Power (KPCo), operator of the Mitchell Plant, and through short-term agreements that will be executed by KPCo over this period.

At Mitchell, the Ohio Valley Resources contract, dating back to 2007, expires at the end of 2021. It is for 2 million tons per year. Recent spot deals for Mitchell includes three with Alpha Coal Sales and one apiece with EDF Trading North America and Koch Carbon.

Mitchell, with about 1,600 MW of total capacity, had 50% of its capacity bought at the end of 2013 by Kentucky Power, and then on Jan. 31 the other half was bought by WPCo.

APCo had several coal contracts, but details are redacted

APCo had six long-term contracts with five vendors that supplied coal in 2014. Three of these long-term contracts with three vendors will be in effect as of July 1, 2015, or are forecasted to begin delivering coal within the Forecast Period. These contracts have various expiration dates, tonnages and prices. Of these three long-term agreements, one is scheduled to expire by the end of the Forecast Period. In addition to the long-term contracts, as of Dec. 31, 2014, APCo had twenty-four short-term agreements that either previously supplied coal, are currently supplying coal, or are scheduled to supply coal to APCo during the Forecast Period.

Additionally, the Mitchell Plant had one long-term contract and five short-term contracts in effect on Jan. 31, 2015, coincident with the transfer date.

APCo has either executed or amended forty-one short-term agreements that were not presented in the last ENEC proceeding. Thirty-one of these were for coal in 2014, nine are for coal in 2015, and one is for coal in 2016. APCo did not enter into any long-term agreements not presented in the last ENEC proceeding.

Thirty-one new short-term agreements supplied coal during 2014 in order to meet the need for coal based on fuel consumption. Fourteen of these short-term agreements, all under three months in duration, supplied coal in the first half of 2014 when the extreme cold weather depleted inventory levels. There were three short-term agreements for Clinch River, three for Glen Lyn, one for Kanawha River, two for Sporn, and five for Amos. Seventeen of these short-term agreements supplied coal in the second half of 2014: five short-term agreements for Mountaineer and twelve for Amos. The remaining ten short-term agreements will supply coal during the Forecast Period or beyond in order to meet the need for coal based on the forecasted fuel consumption.

Given the continued volatility of power demand, the projected forecast of coal consumed is prone to dramatic shifts both up and down. As a result, APCo may procure additional coal on the spot and short-term market during the Forecast Period. Accordingly, for the purpose of preparing the forecast, short-term market prices were used to estimate prices for coal supplies not under contract.

APCo did not participate in any coal hedge transactions in 2014, as favorable conditions for hedging opportunities did not arise during the Review Period.

Beginning in early 2013, the coal procurement team assessed the inventory needs related to the Disposition Units. The team made and is continuing to make any necessary adjustments, while working with each plant’s coal yard supervisor to manage the coal pile. These efforts are being made to achieve declining inventory levels at the Disposition Units, while continuing to operate the plants when called on by PJM to provide needed generation.

In the 2013 ENEC case, a dispute over excess low-sulfur coal supplies for the Amos plant was resolved. John J. Scalzo, employed by APCo as Director of Regulatory Services for West Virginia, testified about the stockpile situation: “APCo’s low-sulfur coal inventory at the Amos plant dropped below the 625,000 ton target in March 2014. APCo restored 10 months or $17 million of the Disputed Coal Inventory to the ENEC balance. Initially, the Companies had projected that APCo’s low-sulfur coal inventory would not drop below the 625,000 ton target until November 2014. All APCo plants ran more than projected during the winter of 2014 which caused APCo to reach its coal inventory targets earlier in the year.”

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.