Florida Power and Light sees big value in buying out coal plant contract

A power contract provision that got skewed over time and became very costly is a major reason why Florida Power and Light wants to buy the 250-MW Cedar Bay coal plant, and the lack of need for its power and environmental considerations are why it then quickly, over two or three years, wants to phase down its operation and shut it.

FPL applied March 6 at the Florida Public Service Commission (FPSC) for approval to buy out its contract to take power from Cedar Bay and to buy the plant itself, under a deal valued at $520.5 million. The Cedar Bay facility is a 250-MW, coal-fired, qualifying cogeneration facility located in Jacksonville, Florida, that uses three circulating fluidized bed boilers and a single steam turbine. It is indirectly and wholly owned by CBAS Power Inc. and its operations are managed by Cedar Bay Operating Services LLC. Cedar Bay Genco, also wholly owned by CBAS, sells the electricity produced by the facility to FPL and sells steam to an adjacent linerboard facility.

FPL’s payments to Cedar Bay Genco are made pursuant to a long-term power purchase agreement (PPA), which the parties originally executed and the FPSC approved under its Qualifying Facility rules in 1988. The current PPA expires in December 2024. Under the existing PPA, FPL’s annual capacity payments to Cedar Bay Genco increase each year until the contract terminates.

FPL’s energy prices under the PPA are based on a fixed heat rate multiplied by the St. Johns River Power Park (SJRPP) cost of coal, not the Cedar Bay facility’s higher actual energy costs. The coal-fired SJRPP is operated and mostly owned by JEA, with FPL owning a piece of the plant.

In contrast, pursuant to the commission’s rules governing qualifying facilities, FPL’s fixed O&M and capacity payments to Cedar Bay Genco were determined based on Florida’s avoided unit at the time the parties entered the PPA, which was an integrated coal gasification combined cycle unit, the utility told the commission. As a consequence, the fixed O&M and capacity payments are above today’s current and projected market prices and well above FPL’s current avoided costs. To illustrate, FPL’s 2014 average avoided cost is $27 per MWh compared to Cedar Bay Genco’s “all in” price under the PPA of more than $178 per MWh, said the utility.

The filing doesn’t say where that coal gasification avoided cost came from, but it may have been based on the Polk gasification unit that Tampa Electric built in Florida in the 1990s.

The Cedar Bay facility is dispatchable by FPL within the operating limits of the facility. In recent years, because the energy charge that FPL pays under the PPA is competitive, FPL has dispatched Cedar Bay at an annual capacity factor of about 50%. 

As new owner, FPL would continue to be entitled to economically dispatch Cedar Bay as needed to meet its system needs. Based on the facility’s projected true energy costs (as compared to the energy charges that FPL pays under the existing PPA), FPL anticipates that it will dispatch the facility until at least 2016, but at a substantially lower capacity factor (approximately 5%). FPL projects that it will retire the facility due to the availability of the new interstate natural gas pipeline system to fuel its natural-gas fired units in early 2017. If the economics of FPL’s system dispatch were to change such that Cedar Bay once again becomes viable, however, FPL would have the option to continue operating it to produce even greater customer savings.

FPL proposes to recover the fuel costs associated with the Cedar Bay facility through FPL’s annual fuel cost case at the commission, including the rail car lease payments and fuel transportation costs associated with delivering coal to the facility.

Several officials argue for the merits of buying out this PPA

Here is a sample of points made in attached testimony from the March 6 application:

  • Robert E. Barrett Jr., FPL’s Vice President of Finance – “The Cedar Bay Transaction provides FPL’s customers an estimated economic benefit of $70 million in cumulative present value revenue requirements (‘CPVRR’), ($156 million nominal savings) primarily as a result of canceling the PPA which currently is priced above market and is projected to remain above market for the balance of the agreement term. The Cedar Bay Transaction is expected to provide CPVRR benefits for customers under a range of sensitivities for key assumptions.”
  • Thomas L. Hartman, FPL’s Director-Business Development in Energy Marketing and Trading – “The Cedar Bay Facility is dispatchable by FPL within the operating limits of the Facility. When FPL dispatches the Facility, FPL compensates Cedar Bay Generating Company, Limited Partnership. (‘Cedar Bay Genco’) for energy delivered to FPL based on the unit cost for coal at the Saint Johns River Power Park (‘SJRPP’), as reported to the FPSC in what is currently Schedule A4, times a fixed heat rate. This results in an energy cost to FPL’s customers very similar to the costs of SJRPP and a similar dispatch rate, currently about 50% per year. When the Cedar Bay Facility is operating, under current economic conditions, it produces energy at a net loss (to Cedar Bay Genco) – that is, the fuel for the Facility costs more than FPL pays for the energy output. However, the very high capacity and O&M fixed payments result in the PPA being profitable for Cedar Bay Genco.”
  • Kim Ousdahl, FPL’s Vice President, Controller and Chief Accounting Officer – “[T]his coal plant has no economic value to a market participant that would seek to sell power from it on a merchant basis into today’s power market. The only value CBAS had for this plant was associated with FPL’s PPA, which will be canceled upon effective date of the transaction. Therefore, FPL will take title to the asset and will record no book basis for the facility. This is not to say that the plant will not have residual value to FPL in the first few years, before the Sabal Trail/Florida Southeast Connection pipelines are in service. However, … that value is unique to FPL and should not be considered in determining the fair value of the Cedar Bay Facility on the open market.”
  • David Herr, a Valuation Consultant for Duff & Phelps LLC – “To estimate the Fair Value of the Facility, we considered the Cost Approach, which is based on the premise that an asset’s value is based on the cost of replacing it with an asset with similar functionality (in this case, the ability to generate 250 MW of power). However, given that there is currently not a market for its capacity, especially in light of the Cedar Bay Facility’s small size and the prevalence of relatively inexpensive natural gas, a power plant of similar functionality would not be constructed, as its profitability would not justify its construction cost.”
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.