Virginia Electric outlines higher usage of gas for power generation

Coal prices continue to decline, despite power plant coal inventories being less than the historical five-year average, but the usual history of lower inventories that tend to push coal prices higher is not repeating this time around.

Gregory A. Workman, the Director-Fuels at Virginia Electric and Power d/b/a Dominion Virginia Power, provided testimony for a Feb. 27 fuel cost filing at the Virginia State Corporation Commission. The testimony covers the current July 2014-June 2015 period, and the future July 2015-June 2016 fuel factor period.

“Coal prices continue to decline, despite power plant coal inventories being less than the historical five-year average,” Workman wrote. “Historically, lower inventories would tend to push coal prices higher. However, coal markets have been fundamentally changed due to the unprecedented productivity witnessed in the shale gas production regions. The abundant availability of competitively priced shale gas provides economic incentive for utilities to switch fuels from coal to natural gas. This phenomenon results in lower coal demand for power generation. In addition, a weak export market for both thermal and metallurgical coal has increased coal supplies for domestic power generation.

“The combination of coal-to-gas fuel switching and weak export markets have driven coal supplies higher, thereby reducing prices. Natural gas prices have declined significantly. This is attributed to a continued increase is in gas production, particularly from the Marcellus shale region. Lower natural gas prices will favor gas-fired power generation, putting downward pressure on coal prices.”

With the addition of the Warren County Power Station and Bremo Power Station to the gas-fired generation fleet in 2014, the company transitioned from a predominantly day-ahead procurement approach for gas to a program that includes day-ahead, monthly, and seasonal purchases. Similar to its coal procurement practices, the company utilizes periodic solicitations and the open market to procure physical gas to meet station requirements. The company also entertains and evaluates opportunities as market conditions change, Workman added.

Fuel diversification helping drive down prices

Steven A. Rogers, Senior Vice President-Financial Management for Dominion Generation, testified that an over-recovery during the 2014-2015 fuel year was driven principally by lower-than-expected commodity and power prices, particularly those for natural gas, as well as milder-than-normal weather in the summer and fall. In addition, its investment in highly-efficient generation resources like the Bear Garden Power Station and the new Warren County station have strengthened fuel diversity and allowed it to leverage these low gas prices for the benefit of customers. These trends helped to reduce fuel costs in the 2014-2015 fuel year, and are projected to continue during the 2015-2016 fuel year.

Natural gas prices have dropped as much as 38% since last year’s filing, from a forecasted $5.03/MMBtu for the July 2014-June 2015 fuel year to $3.12/MMBtu through Jan. 19 2015.

The Brunswick County Power Station, a 1,358-MW (nominal) natural-gas fired combined-cycle facility, is expected to become operational in May 2016. Employing state-of-the-art 3×1 gas combined-cycle technology, Brunswick will further strengthen the mix of fuels and generation resources now available to the company and enhance existing operational efficiencies. Like Warren, the facility’s heat rate will be among the best in the nation when it enters service, resulting in reduced fuel costs and lower emissions. Possum Point Unit 6, a combined-cycle 559 MW unit, will be uprated by 27 MW in May 2015.

The company’s natural gas-fired units now provide baseload, intermediate, and peaking services, and in 2014 met approximately 15% of the company’s annual energy requirements. By 2019, the natural gas percentage of energy production is expected to increase to as much as 40%, with corresponding decreases in the percentage of system energy derived from coal and purchased power, as new, efficient gas-fired generation resources like Brunswick come on-line.

Robert G. Thomas, Director of Energy Market Analysis and Integrated Resource Planning in the Budgeting, Business Planning & Market Analysis Department, said that for projection purposes, three distinct product prices based on market quotes are compiled in the company’s fuel projections. Coal price data are obtained from United Power, a division of ICAP United Inc., which is a primary source for coal pricing in the industry. The first product quote is a Central Appalachian coal with a 12,500 Btu/lb heating value and 1.6 lb/MMBtu sulfur dioxide (SO2) content obtained using the CSX Corp. railway system. The second product quote has the same specifications, but is delivered using the Norfolk Southern railway. The final product quote is a Northern Appalachian coal with a 13,000 Btu/lb heating value and 3.8-4.2 lb/MMBtu SO2 content. All three of these coals have the potential to be burned in the company’s generating units depending upon commodity and transportation pricing, and specific unit characteristics. 

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.