The coal purchasing situation for the Appalachian Power Co. (APCo) unit of American Electric Power (NYSE: AEP) is undergoing a seismic shift, since the utility is due to shut several coal-fired units by June 1 of this year to comply with the federal Mercury and Air Toxics Standards.
Billy Jack Gregg, an independent consultant employed by the West Virginia Consumer Advocate Division, supplied May 19 testimony to the state Public Service Commission in the latest Expanded Net Energy Charge (ENEC) review for Appalachian Power and Wheeling Power. Wheeling Power is another AEP subsidiary that only recently got into the power generation business with a buy, which closed on Feb. 1 of this year, of half of the coal-fired Mitchell power plant in northern West Virginia. Gregg’s heavily-redacted testimony includes recommendations for ENEC rates to be established for the July 2015-June 2016 forecast period.
Gregg noted that reductions in ENEC costs forecast for the July 2015-June 2016 period are the result of various factors, including the asset transfers of Amos Unit 3 and Mitchell, the closure of high-cost older generating plants, reduction in purchased power costs, and reduction in the cost of fuel.
“Coal prices have continued to decline,” he added. “For the week ending May 8, 2015, central Appalachian coal for delivery during the July 2015-June 2016 period had dropped to $48.24 per ton. A year earlier, coal to be delivered during the same period was priced at $67.97 per ton.”
Gregg also noted: “Gas prices for the forecast period have gone both above and below the NYMEX price at the end of February. For the week ending May 8, 2015, NYMEX natural gas for delivery during the July 2015-June 2016 period closed at $3.133 per MMBtu. A year earlier, natural gas for delivery during the July 2015-June 2016 period was priced at $4.222 per MMBtu.”
Gregg pointed out: “APCo is closing all of its sub-critical coal generating units – Glen Lyn Units 5 and 6 (325 MW), Clinch River Units 1 and 3 (460 MW), Sporn Units 1 and 3 (288 MW), and Kanawha River Units 1 & 2 (400 MW) – totaling 1,473 MW of capacity, prior to June 1, 2015. However, Clinch River Unit 1 will be converted to gas with an in-service date of December 2015, adding 242 MW of capacity. Clinch River Unit 2 will then be taken out of service and likewise converted to gas-firing. When Unit 2 re-enters service in May 2016, APCo will have an additional 242 MW of capacity. Any additional capacity resource needs over the next ten years are expected to be met by a combination of rerates of existing generation, demand-side management, wind resources, utility-scale solar, and volt VAR (volt-ampere reactive) optimization (VVO).
“New gas-fired capacity is not anticipated to be added until 2026,” Gregg said. “This new generation capacity will replace the gas-fired units at Clinch River which are expected to be retired in 2026. This capacity plan was contained in the Updated Integrated Resource Plan (IRP) submitted by APCo to the Virginia [State Corporation Commission] in March 2014, and has not been updated since.”
Appalachian Power’s coal purchasing has tumbled in recent years
The most obvious change in coal purchasing for the two utilities is that Wheeling now owns an undivided one-half interest in Mitchell. However, coal purchasing for APCo and Wheeling has actually been greatly simplified, Gregg noted. With the retirement of APCo’s older coal plants and the conversion of what is left of Clinch River to gas-firing over the next year, APCo will have only two coal plants going-forward – Amos and Mountaineer – and Wheeling will have one – its half of Mitchell. “All of these plants are highly efficient, super-critical plants which are located on navigable rivers,” Gregg noted. “As a result, all three plants can take coal by rail or barge transportation, and Mitchell can take coal by belt as well. All of the plants are scrubbed and can burn high-sulfur, high Btu northern Appalachian coal. However, approximately half the tonnage at Amos and Mitchell must still be low-sulfur coal because of limitations on the scrubbers at those plants.
“APCo’s 2014 coal deliveries represented a sharp rebound from the previous year, but were still far below the level of coal deliveries in the past,” Gregg added. The coal deliveries to APCo plants came in at nearly 16 million tons in 2008, tumbling over the years to a low of about 7 million in 2013, with a rebound to over 9 million tons in 2014. When the Mitchell tonnages attributable to Wheeling are added, total coal deliveries to APCo and Wheeling plants will total approximately 11.5 million to 12 million tons a year on a going-forward basis, Gregg said.
Gregg wrote that the company’s new coal purchasing strategy, which tolerates greater open positions, has allowed it to take advantage of lower coal prices which currently prevail. “In essence, the Company now targets its long term contracts to projected minimum coal burn at its plants, and fills any need for additional coal bit by bit as it approaches the period of expected additional generation. Because of the new policy, the Company should no longer be locked-in to contract supplies in excess of its actually experienced coal burn, which have served to preclude the Company from taking advantage of favorable markets and ensured that it could only enter the market when coal demand was high and so were prices. While this new purchasing approach increases the Company’s flexibility, it also means that overall Company coal prices will tend to follow the market – falling when market coal prices are low and rising when market coal prices are high. However, this is certainly preferable to the Company’s prices rising when the market price is rising, and the Company’s prices rising when the market price is falling, as has happened several times in the past. Moreover, the Company’s large long-term high-sulfur contracts – with their pricing mechanisms using base-price/escalator and staggered market reopeners – should provide adequate ballast to mitigate price volatility.”
During 2014, Amos took 3.86 million tons of coal by barge and 0.8 million tons by rail. Coal delivered by rail to Amos in 2014 carried a transportation cost that was $7 to $9/ton higher than barge coal for every month except February, Gregg noted. Quite simply, APCo ratepayers were better off in 2014 taking less rail coal and paying the liquidated damages, than they would have been taking more tons of more expensive rail coal simply to avoid incurring the liquidated damages. “For this reason, I am not proposing any adjustment in this case,” Gregg said. “Hopefully, APCo has now got its rail contract minimums aligned with its actual needs, and liquidated damages related to rail transportation will not be an issue in future AEP ENEC proceedings.”