Arizona Public Service permits 2016 shutdown of unit at Cholla coal plant

The Arizona Department of Environmental Quality will be taking comment until July 14 on a significant revision to an air Operating Permit that will allow Arizona Public Service Co. to shut a unit at the coal-fired, 995-MW Cholla Generating Station.

The permit revision would authorize shutdown of Cholla Unit 2 by April 1, 2016, and authorize conversion of Units 1, 3, and 4 to pipeline-quality natural gas operation by July 31, 2025. Additionally, this revision sets emission limits for NOX, SO2, and PM10 for all units operating on coal as well as Units 1, 3, and 4 operating on natural gas by July 31, 2025.

In February 2011, the Arizona DEQ submitted a Regional Haze State Implementation Plan (SIP) to the U.S. Environmental Protection Agency. In December 2012, EPA published its notice of final rule-making approving Arizona’s SO2 and PM10 Best Available Retrofit Technology (BART) determination, disapproving Arizona’s NOX BART determination, and establishing a NOX BART Federal Implementation Plan (FIP) for Cholla Units 2, 3, and 4, the three BART-eligible units at Cholla Generating Station, effective Jan. 4, 2013. As a part of the final rule, the FIP imposed an average NOx emission limit of 0.055 pound/MMBtu based on a 30-boiler-operating day average for Units 2, 3, and 4. The rule also required APS to install selective catalytic reduction emission controls and imposed a new 95% SO2 removal efficiency requirement on these units by Dec. 5, 2017.

On Jan. 31, 2013, the State of Arizona filed a petition for review challenging the EPA’s FIP before the U.S. Court of Appeals for the Ninth Circuit. APS and PacifiCorp, a Cholla co-ownerr, subsequently filed petitions for review of the same EPA final action.

On Sept. 9, 2014, APS and PacifiCorp met with the ADEQ and EPA Region 9 to discuss a proposed BART reassessment for Cholla that would resolve the litigation and result in greater long-term environmental benefits and be more cost-effective than EPA’s BART determination. At the meeting, EPA indicated that APS and PacifiCorp’s BART reassessment had sufficient merit to warrant a formal proposal for the agency’s consideration. On Dec. 15, 2014, APS submitted the BART reassessment including a new five-factor BART analysis as a proposed revision to the Arizona Regional Haze SIP and a permit revision application subject to approval of the SIP.

This permit revision now out for comment is contingent on approval of the permit revision as part of the Regional Haze State Implementation Plan (SIP) for Arizona and will be effective on the date of final action by EPA, provided that such final EPA action also revokes or rescinds EPA’s FIP, insofar as that FIP establishes emission limits or other requirements for one or more units at Cholla.

Arizona DEQ permitting documents said the compliance schedule is:

  • Unit 2 is required to be permanently retired by no later than April 1, 2016;
  • The permittee must permanently discontinue burning coal or fuel oil or used oil at Units 1, 3, and 4 by April 30, 2025; and
  • The permittee may convert any or all of Units 1, 3, and 4 to pipeline-quality natural gas after permanent discontinuation of coal- or fuel oil- or used oil-firing. Upon such conversion, these units must not operate at a capacity factor greater than 20%.

Cholla is a four-unit plant located in Joseph City, Arizona. PacifiCorp owns Cholla Unit 4, which contributes 387 MW of capacity to the PacifiCorp system. APS, the operator of the plant, owns units 1, 2, and 3.

PacifiCorp eyes even earlier coal-to-gas switch at its Cholla unit

Under the BART determination under the Regional Haze program, installation of SCR is required at Cholla Unit 4 by Dec. 5, 2017. PacifiCorp said in an integrated resource plan (IRP) filed in March in Idaho that it considered compliance alternatives to the Cholla Unit 4 SCR requirement in EPA’s FIP for Arizona, which include: early retirement; cease coal-fueled operations by converting the unit to operate on natural gas; and technology and inter-temporal tradeoffs. An acceptable alternate compliance solution would require that the state of Arizona incorporate the alternative as a recommended amendment to its SIP for EPA review and approval.

Part of the planning analysis was based on the fact that PacifiCorp and Peabody Energy (NYSE: BTU) are parties to a long-term coal sales agreement for the El Segundo/Lee Ranch mine complex through December 2024. In both the 2017 early retirement case and a 2018 natural gas conversion case, termination of the agreement under the “Early Termination and Buy-Out” provision of the contract requires a payment amount that was redacted from the public version of the IRP.

Said the PacifiCorp IRP: “PacifiCorp’s financial analysis shows that installation of SCR by an assumed compliance date of December 5, 2017, is not a cost effective solution for customers when evaluated against a range of compliance alternatives. Customer benefits are maximized under an assumed alternate compliance scenario in which Cholla Unit 4 continues operating through early 2025 without the installation of SCR, followed by conversion of the unit to natural gas fueling, thereby avoiding coal contract [termination damages], avoiding casualty payments under the Safe Harbor Lease, and avoiding or mitigating pre-paid transmission write-off expenses. This preferred compliance alternative also effectively manages utilization and depreciation of the resource over an appropriate period of time for the benefit of customers. If an alternate compliance solution that maximizes benefits for PacifiCorp customers consistent with these results cannot be reached, converting Cholla Unit 4 to a natural gas-fired unit in 2018 or later is currently assessed as the next best alternative to a 2017 early retirement outcome.”

Said the May 1 quarterly Form 10-Q report of APS parent Pinnacle West Capital Corp. (NYSE: PNW) about the situation: “After considering the costs to comply with environmental regulations, on September 11, 2014, APS announced that it will close Unit 2 of the Cholla Power Plant (‘Cholla’) by April 2016 and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if EPA approves a compromise proposal offered by APS to meet required environmental and emissions standards and rules. Previously, APS estimated Cholla Unit 2’s end of life to be 2033. APS is currently recovering depreciation and a return on the net book value of the unit in base rates and plans to seek recovery of all of the unit’s retirement-related costs in its next retail rate case. On April 14, 2015, the [Arizona Corporation Commission] approved APS’s proposed retirement of Cholla Unit 2 in accordance with the ACC’s Integrated Resource Planning rules. The ACC expressly stated that this approval does not imply any specific treatment or recommendation for rate making purposes.”

The Pinnacle West Form 10-Q added: “If APS closes Cholla Unit 2, APS believes it will be allowed recovery of the remaining net book value of Unit 2 ($127 million as of March 31, 2015), in addition to a return on its investment. In accordance with GAAP, in the third quarter of 2014, Unit 2’s remaining net book value was reclassified from property, plant and equipment to a regulatory asset. If the ACC does not allow full recovery of the remaining net book value of Cholla Unit 2, all or a portion of the regulatory asset will be written off and APS’s net income, cash flows, and financial position will be negatively impacted.”

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.