A declining level of coal-fired capacity and a “poor” operating performance last year for its mainstay Stuart coal plant highlight the recent operations of Dayton Power & Light, said consulting firm Energy Ventures Analysis in a fuel audit report filed on Oct. 2 at the Public Utilities Commission of Ohio.
Energy Ventures Analysis did this report on behalf of the commission. The public version of the report is heavily redacted, especially in the section about specific coal procurement contracts. Ohio is a largely deregulated state in terms of power generation, but the commission has some residual oversight over Dayton Power & Light’s (DP&L) fuel procurement.
The report noted that in July 2014, Dayton parent AES Corp. (NYSE: AES) announced that it planned to retain DP&L’s generating assets, instead of selling them to an outside party, and that it would do so by transferring them to an affiliate by Jan. 1, 2017, consistent with one of the allowed options in the latest approved DP&L Electric Security Plan (ESP). AES indicated this strategy was preferable because it allowed an ultimate sale value to benefit from an intervening recovery of power prices. In September 2014, the PUCO approved DP&L’s plan to sell most of its generation to an affiliate.
The PUCO indicated that DP&L needs to at least try to market its stake in the coal-fired Ohio Valley Electric Corp. (OVEC), despite numerous challenges associated with that. OVEC controls the Kyger Creek and Clifty Creek coal plants.
With respect to fuel cost recovery, the current ESP provides for both a Fuel Adjustment Clause (FAC) and Alternative Energy Rider (AER) through the term of the second ESP. DP&L continues to be required to make quarterly filings related to its fuel and purchase power costs and have its costs subject to an annual audit by an independent third-party or PUCO staff. Energy Ventures Analysis and its subcontractor, Larkin & Associates PLLC, were selected by the PUCO to perform the desired management/performance and financial audits. EVA and Larkin had previously performed the audits of 2010, 2011, and 2012.
Dayton bought 6.9 million tons of coal in 2014, about the same as 2013
In 2014, DP&L purchased 6.9 million tons of coal at an average delivered price of $50.91 or $2.193 per MMBtu which is about the same volume and price experienced in 2013. In 2014, DP&L generation decreased by 13% overall. The large decrease was due to large reductions in generation across much of the coal fleet. The only two coal plants which experienced an increase in 2014 were Conesville Unit 4 and Killen. Coal accounts for over 99% of DP&L generation. About 48% of its coal-fired generation comes from DP&L-operated plants.
The audit noted: “DP&L’s 2014 coal purchase costs as reported to the Energy Information Administration (EIA) on Form 923 are competitive with other Ohio and nearby utilities for which data are available. The average delivered price of coal to the Killen and Stuart Stations in 2014 are competitive with the average delivered cost to 11 utility plants which receive coal by barge that are equipped with scrubbers, bum high sulfur coals, and that are proximate to Killen and Stuart.”
One audit recommendation was that DP&L should develop a strategy “to address the financial weakness of its counter-parties in coal supply agreements.”
DP&L owns all or part of 12 generating facilities with a total capacity of 3,251 MW (2,829 MW of coal and 422 MW of other capacity). DP&L’s coal capacity will decline with the official retirement of Hutchings in 2015 (the coal units there haven’t generated power since 2012) and the sale of DP&L’s share of an East Bend unit to Duke Energy Kentucky which was completed in January. DP&L sold its 31% ownership interest (186 MW) in East Bend Unit 2 to Duke Energy Kentucky. DPL’s ownership in the coal-fired Beckjord Unit 6 is not included because it was retired in 2014.
Generation in 2014 as opposed to 2013 declined by 13% overall and 11% for DP&L operated plants. A large decline in Stuart generation (22%) was partially offset by increased Killen generation (12%). With the exception of Conesville Unit 4, which is operated by American Electric Power, all of the coal plants in which DP&L is a non-operating partial owner also had lower generation in 2014.
As for the the only coal plants for which DP&L has responsibility for coal procurement:
J. M. Stuart
The Stuart Station consists of four units with a total capacity of 2,308 MW. The retrofits of flue gas desulfurization units on all four units were completed in 2008. All coal to this station is delivered by barge. Prior to the retrofitting of the scrubbers, the Stuart Station burned low sulfur coal in order to meet its 3.16 pound of SO2 per MMBtu state limit. The coal originated primarily in Central Appalachia. The scrubbers are designed for coals with an SO2 content up to 7.22 pounds per MMBtu. However, given the design of the boilers, DP&L did not assume a complete switch to higher sulfur coals because of concerns over slagging and fouling. DP&L ultimately switched all four units to burn 100% high sulfur coal.
DP&L dispatches Stuart on a two-tiered basis. Based upon its finding that slagging was a controllable problem when the load was 537 MW or less, DP&L established two operating levels. Tier I is the operating level at which no on-line deslagging is needed. Tier II is operations above the Tier I level. DP&L added a cost rider to the last 40 MW when operated above the Tier I level.
“Poor performance at Stuart has been a major issue for DP&L over the last year,” said the audit about the Stuart plant. In response to an Energy Ventures request to describe DP&L’s strategy to improve performance, DP&L indicated it adopted a multi-faceted approach that includes:
- Significant restructuring of the DPL Generation team in early 2015 including a new Vice President of Generation, a new Director of Planning, Outages & Engineering, a new Stuart station manager, and new managers in many of the key plant roles.
- Complete reorganization of the Stuart team to create a more team-driven, performance-based business.
- Improved culture within the business.
- Development of an improved Asset Life Cycle Program that matches the challenging operations using high-sulfur Illinois Basin coal as a main source of fuel.
“While DP&L’s admission of problems is quite remarkable, it seems largely driven by (a) the lack of market interest in acquiring the assets at values acceptable to AES and (b) the poor performance in 2014,” said the audit. “In 2014, the Equivalent Forced Outage Rate (EFOR) for Stuart was 21.5 percent versus the stated corporate target of 6-7 percent. While this matter now appears to be getting the attention it deserves, jurisdictional customers were adversely affected in 2014 due to lower generation from what should have been one of the lowest cost resources.”
The Killen Station consists of one 600-MW coal-fired unit. The unit was subject to the original New Source Performance Standard of 1.2 pounds SO2 per MMBtu which the utility chose to comply with through the use of low-sulfur compliance coal. A scrubber was retrofitted in 2007. All of the coal consumed by Killen is delivered by barge. Killen has converted almost completely to high-sulfur Illinois Basin coal, which currently sells at a discount to the Central Appalachian coal for which it was designed. The discount is substantially lower than what it was in 2013.
The single boiler at Killen is substantially larger than the boilers at Stuart. Due to its size, Killen’s boiler is capable of accommodating the higher sulfur and lower-fusion Illinois Basin coals with fewer operational challenges than Stuart. After significant testing, the plant can now accept lower quality coals for up to 33% of its supply.
Killen retains a small amount low-sulfur Central Appalachian coal, which allows the plant a larger degree of flexibility during start-up after maintenance outages. The low-sulfur coal has two applications, both related to the scrubber operations. After an extended maintenance outage, the chemical reaction in the jet bubbling reactor (JBR) must be initiated before it reaches a level sufficient to remove SO2 from high-sulfur coal. Killen has a short (one hour) air permit, requiring the plant to meet a lower level of emissions during start-up which is more difficult with high-sulfur coal. DP&L believes the plant start-up with the low-sulfur coal is a better strategy for enabling the JBR reaction to reach the level needed to effectively scrub the higher sulfur coal to comply with the air permit, the audit noted.
The second use of low sulfur coal is when issues arise with the scrubber which may compromise its operation, but are not sufficiently problematic to require complete shut-down. During this time the plant may bum low-sulfur coal in order to slow the chemical reaction in the JBR down and make repairs, while the unit remains in service.
The Killen plant operated above a 70% capacity factor in 2014 and burned approximately 1.8 million tons of coal.
Report says ‘dramatic’ changes in coal industry affect Dayton
“Given DP&L’s reliance on coal, the dramatic changes that occurred in the coal market in 2014 are relevant to the management/performance audit,” wrote Energy Ventures. “Power sector demand for coal contracted during 2014 as the price for natural gas fell in order for natural gas-fired combined cycles to displace coal generation. As the power sector is the largest source of demand for U.S. coals, the loss of that market had a significant impact on the overall market. This is similar to what occurred in 2012 with one major exception. In 2014, a strong U.S. dollar caused the global coal price to fall making U.S. coal uncompetitive in the global market. The net result was a large drop in domestic coal prices. The decline was pronounced in 2014, but has been worse in 2015.
“There are a number of consequences related to the price decline in addition to the obvious benefit of lower cost fuel. The most important is the impact on the financial health of the coal industry. By the end of 2014, several smaller coal producers had filed for bankruptcy and the specter of additional insolvencies began to loom. ‘The concern about counter-party credit has increased, as a result heightening the importance of supply and supplier diversification. The management of stockpile levels has become more challenging as many power generators have coal under contract in excess of their demand.”
The audit said that in February 2013, DP&L entered into four agreements with a company (the name of the company was redacted) that collectively provide the basis for the installation of a Refined Coal facility at Stuart. The interest in refined coal is related to the tax credit parties can receive for Refined Coal under Section 45 of the Intemal Revenue Code. Refined Coal is coal which has been treated in a manner which provides for a 20% reduction in emissions of NOx and a 40% reduction in the emissions of either SO2 or mercury. In order to qualify for the tax credit, the refined coal must be purchased from an unrelated party. So DP&L must sell the coal to a third party and then repurchase the coal from the third party after the coal has been treated. The agreements all expire Dec, 13, 2021, unless they have been terminated early.
In 2014, DP&L owned shares of the coal-fired Conesville Unit 4, Zimmer, and Miami Fort Units 7 and 8. Conesville Unit 4, which was initially owned and operated by AEP’s Columbus Southern Power, is now owned and operated by AEP Generation Resources. Zimmer and Miami Fort were built by Cincinnati Gas & Electric, became part of Duke Energy Ohio and as of April 2015 are owned and operated by Dynegy.