Big Rivers Electric Corp. has conducted a high-level feasibility study of the conversion of the currently idled, 443-MW Coleman station from a coal-burning facility to a natural gas-fired facility, said an Oct. 6 audit commissioned by the Kentucky Public Service Commission.
Big Rivers Electric will need to move more aggressively in coming years to mitigate the recent loss of its two largest customers, which were two local aluminum smelters, according to the audit. Big Rivers is relying on assumptions that may be overly optimistic and should give more consideration to measures such as selling off power plants that are no longer needed to serve the remaining customers, the audit said. The audit was conducted by Concentric Energy Advisors Inc.
In order to finalize its feasibility study on the Coleman coal-to-gas conversion, Big Rivers would need to hire an engineering firm to complete the modeling to determine any impacts such as boiler modifications, boiler design and capacity, and heat rate due to the fuel switch, the audit said. Big Rivers has had informal discussions with a current gas supplier, Atmos Energy, about gas supply at Coleman. The existing four-inch gas supply line has a maximum capacity of 300-400 MCF/hr. Atmos Energy believes there is adequate gas available to supply one Coleman unit if a larger supply pipe is installed due to two major gas suppliers being located within one mile from Coleman Station. A gas study would need to be performed to determine if supply is adequate to convert all three Coleman units to natural gas.
“While a converted gas-fired Coleman unit would be challenged in the competitive marketplace,” the audit said, “a more important consideration for Big Rivers in deciding whether to proceed any further with a study of a conversion of the Coleman unit(s) is whether this strategy is consistent with its core mission. Coleman output is not needed to serve existing member load, and converting Coleman to gas for reasons other than serving new load would be a significant departure from Big Rivers’ mission. Big Rivers is an organization that is in the business of serving its member cooperatives. It is not in the business of owning uncontracted generating capacity in excess of what is needed to serve member load, and is not currently positioned to consistently and successfully market excess capacity as an addition to its core mission.”
Coleman has been idled for over a year, and the 417-MW Wilson coal plant is only avoiding a similar fate due some success that Big Rivers has had selling that power to outside customers.
The audit said that offers to sell the Coleman units/facility or the Wilson facility outright have been based on achieving a sale price that would not impair Big Rivers’ ability to issue debt. As of July 2013, net book values were approximately $187 million, or $420/kW for Coleman and $454 million, or $1,090/kW for Wilson.
Big Rivers has also had what may best be described as very informal discussions of the potential to either merge with another generation and transmission cooperative, or sell Big Rivers to another generation and transmission cooperative or an investor-owned utility. Concentric said it considers these potential opportunities much longer term in nature, which can take several years to complete, and frequently involve pre-established relationships at the cooperative level.
Concentric says the competitive positions of Coleman and Wilson only likely to get worse
Because the unit that sets the locational marginal price (LMP), which is known as the marginal unit, is frequently a coal-fired unit with similar fuel and operating costs to the Coleman and Wilson units, the advantage that these units have in the wholesale energy market lies in the efficiency of these units relative to the marginal unit, the audit said. A comparison of the Wilson and Coleman units to other units operating in the Midcontinent ISO shows that these units are on the lower portion of the dispatch, or supply curve. A lower position on the supply curve means that a unit is dispatched before other units that are higher on the supply curve. The Coleman units are not as efficient as the Wilson unit and are dispatched somewhat higher on the supply curve.
“While the Wilson and Coleman facilities are currently reasonably well-positioned on the MISO supply curve, these facilities (and the Coleman units in particular) will be more challenged in the future as more efficient gas-fired combined cycle units with heat rates in the 6,700 to 7,200 BTU/kWh enter the market to fill the stated MISO need for additional capacity,” the audit pointed out. “Over 5,000 MW of new requests for interconnection of gas-fired generation entered the MISO interconnection queue in September of 2014.”
Big Rivers has made operational improvements at the Wilson and Coleman facilities, including an improvement in heat rate at the facilities between 2009 and 2013. A review of benchmarking data provided by Big Rivers shows that the company’s coal units continue to achieve top quartile performance for comparable coal units in terms of availability, forced outage rates, capacity factor, and fuel costs. Any additional efficiency improvements are likely to be minimal. The expected entry of newer and more efficient gas-fired generation in MISO, in addition to forecasted low gas prices, will put increasing economic pressures on existing coal-fired units, as these lower cost units will more frequently set clearing prices in the future, the audit said.
New environmental requirements will put additional financial pressures on coal plant operators. The future capital expenditures necessary for continued compliance with environmental mandates, as they are known today, will cost in excess of $70 million for the Coleman facilities. It is important to note that any retrofits on Coleman that will allow for future operation of the station in compliance with environmental mandates will result in the consumption of Cross-State Air Pollution Rule (CSAPR) allowances currently being banked as a result of the idling of Coleman Station. These allowances are currently being used for compliance purposes for Big Rivers’ generation portfolio. This is expected to add approximately $1/MWh to $2/MWh to the variable cost of generation to these units based on publicly available information.
While a majority of the coal units operating in MISO will also incur similar environmental compliance costs, gas-fired units, nuclear units and renewable generation will not incur such costs, Concentric pointed out. This will result in a shift of the dispatch curve, making coal-fired units less competitive relative to these alternative forms of generation and thereby further decreasing the capacity factors of these units in the future. In addition to the wider market factors, a generating plant’s age and relative efficiency are also important factors that should be considered in evaluating resource choices. These factors play a significant role in generation plant retirement decisions being made by companies.
The projected coal retirements in MISO should create some opportunity for Big Rivers to sell its excess capacity in the bilateral market, and several participants in MISO have stated a need for generation in the future. However, the impact of current and future environmental regulations including the Clean Power Plan (CPP) on the operation and viability of Big Rivers’ generating units is uncertain at this time.
Big Rivers has to compete with parties like Dynegy in the power market
Big Rivers has responded to a number of potential MISO counterparties that may have an interest in the output of Coleman or Wilson. The list includes over 1,000 MW of potential load in the MISO footprint. There are, however, independent power producers with surplus generation that will compete with Big Rivers for the sale of its generation. Dynegy has over 4,000 MW of generation available to sell in the MISO footprint, the audit said. Big Rivers will continue to face competition from merchant generators with available generating capacity in achieving its objective to sell the output from the coal-fired facilities. Furthermore, if capacity prices increase and projections indicate a likely further increase in the future, additional new generation will enter the MISO market in response to these price signals, and Big Rivers will see additional competition to sell output from its units, making it increasingly difficult to justify the continued operation of both of these units.
In terms of Mercury and Air Toxics Standards (MATS) compliance, Coleman will require the installation of a dry sorbent injection (DSI) and activated carbon injection (ACI) system. Further SO2 reductions under CSAPR could require the installation of a flue gas desulphurization system (FGD) at Wilson, lower sulfur fuel, conversion to natural gas, and/or reduced generation levels. Additional NOx reductions at Green (another Big Rivers coal plant) and Coleman will likely be necessary if Coleman returns to operation.
Big Rivers has and continues to evaluate the implications of the EPA proposed and existing regulations in its analysis of future options for Coleman and Wilson. It has also engaged Burns & McDonnell Engineering to perform an Environmental Master Plan Study. The intent of the study is to assist Big Rivers in developing a preliminary plan for complying with new and future environmental regulations, including but not limited to the final coal combustion resideal and Section 316(b) regulations, CSAPR, the National Ambient Air Quality Standards (NAAQS), the proposed Effluent Limit Guidelines (ELG), and proposed ozone NAAQS, as well as any estimates of compliance costs that may be required.
In addition to these economic pressures, there is significant market uncertainty, particularly for coal units like Coleman and Wilson around the CPP. Under the draft version of the CPP, Kentucky was required to reduce carbon emissions by 15% from 2012 levels by 2020 and a total of 18% by 2030. A final version of the CPP was released by the EPA on Aug. 3 and calls for a 16% reduction by 2022 and a 30% reduction by 2030.
Kentucky is among more than a dozen states that have consistently opposed federal efforts to impose environmental rules on the state’s power plants. Kentucky was the first state in the country to pass a law restricting what its environmental agency can include in a state plan to the EPA. Specifically, lawmakers in Kentucky have passed a bill to exempt the state from submitting a plan to meet the proposed air regulations that work against coal. In addition, Kentucky has joined other states in suing the EPA over the CPP rule. If Kentucky does not submit a plan – or submits one that does not pass muster – the EPA will create one for the state.
Kentucky’s Energy and Environment Cabinet hopes to avoid having EPA impose an implementation plan for curbing carbon dioxide emissions with a strategy that relies on retirements of coal-fired power plants, including Coleman, that were already planned for the next 15 years. It is unclear, with the more stringent reduction requirements under the final CPP, whether those plant shutdowns could generate enough emission reductions to allow Kentucky to meet its 2030 EPA target, the audit said.
Coleman has already been idled for almost 12months, and has 24 months remaining before Big Rivers will be required to either retire the unit or return the unit to service in order to avoid the loss of its interconnection and the risk of incurring the cost of network upgrades to reestablish its interconnection, Concentric said. A return to service would likely require capital investments for environmental compliance of $70 million or more, pending further analysis by Big Rivers.
In terms of Wilson, the audit said this unit continues to be profitable in the marketplace, and there is optionality with this unit that supports its continued operation for the foreseeable future until compliance with environmental mandates is required.