Duke Energy Indiana has lately seen its coal inventories climb again, causing it to again use a “decrement” mechanism to boost the power sales for the coal units in the power markets.
Brett Phipps, Managing Director, Fuel Procurement for Duke Energy Progress, a utility affiliate of Duke Energy Indiana, supplied Oct. 29 testimony on the coal situation to the Indiana Utility Regulatory Commission in support of the latest version of the utility’s twice-year fuel cost passthrough case. Both utilities are subsidiaries of Duke Energy (NYSE: DUK). A decrement is a way of factoring in the costs of not burning coal, like stockpile costs, which allows coal units to dispatch more easily.
Phipps noted that the Gibson, Wabash River, Cayuga and Edwardsport power plants are supplied by long-term coal agreements. Gallagher Station will continue to be supplied by spot purchases depending on how much the Gallagher Station units actually operate.
For the twelve-month period ending Aug. 31, the company purchased a total of about 12.2 million tons of coal (under both long- and short-term contract commitments) at an approximate average cost of $2.51/MMBtu. The delivered cost of coal purchased under long-term commitments averaged $2.50/ MMBtu and made up 98.5% of total coal receipts. The delivered cost of coal bought under short-term commitments averaged $2.85/MMBtu.
“Although published prices for U.S. coal markets have not changed significantly since the last fuel proceeding they have softened across the regions,” Phipps wrote. “The following are 2015 price indications for the different coal producing regions: High-sulfur Illinois basin coal prices are in the low to mid $30’s per ton; Central Appalachia coal prices are in the mid $30’s; Northern Appalachia coal prices are in the high $30’s to low $40’s; and Powder River Basin coal prices are approximately $10 per ton. Coal demand has continued to be weak mainly due to cheaper natural gas pricing, lower purchase power cost, and fall weather. As a result, over the next few months utility stockpiles are forecasted to stay flat or slightly increase.
“Coal markets are likely to be relatively stable in Indiana between now and the next [fuel case]; however, in the next year there is potential for market volatility due to a number of factors, including: (a) deterioration of the financial health of coal suppliers; (b) recent U.S. Environmental Protection Agency (‘EPA’) regulations for power plants that result in utilities retiring or modifying plants, which lower total domestic steam coal demand, and can result in some plants shifting coal sources to different basins; (c) continued softening demand in global markets for both steam and metallurgical coal, causing export opportunities to decline for U.S. coal producers; (d) increased volatility in gas prices, and continued increase in gas supply combined with installation of new combine cycle (‘CC’) generation by utilities, especially in the south, which may also lower overall coal demand; (e) increasingly stringent safety regulations for mining operations, which result in higher costs and lower productivity; (f) volatile power prices; (g) mergers and acquisitions in the different coal basins; and (h) mining employee layoffs and production declines in an attempt to bring an oversupply of coal into balance with current demand.”
Duke Energy Indiana’s coal inventories as of May 31, 2015, were about 4,892,000 tons (or 80 days of coal supply at a full load burn rate per day) across the system. As of Aug. 31, 2015, coal inventories decreased to approximately 4,519,075 tons (or 74 days of coal supply). This decrease in coal inventories can be attributed to a number of factors that include: deferral of approximately 175,000 tons: an extension of a current off-site storage agreement; and the implementation of the coal price decrement in July 2015. Duke Energy Indiana expects coal inventories to stay relatively flat to minimal growth over the next quarter.
Limited chances to re-sell coal to help with stockpile position
Besides the coal price decrement, Phipps said the utility continues to evaluate a host of options in order to effectively manage the growing coal inventories. As inventory levels dictate, the company explores options to store or defer contract coal or resell surplus coal into the market. Upon the evaluation of the growing levels of coal inventory, the company has extended an existing storage agreement with one supplier to store coal at the supplier’s mine facilities for up to one additional year. In addition, the company has agreed to defer approximately 174,000 tons of coal for delivery in 2015 to 2016 with this same supplier. Due to continued weak coal market conditions, resell opportunities will continue to be extremely difficult in the near term, Phipps pointed out.
Phipps reported that spot natural gas prices are dynamic, volatile and can change significantly day to day based on market fundamental drivers. The current spot price for natural gas is in the range of approximately $2.60 to $2.95 per MMBtu. For the period June through August 2015 the price the company paid for delivered natural gas at its gas-burning stations was between a low of $1.75 MMBtu on Aug. 21 to a high of $3.65 on July 20.
In comparison, during the previous period of March 2015 to May 2015, the price the company paid for delivered natural gas at its gas-burning generation stations was in a range of delivered daily gas prices between a low of $2.48 MMBtu on April 10 to a high of $6.25 per MMBtu on March 5.
Supplying Oct. 29 testimony on the decrement and other matters was John D. Swez, employed by Duke Energy Carolinas as Director, Generation Dispatch and Operations.
Swez noted that starting in late February 2012, the company started applying a coal price decrement to the dispatch costs of Gibson 1-5, Wabash River 2-6, and Cayuga 1-2 to correctly reflect the economics of additional costs associated with avoiding or reducing surplus coal inventories. To the extent that the price decrement results in units being dispatched that otherwise would not be, coal coming into the station is consumed, other potential costs are avoided, and customers ultimately benefit because higher cost alternatives to manage the inventory are avoided, he said.
With the price decrement in place, the company initially saw a significant increase in generation output from these units. As the level of the coal price decrement has decreased over time, the impact of the decrement has lessened. During this latest fuel cost period, the coal price decrement was zero until a non-zero coal price decrement was initiated for Cayuga 1-2 and Gibson 1-5 on July 28.
Swez noted that the coal-fired Wabash River Units 2-5 will be retired by April 15, 2016. These units were granted a one-year extension of the April 2015 federal Mercury and Air Toxics Standards (MATS) compliance date due to the need for at least two of the four units to operate at any given time for transmission system reliability (in addition to Wabash River Unit 6, which also has a one-year MATS rule extension of time).
In consideration of the minimization of MATS-related emissions during the extension period and the operational complexities of Wabash River units at this point in the lifecycle, Duke Energy Indiana is employing a Midcontinent ISO offer strategy which prioritizes availability and operation of the units to solve transmission reliability constraints. As a result, Duke Energy Indiana will generally be holding two of the four of Wabash River Units 2-5 in reserve shutdown available for emergency operation only. Additionally, offer prices on these four Wabash River units have been adjusted to reflect these considerations.
As for the new-ish Edwardsport coal gasification unit, Swez said that during July 2015, the unit produced more generation than in any month since being declared commercial in 2013. In addition, in September, the unit produced the second most generation in any month since being declared commercial. The unit also performed well during June and August 2015.
When the Edwardsport unit’s gasifiers are operating, Edwardsport is being offered with a commitment status of must-run with the unit’s parameters outlined for MISO, as is typically the case with other Duke Energy Indiana large coal generating units. Edwardsport has followed MISO’s dispatch direction between the minimum and maximum capability of the unit during this time. In addition, during times when syngas is not available and the station is available on natural gas operation, the unit will typically be offered to MISO with a commitment status of economic and can be committed and dispatched at MISO’s discretion.