Audit outlines 2014 coal procurement for ex-Ohio Power plants

Consulting firm Energy Ventures Analysis on Nov. 30 filed with the Public Utilities Commission of Ohio an audit of the fuel buying in 2014 by the Ohio Power unit of American Electric Power (NYSE: AEP), even though Ohio Power didn’t technically own the power plants during that period.

Energy Ventures Analysis and its subcontractor, Larkin & Associates PLLC, were selected by the PUCO to perform the management/performance and financial audits and provide reconciliation support as the PUCO transitions into deregulation and away from Ohio Power owning any generating capacity.

In October 2012, American Electric Power Service Corp. (AEPSC) on behalf of its affiliates, the regulated Ohio Power and the unregulated AEP Generation Resources (AEPGR), filed an application with the commission for Ohio Power to sell its plants to AEPGR. This transfer was required under the second Electricity Security Plan (ESP) in which Ohio Power agreed to separate its generating assets from its distribution business. The audit noted that in early 2015, AEP retained Goldman, Sachs & Co. to explore disposition options for AEPGR.

Effective Dec. 31, 2013, Ohio Power transferred approximately 11,200 MW of Ohio Power-owned generation to AEPGR. Its two-thirds ownership of the coal-fired John E. Amos Unit 3 (867 MW) in West Virginia was transferred to AEP regulated subsidiary Appalachian Power and 50% of the Mitchell coal plant (816.5 MW) in West Virginia and operating control of that plant was transferred to AEP’s regulated Kentucky Power. Following the transfers and expected retirements through 2015, including the Philip Sporn station in West Virginia, AEPGR expects to own about 8,000 MW. AEPGR will bid into the PJM Interconnection market, and Ohio Power will purchase electricity from PJM, from 2014 moving forward, the audit said.

Coal generation accounted for 88% of AEPGR generation in 2014. AEPGR purchased about 13.0 million tons of coal in 2014. This was slightly lower than 2013 purchases. The audit is heavily redacted, so most of the coal procurement details are unavailable.

Responsibility for fuel procurement for the former OPCo units was transferred from AEPSC to AEPGR. Effective Jan. 1, 2014, AEPGR has had the sole responsibility and scope of discussions between AEPSC and AEPGR regarding fuel supply management were limited. A number of functions continue to be provided by AEPSC personnel through a joint services agreement.

Looking at coal supply issues by plant:

Cardinal

The Cardinal plant is located on the Ohio River, at mile marker 76.6. Cardinal consists of three units. Unit 1 is owned by AEPGR: Units 2 and 3 are owned by Buckeye Power. Unit 1 was retrofitted with a scrubber in 2008; Unit 2 was retrofitted with a scrubber in 2007. The Cardinal 1 scrubber was one of the scrubbers that did not perform as designed. An extended outage in 2012 was necessary to modify the scrubber. AEPSC buys coal for the entire station but the contracts are now independent. This plant receives coal by barge and truck.

Cardinal 1 generation fell by almost 70% in 2012 due to the scrubber-related outage. Generation began to retum to normal levels in 2013. Lower generation in 2014 was largely due to reduced dispatch because of lower natural gas prices.

Conesville

The Conesville station consisted of six units with a total generating capacity of 1,745 MW. All of the units except Conesville 4 were 100% owned by AEP. Conesville 4 is jointly owned by Dayton Power & Light (16.5%) and Duke Energy Ohio (40%) which sold its share to Dynegy in 2015.

Conesville Units 1 and 2 were retired in 2005. Conesville 3 was retired in 2012. Conesville Unit 4 was retrofitted with a scrubber in 2009. This scrubber was a jet bubbling reactor design which AEP deployed at a number of plants. AEP encountered numerous problems with this technology which it determined to be a result of fundamental design deficiencies. Beginning in September 2012 and continuing through March 2013, problems with the scrubber at Conesville 4 forced the unit out of operation. Conesville Units 5 and 6 were built with scrubbers and these scrubbers were upgraded in 2009 to comply with a New Source Review settlement.

Coal to this station is delivered by truck and rail. The Conesville Coal Preparation Plant, which was originally built to wash locally produced trucked coal, was closed in January 2012 and sold to a redacted party in 2013. The prep plant was operated for a short period in 2013 under AEP’s permits with contract personnel to prepare washed coal for tesfing at Conesville 5 and 6. AEP had no involvement of the preparafion plant during the audit period.

Generation at Conesville 4 had been fairly flat from 2010 through 2013. Generation increased significantly in 2014. Generation at Conesville 5 and 6 declined significantly in 2012 with a slight rebound in 2013. Generation in 2014 improved again still.

Gavin 

The Gavin station consists of two units with a total generating capacity of 2,640 MW. These units were retrofitted with scrubbers in the early 1990s. All coal to this station is currently delivered by barge.

Gavin has two samplers connected to the barge unloaders. During much of 2014, one or both samplers were unavailable. The reasons provided by the plant was lack of resources (money and people). AEPGR supplemented the explanation by telling EVA: “Upon discovering the sampler issue, the plant contacted the manufacturer of the sampling equipment and scheduled an appointment to inspect the equipment (the manufacturer was backed up with other appointments at this time). After inspecting the equipment, the manufacturer determined that replacement parts were needed and had to be ordered, which again extended the time the sampler was out of service. Once the parts arrived, the manufacturer came back to the plant and made the necessary repairs.”

Generation at Gavin in both 2012 and 2013 was down compared with 2011. This is AEPGR’s largest stafion and before 2013 consistently burned more than seven million tons per year. In 2013 and 2014, it burned 6.5 million and 6.3 million tons respectively.

Kammer

The Kammer station consisted of three 210-MW coal units. Kammer’s boilers were cyclones and as such required a lower fusion coal, consistent with the fusion content of the high sulfur coal they were designed to burn. Compliance with clean air regulations had been a challenge for Kammer because low sulfur bituminous coals typically have a high ash fusion temperature.

The Kammer units were not retrofitted with advanced pollution control equipment. All three units at Kammer were retired in 2015. Utilization ofthis plant was very low in 2013 and 2014.

Muskingum River

The Muskingum River plant was located in Beverly, Ohio, and consisted of five units. The four smallest units were wet bottom boilers which required a lower ash fusion coal. Unit 5, the newest and largest boiler, was a dry bottom supercritical unit which could burn higher ash fusion coals. This plant received coal by rail, as the Muskingum River is not navigable for barge deliveries. Coal could also be delivered by truck when necessary. None of the units were retrofit with scrubbers; Unit 5 was retrofitted with an SCR. All units at Muskingum River were retired in 2015. As a result of the polar vortex in early 2014, bum was higher than had been expected as the stafion was needed to meet system requirements.

Picway 

Picway was AEP Ohio’s smallest coal plant. Coal was delivered to this station by rail or truck. This plant was not equipped with any advanced pollution control equipment. No generation was reported for 2014.

Audit looks at changes in AEPGR fuel buying 

Said the audit: “In 2014, AEPGR purchased approximately 13 million tons of coal for five plants. As AEPGR is separate from AEPSC, the solicitations be in writing or over the phone were specific to AEPGR’s requirements. As a result and to the extent that suppliers have a location or quality advantage to anyone of AEPGR’s plants, AEPGR’s lost the advantage of an open non-destination specific solicitation.

“AEPGR’s strategy is to layer in coal commitments to minimize market exposure at any one time. The recent volatility in coal bum has resulted in AEPGR and other utilities increasing the use of spot procurements in order to avoid over-commitment. AEPGR had a larger open position than its predecessor going into 2014 and, as a result, paid more for coal in 2014 because of the higher than expected burn in the first half of the year. Other consumers have taken different approaches such as increased volume optionality in their contracts, fixed volume contracts with flexible terms, requirements contracts and higher stockpiles. AEPGR has almost no volume optionality in its contracts and has reduced rather than increased its stockpile target. AEPGR inherited one fixed volume contract with a flexible term and one contract with volume optionality and negotiated two short-term requirements contracts. The balance o fthe contracts are for fixed volumes and fixed terms.

“Prior to Corporate Separation, AEPSC monitored its coal position overall and by plant and supplier through an internally developed model which monitored actual and target inventory levels, actual and projected bum, and spot and contract commitments. AEPSC typically bought through formal solicitations. A request-for-proposal (‘RFP’) was issued, generally by AEPSC without naming which plants require coals. The RFP requested bids for a wide range of coals and gave bidders the opfion to bid for spot and/or multi-year contract business. The results from the RFP process helped to determine whether to buy coal on a spot or contract basis and for what term.

“On occasion, AEPSC also bought coal through direct negotiation with suppliers, telephone solicitations, and over-the-counter. Typically, telephone soficitafions were conducted when there was an immediate and generally unexpected need. Over-the-counter was used for spot coal commodity type purchases, e.g., 8,800 Btu per pound Powder River Basin coal.

“Since Corporate Separation, AEPGR has moved away from the historical practices in two important respects. It only conducted one formal solicitation in 2014. The balance of the purchases were made through email or phone sohcitations with limited counter-parties or direct negotiation with single counter-parties. Also, AEPGR does not appear to have purchased OTC coal for its commodity needs. AEPGR conducted one formal coal solicitation in 2014 (January) and multiple e-mail and phone solicitations.”

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.