Duke Energy Indiana is continuing to manage its bloated coal inventories through means like a coal price decrement, which allow its to factor coal stockpile costs into the bids for this capacity offered in the Midcontinent ISO marketplace.
This Duke Energy (NYSE: DUK) subsidiary on Jan. 28 filed with the Indiana Utility Regulatory Commission the opening testimony in the latest version of its twice-yearly fuel cost adjustment case.
Brett Phipps, employed as Managing Director, Fuel Procurement at Duke Energy Progress, outlined Duke Energy Indiana’s coal situation. He noted that the Gibson, Wabash River, Cayuga and Edwardsport IGCC stations are supplied by long-term agreements. The aging Gallagher Station will continue to be supplied by spot purchases depending on how much the Gallagher units actually operate.
For the twelve-month period ending Nov. 30, 2015, the company purchased about 12 million tons of coal (pursuant to both long and short-term contract commitments) at an approximate average cost of $2.36/MMBtu. The delivered cost of coal purchased under long-term commitments averaged $2.37/ MMBtu and made up 98.69% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.07/MMBtu.
Phipps wrote about the coal market in general: “Published prices for U.S. coal markets have increased slightly since the last fuel proceeding. The following are 2016 price indications for the different coal producing regions: High-sulfur Illinois basin coal prices are in the mid to high $30’s per ton; Central Appalachia coal prices are in the high $30’s to low $40’s; Northern Appalachia coal prices are in the high $30’s; and Powder River Basin coal prices are approximately $9.50 per ton. Coal demand has continued to be weak mainly due to cheaper natural gas pricing, lower purchase power cost, and lower power demand. As a result, over the next few months utility stockpiles are forecasted to stay flat or slightly increase.
“Coal markets continue to be over-supplied with the industry continuing to be distressed and in the next year there is the 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 soft 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. However, despite the distress on the coal industry, the Company has not experienced non-performance by suppliers on any of its coal contracts.”
Duke Energy Indiana’s coal inventories as of Aug. 31, 2015, were about 4,519,075 tons (or 74 days of coal supply at a full load burn rate per day). As of Nov. 30, 2015, coal inventories increased to around 4,753,201 tons (or 77 days of supply). This increase in coal inventories can be attributed to a number of factors that include lower natural gas prices, lower purchase power cost and lower power demand, Phipps noted. Duke Energy Indiana expects coal inventories to stay relatively flat or grow minimally over the next quarter.
Duke has implemented the coal price decrement to help cut coal inventories. Also, the company continues to evaluate a host of options in order to effectively manage the growing inventories. Due to continued weak coal market conditions, coal resale opportunities will continue to be extremely difficult in the near term.
As for natural gas supply, Phipps reported that spot natural gas prices are volatile and can change significantly day to day based on market fundamental drivers. As of mid-January 2016, the current spot price for gas is in the range of $2.40 to $2.75 per MMBtu. For the period September-November 2015 the price the company paid for delivered natural gas at its gas burning stations was between a low of $1.79 MMBtu on Nov. 2 to a high of $4.20 on Sept. 8. In comparison, during the previous period of June 2015-August 2015, the price the company paid for delivered natural gas at its power plants during this period was in a range of delivered daily gas prices between a low of $1.75 MMBtu on Aug. 21, 2015, to a high of $3.65 per MMBtu on July 20, 2015.
Swez reports on decrement, status change for part of Gibson 5
John D. Swez, employed by Duke Energy Carolinas as Director, Generation Dispatch and Operations, also provided Jan. 28 testimony about matters like the coal decrement and power plant operations.
Starting in February 2012, the company started applying a coal price decrement to the dispatch costs of the Gibson 1-5, Wabash River 2-6, and Cayuga 1-2 generating units 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. With the price decrement in place, the company initially saw a significant increase in generation output from these units.
During 2015, 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, 2015. In addition, the coal price decrement was initiated for Wabash River 6 on Nov. 11, 2015. Due to the planned retirement of Wabash River 2-5 on April 15, 2016, the coal price decrement was not applied to these units.
Addressing the Edwardsport integrated gasification combined cycle unit, a relatively new facility, Swez said that during September 2015, the station produced the second-most generation in any month since being declared commercial. During October, the station began a scheduled outage, which continued into November. The station returned to an available status on natural gas on Nov. 16 and returned to service on Nov. 29.
When the 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.
The coal-fired Gibson Unit 5, although owned 50.05% by Duke Energy Indiana, 25% by the Wabash Valley Power Association (WVPA), and 24.95% by the Indiana Municipal Power Agency (IMPA), is currently offered to MISO by Duke Energy Indiana as a whole (100%) unit, Swez noted. Thus, the company offers the entire unit to MISO, and MISO settles the charges and credits as if Duke Energy Indiana owned 100% of the unit. Outside of the MISO market, the company then sends the WVPA and IMPA share of the energy and related charges and credits, through various billing mechanisms and market instruments, to each owner respectively.
At WVPA’s request, on March 1, 2016, the WVPA share of Gibson 5 is scheduled to be “pseudo-tied” to the PJM Interconnection market, Swez wrote. Thus, the WVPA share of Gibson 5 will be part of the PJM market on this date. The remaining Duke Energy Indiana and IMPA shares of Gibson 5 will remain in MISO. Although there are various steps and process changes involved to ensure this transition occurs smoothly and accurately, there will be minimal change for Duke customers because only the Duke share of Gibson 5 serves those customers today and after March 1.