Due in part to the vagaries of the Southwest Power Pool market and continuing low prices for natural gas, the Southwestern Electric Power Co. (SWEPCO) unit of American Electric Power (NYSE: AEP) is increasingly reliant on short-term coal contracts.
SWEPCO on Feb. 16 outlined various fuel buying mattees in a request for a decrease filed with the Arkansas Public Service Commission of its current Energy Cost Rate as set forth in its Energy Cost Recovery Rider.
SWEPCO currently has three coal-fired plants that utilize Powder River Basin (PRB) coal as their primary fuel.
- The Welsh Plant, which is wholly owned by SWEPCO, has three 528-MW units.
- The Flint Creek Plant has one 528-MW unit and is jointly owned by SWEPCO (50%) and Arkansas Electric Cooperative Corp.(AECC) (50%).
- The Turk Plant, which has one 650-MW unit, is majority owned by SWEPCO (73.333%) and minority owned by AECC (11.667%), East Texas Electric Cooperative (ETEC) (8.333%), and Oklahoma Municipal Power Authority (OMPA) (6.667%).
SWEPCO, as plant operator, has fuel procurement responsibilities for the entire capacity at all three facilities. SWEPCO’s fuel procurement practice includes maintaining a reliable coal supply at the lowest reasonable cost. SWEPCO utilizes agreements with varying lengths to secure coal suitable for use in its coal-fired generating units. While longer term contracts spanning many years or decades have been used in the past to assure reliable supply of PRB coal, the PRB coal market is currently at the point that supply availability, while not guaranteed, is no longer of significant concern. “This change in market conditions, combined with the fact that long-term contracts without price reopeners are not available, favors the use of shorter-term contracts that provide readily available supply at market-based prices and flexibility,” the company said.
It added: “2015 was SWEPCO’s first full year of operation in the Southwest Power Pool Integrated Marketplace (SPP IM). The added uncertainty that SWEPCO has seen during 2015 in the SPP IM has brought a change in utilization of SWEPCO’s generating units (further detailed in the ‘Natural Gas’ section below), along with much lower natural gas prices, has reinforced SWEPCO’s strategy of using short-term coal supply agreements.”
SWEPCO currently co-owns two plants that rely on locally-mined lignite supply.
- The Pirkey Power Plant is a 675-MW generating unit that is jointly owned by SWEPCO, Northeast Texas Electric Cooperative (NTEC) and OMPA. SWEPCO’s ownership interest of Pirkey is 85.936%.
- The Dolet Hills Power Station is a 650-MW unit which is operated by Cleco Power LLC. Dolet Hills is jointly owned by Cleco, SWEPCO, NTEC and OMPA. SWEPCO’s ownership interest of Dolet Hills is 40.234%.
Lignite is supplied to the Pirkey Power Plant with deliveries from the lignite reserves SWEPCO owns or leases. These reserves are located adjacent to the plant and are mined for SWEPCO by Sabine Mining. At the Dolet Hills Power Station, lignite is primarily provided from adjacent lignite reserves mined by Dolet Hills Lignite, a wholly owned subsidiary of SWEPCO.
Figures given by SWEPCO show that coal inventories jumped in 2015 at the non-lignite plants. For example, at Welsh, the plant began the year at 795,951 tons of inventory, which was 34 days of full-load burn, with the inventory rising to 1.089 million tons in December, which was 46 days of burn. The burn days of inventory at Flint Creek jumped from 28 to 58 during the year, with Turk going from 30 days up to 50 days by the end of the year. At Pirkey, lignite inventories actually fell from 25 days down to 20 days during the course of last year, and at Dolet Hills it fell from 33 days to 24 days.
SWEPCO has seven natural gas power plants: Arsenal Hill (110 MW), Lieberman (242 MW), Knox Lee (475 MW), Lone Star (50 MW), Mattison (313 MW), Wilkes (838 MW), and Stall (534 MW). SWEPCO also uses natural gas for ignition and flame stabilization at the Turk Power Plant and its lignite power plants, Pirkey and Dolet Hills. The natural gas requirements for Dolet Hills are purchased by Cleco.
SWEPCO’s participation in the SPP IM facilitates the strategy of utilizing the region’s least-cost generation, taking advantage of lower-cost purchased power and wind whenever available, and then using natural gas to provide any remaining base load requirements and to meet peak electric demand to achieve the overall lowest reasonable delivered fuel cost. This strategy results in SWEPCO’s natural gas generating units being operated in a highly variable and unpredictable manner. SWEPCO and other gas generators are subject to additional uncertainty of natural gas consumption due to the misalignment of the gas and power days as well as the mismatch of each market’s timeline and scheduling deadlines, the utility noted.
To meet its gas needs, SWEPCO has primarily relied on spot market purchases. This reliance on the spot market is even more necessary with the implementation of the SPP IM. As a result, the company has very limited ability to commit to minimum natural gas purchase obligations, however, if favorable conditions exist, SWEPCO is able to purchase monthly base load natural gas supplies. SPP’s market optimization has resulted in fewer dispatches of SWEPCO natural gas units and lower overall natural gas consumption.
The Feb. 16 filing also outlined environmental rules affecting its power plants. The following is a list of retrofit technologies that are being added, or have been added, to the SWEPCO fleet, including technologies to meet the requirements of the federal Mercury and Air Toxics Standards (MATS):
- Dolet Hills Unit 1 installed an activated carbon injection system (ACI) system, dry sorbent injection (DSI) technology, and a baghouse to mitigate mercury and particulate matter (PM) emissions.
- Pirkey Unit 1 has completed the installation of an ACI system.
- Welsh (Units 1 & 3) are in the process installing an ACI system with a baghouse. These units have a one-year MATS extension from the Texas Commission on Environmental Quality (TCEQ) that lasts until April 16 of this year.
- Welsh Unit 2 will be retired under an unrelated settlement agreement and received an extension of the MATS requirements until the unit retires or until April 16, 2016, whichever comes first.
- Flint Creek is installing dry flue gas desulfurization, ACI system, and a baghouse to meet MATS and regional haze requirements. This plant has also received a one-year MATS deadline extension.
All other SWEPCO generating units are expected to meet the MATS requirements without modification.