Duke Energy Indiana has made some progress lately drawing down its big coal inventories, in part because it shut out coal consumption in mid April at Wabash River Units 2-6.
Brett Phipps, the Managing Director, Fuel Procurement for Duke Energy Progress, supplied April 28 fuel cost testimony to the Indiana Utility Regulatory Commission on behalf of sister utility Duke Energy Indiana, which is also a subsidiary of Duke Energy (NYSE: DUK).
The Gibson, Wabash River, Cayuga and Edwardsport IGCC stations are supplied by long-term coal agreements. The old, little-used Gallagher Station will continue to be supplied by spot purchases depending on how much the Gallagher units operate, Phipps noted.
For the twelve-month period ending February 29, 2016, the company purchased about 12 million tons of coal (pursuant to both long and short-term contracts) at an approximate average cost of $2.29/MMBtu. The delivered cost of coal purchased under long-term commitments averaged $2.30/ MMBtu and made up 98.58% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.08/MMBtu.
Published prices for U.S. coal markets have decreased slightly since the last fuel proceeding, Phipps noted. The following are 2016 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 low to mid $30’s per ton;
- Northern Appalachia coal prices are in the low to mid $30’s per ton; and
- Powder River Basin coal prices are approximately $9.10 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, Phipps wrote.
He added that 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: deterioration of the financial health of coal suppliers; proposed and imposed U.S. Environmental Protection Agency regulations for power plants that have resulted in utilities retiring or modifying plants, which lowers total domestic steam coal demand, and can result in plants shifting coal sources to different basins; abundant natural gas supply and storage resulting in lower natural gas prices combined with installation of new combined cycle generation by utilities, especially in the Southeast, which has also lower overall coal demand; continued softening demand in global markets for both steam and metallurgical coal; increasingly stringent safety regulations for mining operations, which result in higher costs and lower productivity; volatile power prices; mergers and acquisitions in the different coal basins; and mining employee layoffs and production declines in an attempt to bring an oversupply of coal into balance with current demand.
Phipps says Peabody plans to keep shipping coal
Phipps added: “Despite the distress on the coal industry, the Company has not experienced non-performance by suppliers on any of its coal contracts. The Company is aware of Peabody Energy’s (“Peabody”) filing for Chapter 11 bankruptcy protection and has had verbal conversations with Peabody since its bankruptcy filing. Peabody has notified the Company that they plan to continue supplying Duke Energy Indiana as contracted.”
Duke Energy Indiana’s coal inventories as of Nov. 30, 2015, were approximately 4,753,201 tons (or 77 days of coal supply at a full load burn rate per day) across the system. As of Feb. 29, 2016, coal inventories decreased to approximately 4,093,665 tons (or 66 days of coal supply). This decrease in coal inventories can be attributed to a number of factors including: drawing down the inventory at the Wabash River plant in preparation for the retirement of units 2 through 5 on April 15, 2016 and suspension of the operation of unit 6 on that same date: and a reduction of inventory due to the utilization of the coal price decrement. Duke Energy Indiana expects coal inventories to stay relatively flat or grow minimally over the next quarter.
A decrement is when the utility factors in the cost of holding coal in inventory into its market price bids for any given coal plant, which boosts the competitive position of that plant in the Midcontinent ISO market.
Phipps said the company has not reopened the price in any coal or transportation contracts during the period specified in this fuel cost proceeding. However, it notified an unnnamed supplier of its intent to renegotiate 2 million tons in 2017.
As of early-April 2016, the current spot price for delivered natural gas is in the range of approximately $1.80 to $2.10 per MMBtu. For the period December 2015 through February 2016 the price the company paid for delivered natural gas at its gas burning stations was between a low of $1.48 MMBtu on Dec. 23, 2015, to a high of $4.00 on Jan. 20, 2016.
In comparison, during the previous period of September 2015 to November 2015, the price the company paid for delivered natural gas at its gas burning stations during this period was in a range of delivered daily gas prices between a low of $1.79 MMBtu on Nov. 2, 2015, to a high of $4.20 per MMBtu on Sept. 8, 2015.