Duke Energy Progress has seen a dip in both coal and natural gas prices lately, helping drive down its latest request to the South Carolina Public Service Commission for fuel cost passthroughs to ratepayers.
Swati V. Daji, Senior Vice President, Fuels & Systems Optimization for parent Duke Energy (NYSE: DUK), provided April 28 testimony to the commission in latest Duke Energy Progress (DEP) fuel case.
Daji provided fossil fuel costs for the period March 2015-February 2016 (called the “review period”) versus March 2014-February 2015 (the “prior review period”), and described changes forthcoming for the period July 2016-June 2017 (the “billing period”).
DEP’s average delivered cost of coal per ton for the review period was $81.63 per ton, compared to $89.58 per ton in the prior review period, representing a decrease of 9%. This includes an average transportation cost of $24.18 per ton in the review period, compared to $29.92 per ton in the prior review period, representing a decrease of approximately 19%.
The company’s average price of gas purchased for the review period was $4.30 per MMBtu, compared to $6.13 per MMBtu in the prior review period, representing a decrease of 30%.
The decrease in coal transportation costs reflects the incorporation of additional lower cost barge movements, where feasible, and reduced rail transportation costs due to lower fuel surcharges caused by the significant drop in fuel oil prices.
The cost of gas includes gas supply, transportation, storage and financial hedging, and the decrease in gas costs is primarily reflective of the historically low price of gas during the review period.
DEP’s coal burn for the review period was 5.1 million tons, compared to a coal burn of 7.1 million tons in the prior review period, representing a decline of 28%. Additionally, the 5.1 million tons burned in the review period represents a 16% decline from the 6.1 million tons originally projected to be burned in the prospective period of the currently billed rate.
The company’s natural gas burn for the review period was 172 MMBtu, compared to a gas burn of 137 MMBtu in the prior review period, representing an increase of 26%. Additionally, the 172 MMBtu burned in the review period represented a 30% increase from the 132 MMBtu projected to be burned in the prospective period of the currently billed rate.
The decline in coal burns, and the increase in gas burns, was primarily attributable to declining gas prices combined with milder than forecasted weather during the 2015-2016 winter season.
Coal market hit by a number of negatives
Daji reported: “Coal markets continue to be in a state of flux due to a number of factors, including: (1) proposed and imposed U.S. Environmental Protection Agency (“EPA”) 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; (2) abundant natural gas supply and storage resulting in lower natural gas prices combined with installation of new combined cycle (“CC”) generation by utilities, especially in the Southeast, which has also lowered overall coal demand; (3) continued softening demand in global markets for both steam and metallurgical coal; (4) increasingly stringent safety regulations for mining operations, which result in higher costs and lower productivity; and (5) the deterioration of the financial health of coal suppliers due to reduced demand and market pricing in combination with increasing production costs.
“At the same time, the nation’s natural gas supply has grown significantly and has outstripped demand. Over the longer term planning horizon, overall growth in gas supply is expected to continue. Currently observable forward market prices are at historically low price levels as producers continue to look for efficiencies to further enhance economics and lower production costs. In addition to the increase in natural gas supply, new pipeline infrastructure continues to be added to provide for opportunities to move the growing supply to various markets.”
DEP’s current coal burn projection for the billing period is 5.4 million tons, compared to 5.1 million tons consumed during the review period. DEP’s billing period projections for coal generation may be impacted due to changes from, but not limited to, the following factors: delivered natural gas prices versus the average delivered cost of coal; volatile power prices; and electric demand.
Coal inventory levels were above target at the end of the review period, and future actual inventory levels may be above target levels at the end of 2016 as well.
Combining coal and transportation costs, DEP projects average delivered coal costs of approximately $76.62 per ton for the billing period compared to $81.63 per ton in the review period. This cost, however, is subject to change based on, but not limited to, the following factors: exposure to market prices and their impact on open coal positions; the amount of non-Central Appalachian coal DEP is able to consume; performance of contract deliveries by suppliers and railroads which may not occur despite DEP’s strong contract compliance monitoring process; changes in transportation rates; and potential additional costs associated with suppliers’ compliance with legal and statutory changes, the effects of which can be passed on through coal contracts.
DEP’s current natural gas burn projection for the billing period is approximately 145 MMBtu, which is a decrease from the 172 MMBtu consumed during the review period. The current average forward Henry Hub price for the billing period is $2.66 per MMBtu compared to $2.48 per MMBtu in the review period, resulting in the company’s decreased natural gas consumption projection. Although the price of natural gas is currently projected to increase slightly, gas markets remain in a historically low price environment which will affect actual burns.