Virginia SCC staff backs latest Kentucky Utilities fuel costs

The staff at the Virginia State Corporation Commission says the past and future fuel cost projections for Kentucky Utilities d/b/a Old Dominion Power are reasonable.

Kentucky Utilities (KU) mostly serves Kentucky ratepayers, but it does also serve nearly 30,000 customers in Wise, Lee, Russell, Scott and Dickenson counties, Va.

Diane W. Jenkins, a Principal Utilities Analyst in the commission’s Division of Energy Regulation, provided April 19 testimony to the commission on the utility’s Feb. 16 fuel cost filing. Due to cheaper fuel, the company has cuts its fuel cost projections for the one-year period beginning April 1, 2016. 

Historically, KU’s baseload electric demand was primarily supplied by coal-fired units. However, recent changes to the generation fleet, including the retirement of several coal-fired units and the addition as of June 2015 of the first combined cycle gas unit, Cane Run Unit 7 (CR7), has created the need for KU to update its business strategy for fuel procurement. CR7 is required to operate a minimum amount in order to meet the projected baseload electric demand. Further, CR7’s high efficiency and low natural gas prices make this unit competitive with the coal-fired baseload units.

Because of uncertainty regarding the volume of natural gas required, KU will continue to purchase physical natural gas on an “as-needed” basis, typically in the day-ahead or intra-day spot market. However, in 2016, the company expects to begin purchasing a portion of the projected minimum natural gas requirement for CR7 on a longer-term basis, Jenkins noted.

KU projects lower coal prices in year beginning April 1

KU’s forecast of delivered coal prices reflects existing contract commitments and the conditions prevailing in the coal markets when the forecast was completed in January 2016. The forecast results in a total average delivered coal price of approximately 219 cents per million BTU for the 2016-2017 fuel year, which is approximately 4.5% lower than the 2015 actual average delivered coal price.

KU is purchasing almost entirely high-sulfur coal. The company forecasts that high-sulfur coal (mostly from the Illinois Basin) will account for 93% of its anticipated coal supply requirements in the 2016-2017 fuel year.

KU projects coal prices to increase for the E.W. Brown power plant and decrease for Ghent and Trimble County with an overall decrease of 5.8%. The changes in coal prices at these stations are the result of new contracts, the renegotiation of current contracts, and/or changes to transportation costs.

Natural gas prices were forecasted based on the Henry Hub natural gas futures price strip traded at the NYMEX on June 18, 2015. NYMEX Henry Hub futures prices as of January 7, 2016, are lower than the forecasted natural gas prices by an average of $0.57 per MMBtu for the 2016-2017 fuel year. Given the potential volatility in natural gas prices, Jenkins said the commission staff believes that the company’s forecast is reasonable for purposes of establishing the 2016-2017 fuel factor. 

KU is projecting that approximately 72% of its net energy supply will be provided from its coal-fired generation fleet, 24% from gas-fired combustion turbines, and 4% from net purchases. Additionally, the company continues to receive a small amount (less than 1%) of its net energy supply from hydro generation and forecasts a small percentage of energy from solar generation beginning in 2016. Approximately 88% of KU’s projected power purchases are economy purchases from its affiliate, Louisville Gas and Electric (LG&E), which has mostly coal-fired facilities.

As compared to actual results for calendar year 2015, the projected energy supply mix reflects a decrease in the level of coal-fired generation and an increase in natural gas-fired combustion turbine. The increase in natural gas generation is driven by the commercial operation of Cane Run 7. Actual results for calendar year 2015 were 80% from its coal-fired fleet, 16% from gas-fired combustion turbines, and 4% from net purchases.

KU is forecasting that its coal-fired and combined cycle generation facilities will achieve a weighted average aggregate Equivalent Availability Factor (EAF) of 83%, which is the same as actual 2015 performance and slightly higher than the actual five-year average EAF of 82.6%. The lengthy planned outages of three steam units impacted the EAF for 2015. Excluding these three planned outages, EAF would have been 87%.

Three coal-fired units (E.W. Brown 3, Ghent 1 and Ghent 2) have scheduled maintenance during the 2016-2017 fuel year and are forecasted to have an EAF for the twelve months ending March 2017 that is less that the five-year average EAF. These units are forecasted to have EAFs of 80.4%, 78.3%, and 72.2%, respectively.

Said Jenkins in conclusion: “The Staff believes that the Company’s projected Virginia jurisdictional fuel expenses and sales for the forecast period are reasonable. The Staff recommends that the Commission accept KU’s proposed forecast of energy sales and delivered fuel prices for the purpose of establishing a 2016-2017 fuel factor and approve the proposed fuel factor of 2.2860 cents per kWh.”

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.