Indiana URC okays Indianapolis Power and Light use of coal decrement pricing

The Indiana Utility Regulatory Commission on May 25 approved a March 17 application from Indianapolis Power & Light (IPL) of a fuel adjustment charge (FAC) to be applicable during the billing cycles of June through August 2016.

Said the commission order: “According to IPL witness Nicholas M. Grimmer, Director, Fuel Supply, Logistics and Coal Combustion Product Management, approximately 97% of IPL’s internally generated kilowatt-hours (“kWh”) in 2015 were generated by coal-fired capacity. He said IPL currently has contracts with four coal producers and receives coal from seven different mines.

“Mr. Grimmer explained that although IPL currently has no spot coal contracts, IPL has used spot purchases of coal in the past to: (1) provide the differential requirement between IPL’s long-term contracts and its projected burn for the year; (2) test the quality and reliability of a producer to see if IPL may want to utilize the company as a long-term supplier; and (3) take advantage of occasional low price market opportunities.

“Mr. Grimmer explained that IPL strives to keep a 25- to 50-day supply of coal in inventory across its coal-fired generation fleet. He explained that although IPL has been working closely with its coal suppliers and transportation vendors, IPL’s system-wide inventory is currently beyond the 50-day maximum inventory target. He said mild weather and soft energy markets have combined to reduce IPL’s coal burn below expectations. He said IPL is actively managing its inventory levels in two ways. He said all of IPL’s long-term coal contracts contain some variability in the quantity of coal that IPL can take under that particular contract. He said IPL has been taking contract minimums for a significant period of time, but this will not bring IPL’s coal inventory back within the target inventory levels in the near future.

“Mr. Grimmer testified that IPL is in the midst of discussions with its suppliers to allow deferral of upcoming coal deliveries. He said IPL has entered into one coal contract amendment that defers a substantial amount of coal out of 2016 into 2018, and that IPL believes it will soon have amendments with other suppliers that will significantly improve IPL’s 2016 position.

“Mr. Grimmer stated that improvements were also made at IPL’s Petersburg Generation Station that increase the footprint of IPL’s coal pile, increasing on-site storage capacity by 200,000 to 250,000 tons. To further address the inventory issue, he said IPL is also negotiating with a number of suppliers and others in the coal industry to arrange to store coal at a temporary interim site between the point at which the coal is acquired and the final unloading point. He said these interim off-site storage options would be used until such time as the coal could be accommodated on the Petersburg coal pile and eventually burned. He said IPL is also talking to suppliers about the possibility of buying out of certain contract obligations or potentially selling excess coal on the market.

“IPL witness Dennis Dininger, Director, Commercial Operations, testified regarding the operating changes occurring at IPL’s Harding Street and Eagle Valley locations. He stated that Harding Street Unit 7 is currently in its outage to install the equipment to enable the burning of natural gas for generation, as approved in Cause No. 44540. He said that the Eagle Valley coal-fired plant will retire in April 2016 as previously determined in Cause No. 44242. He said the coal burn is being managed at Eagle Valley to minimize the cost of the coal inventory to the fleet. He said that all generating units to support the reliability of IPL’s 138-kV system will be fired by natural gas as a result of these events.

“Mr. Dininger testified that IPL’s coal units are experiencing periods of economic shutdown and reduced dispatch due to a lower priced Midcontinent Independent System Operator, Inc. (“MISO”) power market. He said the MISO power market prices declined nearly 30% from the same FAC period last year, commensurate with lower natural gas prices. He explained this low-price power market environment is expected to continue, causing IPL to now project an oversupply of coal to its units. He explained that IPL has determined that instituting a practice of decrement pricing in the offer of the coal units to the MISO Energy and Operating Reserves Market (“MISO EOR”) will assist in mitigating the costs of oversupply.

“Mr. Dininger explained that decrement pricing is a process by which the cost of coal is reduced in the offer to the MISO EOR equivalent to the cost of the option required to manage the oversupply. He said that, in other words, the price decrement represents the avoided cost associated with implementing a more expensive option to avoid or reduce surplus coal inventories, such as buying out of a coal contract, temporarily storing the coal, or taking some other form of action. He explained that to the extent the units are dispatched, coal coming to the station is consumed, other potential costs are avoided, and customers ultimately benefit. He added that decrement pricing is compliant with MISO Independent Market Monitor rules.

“Mr. Dininger stated that decrement pricing will be one of many options implemented to manage the coal inventory surplus, and that all options will work together to bring the inventories back into target levels. He said that as the surplus subsides, the higher cost options will be avoided and lower cost options will be used to set the decrement pricing amount. He noted that the lower decrement pricing amounts may slow IPL’s progress towards its target inventories. He added that IPL is investigating additional ways to mitigate the difference between current coal inventory costs, coal commitments, and low market power prices.

“Based upon the evidence presented, as discussed here and further below, the Commission finds that IPL’s utilization of the coal price decrement strategy is reasonable, and that in this proceeding IPL has made every reasonable effort to acquire fuel and generate or purchase power so as to provide electricity at the lowest fuel cost reasonably possible. As noted by IPL’s witnesses, the inputs used to determine an appropriate coal price decrement will change over time. Accordingly, the Commission further finds that IPL shall file information to support the utilization of coal decrement pricing in future FAC filings that involve such pricing, subject to appropriate protection of confidential information.”

Utility retired the four-unit Eagle Valley coal plant on April 15

IPL, a subsidiary of AES Corp. (NYSE: AES), had on April 15 announced the shutdown of Eagle Valley. April 15 was the last day of operations as the plant’s four coal units are to be retired.

“We will meet the future needs of our customers with a balanced energy mix and by making our generation of energy cleaner and more efficient,” said Ken Zagzebski, President of AES United States, in the April 15 statement. “This all-of-the-above approach of integrating clean and renewable resources with traditional energy sources allows us to keep prices competitive while giving customers the reliable energy they have come to depend upon.”

The Eagle Valley plant became operational in 1949. The retired units are being replaced by a new 671-MW combined-cycle gas turbine (CCGT) power station at the Eagle Valley site. The plant will combine two natural gas-fired turbines and one steam turbine to maximize energy production efficiency with significantly fewer environmental emissions. Construction of the new CCGT is more than one-third complete and scheduled to go online in the spring of 2017.

In February, IPL’s Harding Street Station in Indianapolis burned coal for the last time. Two coal units at Harding Street were converted to natural gas at the end of 2015. The third unit was expected to be converted by the end of April. These projects, along with IPL’s future plans, will significantly reduce dependence on coal, making natural gas IPL’s largest source of generating capacity. 

IPL provides retail electric service to more than 480,000 residential, commercial and industrial customers in Indianapolis, as well as portions of other Central Indiana communities surrounding Marion County.

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.