NIPSCO looks to price decrement to goose lagging coal burn

With coal units being backed down due to cheap natural gas, and coal inventories rising at its power plants, Northern Indiana Public Service Co. is suggesting to the Indiana Utility Regulatory Commission that a coal price decrement be instituted to boost coal burn.

A decrement, which has been used off and on in recent years by Duke Energy Indiana, adds the cost of holding coal in stockpile to bid prices for power out of these plants, making them more competitive in the power markets.

Dennis S. Rackers, the Director, Fuel Supply, for Northern Indiana Public Service Co. (NIPSCO), explained the situation in a May 2 fuel cost filing with the commission.

Rackers said: “In first quarter of 2015, low natural gas prices started to displace coal and coal consumption underperformed projections. The problem grew worse throughout 2015, but larger coal inventories and small volume deferrals to 2016 sufficed to satisfy fuel contract obligations in 2015. In 2016, NIPSCO’s coal-fired generating units continue to significantly under-consume projections and the plant inventories are already full. The stations cannot carry additional inventory; therefore, NIPSCO has explored options to relieve the oversupply condition.

“Soft demand for coal generation over the last year has pushed NIPSCO coal inventories well above the target level of 40 max-burn days at our generating stations. Where coal pile height is not limited by fugitive dust concerns, the average maximum burn measure for NIPSCO coal inventories was 73 days at the end of March 2016. The maximum burn represents the average daily burn tons for each unit in the month with the highest consumption over the last 10 years. This max-days burn measure has less relevance when compared with the low burn rates in recent months. When measured using the average daily consumption over the last 12 months, NIPSCO’s system coal inventory was actually at 154 days at the end of March 2016.

“NIPSCO has investigated reselling excess coal on the market at a loss, buying out coal supply contracts, storing coal at off-site locations (either at the supplier’s mine or at remote locations after delivery), paying suppliers to defer tonnage into 2017, paying coal and transportation suppliers to reduce tonnage commitments and using price decrements in the MISO offers to increase coal consumption.

“A generation offer is usually equal to the sum of the incremental costs the company will incur if the generating unit produces power. A price decrement is a cost that will be avoided if the unit produces power. When a company includes a decrement in its offer, the offer price is reduced and the unit is more likely to be called by MISO to operate.

“NIPSCO believes that it should begin to add a price decrement to its MISO generation offers in order to provide its customers with the lowest fuel cost reasonably possible. NIPSCO Witness Campbell explains the coal price decrement process and how it minimizes customer cost. All the other options are either not practical over the long run and/or will increase costs for the customer.”

Andrew S. Campbell, the Manager of Planning & Regulatory Support for NIPSCO, wrote in companion testimony: “The decrement process would use estimates for the avoided costs to reduce the dispatch fuel cost by an equivalent amount. This would be the price decrement. If MISO accepts the offer and the unit is dispatched, the decrement strategy results in the lowest cost alternative for the customer. In other words, it is more economical for NIPSCO to generate the MWh than to utilize the oversupply mitigation options mentioned [by Rackers]. Conversely, in the instance where the unit is not dispatched by MISO, the more economical option on behalf of the customer is to utilize the oversupply mitigation options mentioned [by Rackers].”

Currently, NIPSCO has determined that price decrements need to be applied on Units 7 and 8 at the Bailly Generating Station and Units 17 and 18 at the Schahfer Generating Station. NIPSCO plans to implement the decrement pricing strategy in the unit offers to MISO beginning in May 2016, Campbell wrote. He noted that both Duke Energy Indiana and Vectren have used a similar approach in their use of decrement pricing and the commission has approved this methodology.

NIPSCO gets the majority of its power generation from coal

Rackers said that for the three months ended March 31, 2016, NIPSCO’s fuel requirements for its generating units were supplied by coal (55.9%) and the remainder by natural gas (44.1%), including the Sugar Creek Generating Station.

NIPSCO uses a blend of Powder River Basin (PRB) coal and Pittsburgh #8 (“Pitt8”) coal in Unit 12 at its Michigan City Generating Station; Illinois Basin (ILB) coal in Units 7 and 8 at its Bailly Generating Station; a blend of PRB coal and Pitt8 coal in Unit 14; PRB coal in Unit 15, and ILB coal in Units 17 and 18 at its R. M. Schahfer Generating Station.

In the first quarter of this year, NIPSCO purchased all coal for the period under five term supply contracts: Arch Coal Sales Co. (PRB coal); Peabody COALSALES LLC (PRB coal); Peabody COALSALES LLC (ILB coal); Sunrise Coal LLC (ILB coal); and Consol Pennsylvania Coal Co. (Pitt 8 coal).

The delivered cost of coal for the twelve months ending March 31, 2016, was $50.28 per ton or $2.469 per million Btu. The delivered cost of coal for all coal shipments during the reconciliation period of January-March 2016 was $48.53 per ton or $2.389 per million Btu. The delivered cost of coal for contract coal shipments during the reconciliation period was $48.28 per ton or $2.398 per million Btu. There were no spot coal shipments during the reconciliation period.

The average spot market price of coal (for delivery in the prompt quarter—2Q 2016) during the reconciliation period was $9.77 per ton for PRB coal, $28.28 per ton for ILB coal and $36.18 per ton for Pitt8 coal. NIPSCO tracks spot market pricing by reviewing various daily and weekly coal publications. These prices do not include transportation charges.

Said Rackers about the coal market in general: “Low natural gas prices, increased renewable generation, and mild temperatures continue to depress demand for coal-fired generation. Consequently, inventory stocks continue to be well above targets. The  total nation-wide coal inventory at the end of February 2016 was reported at about 95 days-burn as measured by consumption in the trailing 12 months. Rail carriers recently reported that their coal volumes are down as much as 35% and 40% year over year. Additional coal unit retirements ahead of the April 2016 deadline for compliance with the Mercury and Air Toxics Standard (MATS) rule are also reducing demand for coal. Generators with coal plants are contemplating compliance options for EPA’s Clean Power Plan. As a result of all these factors, both spot and term prices across all coal regions are very soft.”

Rackers noted that both Arch Coal and Peabody Energy, the corporate parents of two of its coal suppliers, have in recent months sought Chapter 11 bankruptcy protection. “While it is early in their respective proceedings, these bankruptcies are not expected to impact NIPSCO’s fuel cost or coal shipments,” he added. “However, we continue to monitor the situation closely.”

NIPSCO’s delivered cost of coal during the reconciliation period was $48.53 per ton and $2.389 per million Btu. This decreased $1.13 per ton and $0.034 per million Btu from $49.66 per ton and $2.423 per million Btu when compared to the fourth quarter of 2015. The cost decrease was primarily due to a change in the mix of coals received and a decrease in the contract prices for PRB and Pitt8 coals. Specifically, the volume of lower cost PRB coal shipments increased relative to higher cost ILB coal shipments. Shipments under a new one year agreement for Pitt8 coal with a significantly lower contract price also helped lower the overall delivered cost.

NIPSCO anticipates that the cost of coal to be burned for generation in the forecast period of July-September 2016 will be approximately $50.38 per ton or an estimated $2.457 per million Btu.

The average spot market prices for delivery in the third quarter of 2016 as of April 25 2016, are currently $9.32 per ton for PRB coal, $26.09 per ton for ILB coal and $32.75 per ton for Pitt8 coal. These average spot market prices do not include the cost of transportation.

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.