Vectren South uses ‘decrement’ power pricing to reduce coal inventories

Southern Indiana Gas and Electric d/b/a Vectren South is working in various ways to reduce its too-high coal inventories, said Wayne D. Games, the company’s Vice President–Power Supply, in May 18 fuel testimony filed at the Indiana Utility Regulatory Commission.

As of March 31, 2016, coal inventory at Vectren South’s coal-fired generating plants stood at approximately 818,313 tons. Mild weather and unusually low locational marginal prices (LMPs) in the power market in the latter part of 2015 resulted in low-loading and frequent reserve shutdowns of Vectren South’s coal-fired generators, Games noted. Coal inventories were too great for the storage space Vectren South has available and to ensure safe maintenance of the piles. 

The U.S. EPA’s Coal Combustion Residual (CCR) regulations required reinforcement of the lower ash pond dam at the AB Brown power plant. This reinforcement will be accomplished by adding a buttress. This work requires extending the base of the dam into the area of the coal pile. In order to provide room for this project the plant had to reduce the coal pile footprint and inventory level.

In addition, the coal pile at the FB Culley plant had also reached levels not seen in the past. This plant accepts coal by truck delivery and there were beginning to be safety concerns given the small footprint for trucks to safely maneuver on the top of the pile. There were also concerns with the safety of employees on bulldozers given the steepness of the coal pile.

At the beginning of the year, Vectren South reduced the amount of coal received in 2016 to its contractual minimum. While that helped somewhat, it was not enough to stem the growing coal inventory, Games noted. As an additional measure, Vectren South received a quote from an unnamed coal supplier to postpone contractually-obligated deliveries to its generating facilities. The cost of postponing coal deliveries would be passed through directly to Vectren South customers had it chosen that option. In an effort to avoid this additional cost, the utility converted that quote to an avoided cost per Megawatt-hour.

Starting on Feb. 23, 2016, Vectren South reduced the offer price to the Midcontinent ISO on all coal-fired generators by this avoided cost value in order to increase the probability that MISO would clear those generators in the Day Ahead and Real Time market. This strategy allowed Vectren South to manage coal inventories at the lowest possible cost. This practice is not uncommon in the industry, and is generally referred to as “decrement pricing,” Games added.

These strategies and a trending increase in LMPs beginning in April allowed Vectren South to manage coal inventories to the point that it elected to end the decrement pricing in early May. “We continue to take the minimum coal deliveries as allowed in our contracts,” Games added.

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.