Indianapolis Power & Light is working out deals to delay coal shipments, has expanded the coal stockpile at its Petersburg power plant and is using a power price decrement, all to battle expanded coal piles brought about by low burn.
Nicholas M. Grimmer, the utility’s Director, Fuel Supply, Logistics and Coal Combustion Product (CCP) Management, outlined the situation in June 16 testimony filed at the Indiana Utility Regulatory Commission in the latest of IPL’s twice-yearly fuel cost review cases.
IPL normally purchases all of its coal from the Illinois Basin, primarily from Indiana producers. It currently has contracts with four coal producers and receives coal from seven different mines. The contracts are with Peabody Energy, Triad Mining, Sunrise Coal LLC and Gibson County Coal.
IPL strives to keep a 25-50 day supply of coal in inventory at its facilities. “Although we have been working closely with our coal suppliers and transportation vendors, IPL’s system-wide inventory is currently beyond our 50 day maximum inventory target,” Grimmer wrote. “Over the last approximately 18 months, mild weather and soft energy markets have combined to reduce IPL’s coal burn below expectations.
“IPL is actively managing its inventory levels in two ways. All of IPL’s long-term coal contracts contain some variability in the quantity of coal that IPL can take under that particular contract. We have been taking contract minimums for a significant period of time. However taking contract minimums will not bring IPL’s coal inventory back within the target levels in the near future. So we are taking additional steps to manage inventory in light of current market conditions. In particular, we are in the midst of discussions with our suppliers to allow deferral of upcoming coal deliveries. We have entered into one coal contract amendment that defers a substantial amount of coal out of 2016 into 2018. Since our last FAC filing, we have entered into an additional contract amendment to defer tons out of 2016 and into 2017 at no additional cost.
“We continue to look for additional opportunities to further improve our 2016 and 2017 coal positions. Additionally, improvements were made at IPL’s Petersburg Generation Station that increased the footprint of IPL’s coal pile. These improvements have increased Petersburg’s on-site storage capacity by 200,000 to 250,000 tons. Even at our substantially reduced delivery schedule, Petersburg’s coal pile is at or very near, its capacity every day.
“To further address the inventory issue, we are 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. 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.
“In addition, we continue to talk to suppliers about the possibility of buying out of certain contract obligations or potentially selling excess coal on the market. Thus, all options are being considered. We are focusing on the most cost-effective solutions ranging from amending contracts to storing coal or changing offer pricing strategies.”
Grimmer noted that decrement pricing is an additional tool that can be used to manage inventory and costs by decreasing IPL’s offer to reflect avoided inventory management costs. Offering the IPL coal units in at a coal price decrement would allow IPL to burn off these excess tons and thereby avoid the cost of storing coal, buying out of a contract or selling coal on the market at below IPL’s cost, which benefits customers.
Dennis Dininger, IPL’s Director, Commercial Operations, explained in June 16 companion testimony that decrement pricing is a process by which the cost of coal is reduced in the offer to the Midcontinent ISO EOR equivalent to the cost of the option required to manage the oversupply. 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. 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.
Dininger wrote: “Decrement pricing will be one of many options implemented to manage the coal inventory surplus. All options will work together to bring the inventories back into target levels. Addtionally, in the event that forecasted MISO market prices for power increase, the forecasted dispatch of IPL coal units without decrement pricing will increase, reducing the projected surplus. As the surplus subsides, the higher cost options will be avoided and lower cost options will be used to set the decrement pricing amount. The lower decrement pricing amounts may slow IPL’s progress toward its target inventories.
Dininger noted that Harding Street Unit 7 is now converted to burn natural gas instead of coal and is currently being tuned as part of the start-up sequence. The Eagle Valley coal-fired plant is now retired.