Duke Energy Indiana reports continued woes for coal market

Duke Energy Indiana said in a July 27 filing at the Indiana Utility Regulatory Commission of its fuel cost adjustment case that it continues to battle large coal inventories as it purchases pretty much only contract coal and stays out of the spot market.

Brett Phipps, the Managing Director, Fuel Procurement, for Duke Energy Progress, a utility affiliate of Duke Energy Indiana, provided then fuel part of the testimony in this fuel case, known as FAC 109. These are subsidiaries of Duke Energy (NYSE: DUK).

Wabash River was supplied by long-term agreements until its retirement on April 15, 2016. The Gibson, Cayuga and Edwardsport IGCC facilities continue to be supplied by long-term agreements. The venerable Gallagher Station will continue to be supplied by spot purchases depending on how much the Gallagher Station units actually operate.

For the twelve-month period ending May 31, 2016, the company purchased a total of approximately 11.5 million tons of coal (pursuant to both long and short-term contract commitments) at an approximate average cost of $2.29/MMBtu. The delivered cost of coal purchased under long-term commitments averaged $2.29/ MMBtu and made up 98.52% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.08/MMBtu.

Wrote Phipps about the coal market in general: “Published prices for U.S. coal markets have increased slightly since the last fuel proceeding. The following are 2016 price indications for the different coal producing regions: High-sulfur Illinois basin coal prices are in the low to mid $30’s per ton; Central Appalachia coal prices are in the mid to upper $30’s per ton; Northern Appalachia coal prices are in the low to mid $30’s per ton; and Powder River Basin coal prices are below $10.00 per ton.

“Coal demand has continued to be weak mainly due to cheaper natural gas pricing, lower purchase power cost, and lower power demand. As a result, over the next few months utility stockpiles are forecasted to stay relatively flat or slightly decrease due to higher burns caused by higher than expected temperatures. Coal markets continue to be over-supplied with the industry continuing to be distressed and in the next year there is the potential for market volatility due to a number of factors, including: (a) deteriorated financial health of coal suppliers; (b) proposed and imposed U.S. Environmental Protection Agency (“EPA”) regulations for power plants that have resulted in utilities retiring or modifying plants, which lowers total domestic steam coal demand, and can result in plants shifting coal sources to different basins; (c) abundant natural gas supply and storage resulting in lower natural gas prices combined with installation of new combine cycle (“CC”) generation by utilities, especially in the Southeast, which has also lower overall coal demand; (d) continued soft demand in global markets for both steam and metallurgical coal; (e) increasingly stringent safety regulations for mining operations, which result in higher costs and lower productivity; (f) volatile power prices; (g) mergers and acquisitions in the different coal basins; and (h) mining employee layoffs and production declines in an attempt to bring an oversupply of coal into balance with current demand.

“Despite the distress on the coal industry, the Company has not experienced non-performance by suppliers on any of its coal contracts. As noted in FAC 108 the Company was aware of Peabody Energy’s (“Peabody”) filing for Chapter 11 bankruptcy protection and has had verbal conversations with Peabody since its bankruptcy filing. Peabody has notified the Company that they plan to continue supplying Duke Energy Indiana as contracted. The Company continues to receive verbal updates and the status has remained the same. The Company has not experienced any contractual nonperformance.”

Duke Energy Indiana’s coal inventories as of Feb. 29, 2016, were approximately 4,093,665 tons (or 66 days of coal supply at a full load burn rate per day) across the system. As of May 31, 2016, coal inventories decreased to approximately 3,764,706 tons (or 69 days of coal supply). This decrease in coal inventories can be attributed to a number of factors including, but not limited to: drawing down the inventory at the Wabash River plant in planned amounts in preparation for the retirement of units 2 through 5 on April 15, 2016, and suspension of the operation of Unit 6 on that same date, and a reduction of inventory due to the utilization of a coal price decrement. Duke Energy Indiana expects coal inventories to stay relatively flat or grow minimally over the next quarter. It should be noted the volume decreased by 328,960 tons but the number of days of inventory increased by three days due to the removal of Wabash River-related calculations.

Phipps said the company has implemented the coal price decrement, which allows it to include coal inventory costs in its MISO market bids, thus boosting power sales from the coal units. Also, the company continues to evaluate a host of options in order to effectively manage the growing inventories. The company explores options to store or defer contract coal or resell surplus coal into the market. Due to continued weak coal market conditions, resale opportunities will continue to be extremely difficult in the near term, Phipps noted.

In terms of a contract reopener, Phipps said the utility has provided Solar Sources Inc. a notice to reopen the contract price for 2 million tons of coal to be delivered during calendar year 2017.

Spot natural gas prices are dynamic, volatile and can change significantly day to day based on market fundamental drivers. As of early July 2016, the current spot price for delivered natural gas is in the range of $2.70 to $3.05 per MMBtu. For the period March through May 2016 the price the company paid for delivered natural gas at its gas-burning stations was between a low of $1.44 MMBtu on March 4 to a high of $2.90 on April 29. In comparison, during the previous period of December 2015 to February 2016, the price the company paid for delivered natural gas at its gas-burning generation stations was in a range of delivered daily gas prices between a low of $1.48 MMBtu on Dec. 23 to a high of $4.00 per MMBtu on Jan. 13.

Phipps noted that the company has moved approximately 47,344 tons of coal during the FAC 109 period. Through June 2016 the company has moved a total of approximately 94,590 tons of coal from the Carlisle Mine interim storage site to the Cayuga power station. Approximately 205,000 tons of coal remains at the Carlisle Mine interim storage site and the company plans on delivering the remaining volume to Cayuga station by the end of December 2016.

Swez outlines coal decrement, decision to retire Wabash Unit 6

John D. Swez, employed by Duke Energy Carolinas as Director, Generation Dispatch and Operations, also supplied July 27 testimony in this case.

Swez said that starting in February 2012, the company started applying a coal price decrement to the dispatch costs of the Gibson 1-5, Wabash River 2-6, and Cayuga 1-2 generating units to correctly reflect the economics of additional costs associated with avoiding or reducing surplus coal inventories. With the price decrement in place, the company initially saw a significant increase in generation output from these units. As the level of the coal price decrement has decreased over time, the impact of the decrement has lessened.

In July 2015, a non-zero coal price decrement was initiated for Cayuga 1-2 and Gibson 1-5. In addition, the coal price decrement was initiated for Wabash River 6 in November 2015. Due to the planned retirement of Wabash River 2-5 on April 15, 2016, the coal price decrement was not applied to these units.

An outage occurred at Wabash River Unit 6 starting on April 6, 2016, and ending on April 15, 2016. This outage was associated with the shutdown of this unit as required prior to April 15, 2016.

Wabash River Units 2-5 were retired on April 15, 2016. These units were granted a one-year extension of the April 2015 Mercury and Air Toxics Standards (MATS) compliance date due to the need for at least two of the four units to operate at any given time for transmission system reliability (in addition to Wabash River Unit 6, which also has a one-year MATS rule extension of time). Duke Energy Indiana employed a MISO offer strategy that prioritized availability and operation of the units to solve transmission reliability constraints. As a result, it generally held two of the four of Wabash River Units 2-5 in reserve shutdown available for emergency operation only. 

Wabash River Unit 6 had a one-year MATS rule extension until April 15, 2016, after which time the unit suspended operation. Duke Energy Indiana has been evaluating the potential to convert Wabash River 6 from coal to natural gas. Swez added: “The Company has decided not to pursue this, and on June 7, 2016, Duke Energy Indiana submitted an Attachment Y notification to MISO requesting a decommissioning and retirement date of December 7, 2016 for Wabash River 6 (318 MW) as well as the Wabash River 7 (8 MW) diesel units. MISO is studying the decommissioning request and has not provided the conclusion to date.”

During March 2016, the Edwardsport IGCC station produced the 5th most generation in any month since being declared commercial. During periods of April and May 2016, the station underwent its spring maintenance outage. During June, the station rebounded with the 4th most generation in any month.  When the unit’s gasifiers are available or operating, Edwardsport is being offered with a commitment status of must-run with the unit’s parameters outlined for MISO, as is typically the case with other Duke Energy Indiana large coal generating units. In addition, during times when syngas is not available and the station is available on natural gas operation, the unit will typically be offered to MISO with a commitment status of economic and can be committed and dispatched at MISO’s discretion.

Prior to March 1, 2016, the coal-fired Gibson Unit 5, although owned 50.05% by Duke Energy Indiana, 25% by Wabash Valley Power Association (WVPA) and 24.95% by Indiana Municipal Power Agency (IMPA), was offered to MISO by Duke Energy Indiana as a whole (100%) unit. Thus, the company offered the entire unit to MISO, and MISO settled the charges and credits as if Duke Energy Indiana owned 100% of the unit. Outside of the MISO market, the Company then sent the WVPA and IMPA share of the energy and related charges and credits, through various billing mechanisms and market instruments, to each co-owner. At WVPA’s request, on March 1, 2016, the WVPA share of Gibson 5 was successfully pseudo-tied to PJM Interconnection. Thus, the WVPA share of Gibson 5 became part of the PJM market on this date. The remaining Duke Energy Indiana and IMPA shares of Gibson 5 remain in MISO.

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.