NIPSCO continues to use decrement pricing to burn more contracted coal

Northern Indiana Public Service Co. has been using decrement pricing since May to boost its coal burn, with some success so far in addressing its climbing coal inventories, the utility told the Indiana Utility Regulatory Commission in Aug. 18 testimony to open its twice-yearly fuel cost review case.

Dennis S. Rackers, Director, Fuel Supply, for Northern Indiana Public Service (NIPSCO), wrote that for the three months ended June 30, NIPSCO’s fuel requirements were supplied by coal (65.14%) and the remainder by natural gas (34.86%), 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.

During the fuel case reconciliation period (April-June 2016), NIPSCO purchased all coal for the period under five term supply contracts as follows: Arch Coal Sales (PRB coal); Peabody COALSALES LLC (PRB coal); Peabody COALSALES (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 June 30, 2016, was $49.27 per ton or $2.406 per million Btu. The delivered cost of coal for all coal shipments during the reconciliation period of April-June 2016 was $48.01 per ton or $2.322 per million Btu. The delivered cost of coal for contract coal shipments during the reconciliation period was $48.01 per ton or $2.322 per million Btu. There were no spot coal shipments during the reconciliation period.

In the reconciliation period, the average spot market price of coal (for delivery in the prompt quarter— 3Q 2016) was $9.28 per ton for PRB coal, $26.14 per ton for ILB coal and $33.70 per ton for Pitt #8 coal. NIPSCO tracks spot market pricing by reviewing various daily and weekly coal publications. These prices do not include transportation charges.

Rackers noted: “Low natural gas prices, increased renewable generation, and mild temperatures during the period continue to depress demand for coal-fired eneration. Consequently, inventory stocks continued to trend well above targets during the second quarter. The total nationwide coal inventory at the end of June 2016 was reported at about 100 days-burn as measured by consumption in the trailing 12 months. Rail carriers continue to report that their coal shipments are well below 2015 volumes. A number of coal units retired before the April 2016 deadline when their owners decided against the extra capital and operating costs required for compliance with the Mercury and Air Toxics Standard (MATS) rule. Further retirements are likely if the EPA’s Clean Power Plan withstands the legal challenge that now has that ruled stayed. This combination of weather, commercial, and regulatory factors resulted in very soft spot and term prices across all coal regions for the reconciliation period.”

Asked about bankruptcies for Arch Coal Sales parent Arch Coal and Peabody COALSALES parent Peabody Energy, Rackers wrote: “Both Arch Coal (filed on January 11, 2016) and Peabody Energy (filed on April 13, 2016) continue to perform their obligations. Their restructuring efforts continue to progress and these bankruptcies are not expected to impact NIPSCO’s fuel cost or coal shipments. However, we continue to monitor the situation closely.”

NIPSCO’s delivered cost of coal during the reconciliation period was $48.01 per ton and $2.322 per million Btu. This decreased $0.52 per ton and $0.067 per million Btu from $48.53 per ton and $2.389 per million Btu when compared to the first quarter of 2016. The cost decrease was primarily due to the combination of a change in the mix of coals received and a decrease in the contract prices when compared to the prior quarter. Specifically, the volume of Pitt 8 coal shipments with a lower price under a new contract increased relative to ILB coal shipments with higher prices under older contracts. The mix of low cost PRB coal was relatively unchanged in the supply when compared to the prior quarter; however, the delivered cost of PRB coal was lower. The combination of these factors lowered the overall delivered cost during the reconciliation period.

For the forecast period of October-December 2016, NIPSCO anticipates that the cost of coal to be burned for generation will be approximately $51.93 per ton or an estimated $22.517 per million Btu.

The average spot market prices for delivery in the fourth quarter of 2016 as of Aug. 15 are currently $10.12 per ton for PRB coal, $27.03 per ton for ILB coal and $36.68 per ton for Pitt 8 coal. These average spot market prices do not include the cost of transportation.

Rail carrier performance is expected to be adequate to meet NIPSCO’s coal transportation needs in the forecast period. Good rail cycle time performance for NIPSCO coal movements is expected to continue in 2016 due to continued sluggish demand for rail transportation of all products and commodities. NIPSCO’s coal consumption has increased both with the implementation of decrement pricing in May 2016 and higher electric demand from warmer temperatures in June of the reconciliation period. Increased consumption has resulted in increased demand for rail sets and most of NIPSCO’s fleet is currently being utilized. Leases for five of NIPSCO’s twelve train fleet will expire by Jan. 1, 2017, and NIPSCO will continue to assess its future need for rail cars as it determines whether to renew these leases.

Decrement pricing used to address coal over-supply

Continued use of decrement pricing for Units 7 and 8 at Bailly Station and Units 17 and 18 at R. M Schahfer Station should allow NIPSCO to meet its contractual obligations with coal and transportation providers. Coal inventory levels are forecasted to remain high throughout the balance of 2016.

In the 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 allowed NIPSCO to satisfy fuel contract obligations in 2015. In early 2016, NIPSCO’s coal-fired units significantly under-consumed projections and the plant inventories were (and continue) at full capacity. The stations could not carry additional inventory; therefore, NIPSCO explored options to relieve the oversupply condition and started decrement pricing in May 2016.

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 the generating stations. Where coal pile height is not limited by fugitive dust concerns, the average maximum burn measure for NIPSCO coal inventories was roughly 70 days at the end of June 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 166 days at the end of June 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, like a coal inventory cost, 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. Increased operation will increase coal consumption and decrease the likelihood that customers will incur additional costs associated with the oversupply situation.

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.