Duke Energy Indiana has had some success lately in reducing its bloated coal inventories and has worked out a coal contact reopener, said officials of this Duke Energy (NYSE: DUK) subsidiary in Oct. 28 fuel adjustment clause (FAC) testimony filed at the Indiana Utility Regulatory Commission.
These FAC cases are filed every six months at the commission.
Brett Phipps, the Managing Director, Fuel Procurement, for Duke Energy Progress, a utility affiliate of Duke Energy Indiana, wrote that the Gibson, Cayuga and Edwardsport IGCC stations continue to be supplied by long-term coal agreements. Gallagher Station will continue to be supplied by spot purchases depending on how much the Gallagher Station units operate.
For the twelve-month period ending Aug. 31, 2016, the company purchased approximately 11.3 million tons of coal (pursuant to both long and short-term contract commitments) at an approximate average cost of $2.28/MMBtu. The delivered cost of coal purchased under long-term commitments averaged $2.28/ MMBtu and made up 98.5% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.08/MMBtu.
Said Phipps about overall coal market conditions: “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 mid to upper $30’s per ton; Central Appalachia coal prices are in the low to mid $50’s per ton; Northern Appalachia coal prices are in the low to mid $40’s per ton; and Powder River Basin coal prices are above $11 per ton.
“Coal demand has increased during the summer months due to warmer than expected temperatures, increased demand for coal-fired generation and higher than expected power prices. As a result, utility stockpiles across the U.S. decreased. Coal markets continue to be over-supplied with the industry continuing to be distressed and there has been 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) changing 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.”
Coal inventories down somewhat in recent months
Phipps said that Duke Energy Indiana’s coal inventories as of May 31, 2016, were approximately 3,764,706 tons (or 69 days of coal supply at a full load burn rate per day) across the system. As of Aug. 31, 2016, coal inventories decreased to approximately 3,535,730 tons (or 65 days of coal supply). This decrease in coal inventories can be attributed to a number of factors including, but not limited to: warmer than expected temperatures and associated higher than expected coal burns; and brief use of the coal price decrement in June. Duke Energy Indiana expects coal inventories to stay relatively flat or grow minimally over the next quarter.
The utility has moved approximately 247,962 tons of coal as of Sept. 30, 2016, from the Carlisle Mine interim storage site to the Cayuga power station. Approximately 52,192 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.
The company has implemented the coal price decrement system to help with high coal inventories. A decrement adds the price of stockpiling the coal to market bids for the affected power capacity, thus making that capacity more competitive. Also, the company continues to evaluate other options. As inventory levels dictate, 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.
As for coal contract reopeners, Phipps said that Duke has provided Solar Sources Inc. a notice to reopen the market price for two million tons of coal to be delivered during calendar year 2017. The company signed the amendment on Sept. 28, 2016, and the amendment becomes effective Jan. 1, 2017.
Spot natural gas prices are dynamic, volatile and can change significantly day to day based on market fundamental drivers, Phipps wrote. As of early October 2016, the current spot price for delivered natural gas is in the range of approximately $3.00 to $3.35 per MMBtu. For the period June through August 2016 the price the company paid for delivered natural gas at its gas burning stations was between a low of $2.075 MMBtu for gas delivered on June 1, 2016 to a high of $3.25 MMBtu for gas delivered on June 30, 2016. In comparison, during the previous period of March to May 2016, the price the company paid for delivered natural gas at its gas burning generation stations during this period was in a range of delivered daily gas prices between a low of $1.44 MMBtu on March 4, 2016, to a high of $2.90 per MMBtu on April 29, 2016.
John D. Swez, employed by Duke Energy Carolinas as Director, Generation Dispatch and Operations, also in this FAC case provided an update on the status of the coal-fired Wabash River Units 6, and also Wabash River Unit 7. Wabash River Unit 6 had a one-year Mercury and Air Toxics Standards (MATS) rule extension until April 15, 2016, after which time the unit suspended operation. Duke Energy Indiana had been evaluating the potential to convert Wabash River 6 to natural gas. The company decided not to pursue this, and on June 7, 2016, Duke Energy Indiana submitted an Attachment Y notification to the Midcontinent ISO requesting a decommissioning and retirement date of Dec. 7, 2016, for Wabash River 6 (318 MW) as well as the Wabash River 7 (8 MW) diesel units. MISO on Sept. 12, 2016, approved the requested date for Wabash River 6 and also determined that MISO approval was not needed for Wabash River 7 due to the fact that it is a behind the meter resource. Both units are planned to retire on Dec. 7, 2016. The coal-fired Wabash River Units 2-5 were retired in April of this year.
At the coal-fueled Edwardsport IGCC, the station experienced strong generation performance this summer, Swez wrote. In particular, during June 2016, the station produced the 5th most generation and during August 2016, the station produced the most generation in any month since commercial operation began.
When the Edwardsport IGCC 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 units. Edwardsport has followed MISO’s dispatch direction between the minimum and maximum capability of the unit during this time. 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.