Southwestern Public Service evaluates post-2017 coal procurement options

Xcel Energy‘s (NYSE: XEL) Southwestern Public Service subsidiary has not decided yet how to handle coal procurement for two Texas power plants after contracts with third-party procurement agency TUCO Inc. expires at the end of 2017.

Those were among the point made by H. Craig Romer in Nov. 1 testimony filed at the New Mexico Public Regulation Commission as part of a utility rate case. Romer is employed by Xcel Energy Services as Director, Fuel Supply Operations.

He provided an overview of SPS’s coal procurement under its long-standing Coal Supply Agreements (CSAs) for its Harrington and Tolk plants with TUCO Inc. He supported the reasonableness of SPS’s non-mine and non-freight coal costs for the period July 2017-June 30 2018 ( the “Test Year”), to be recovered through base rates. SPS currently procures all of its coal requirements from TUCO under separate, long-term coal supply agreements for its two coal-fired plants. 

During the Test Year, SPS expects to incur $37,526,000 (total company) in non-mine and non-freight coal costs. This total company amount is $690,824 less than the amount incurred during the period July 2015-June 30 2016 (“Base Period”). The decrease is primarily due to a reduction in the total margin costs under the SPS/TUCO CSAs.

SPS procures coal from TUCO for SPS’s two coal-fueled facilities, Harrington and Tolk, under a separate, long-term CSA for each station. In August 2016, the SPS/TUCO-Harrington CSA was amended to expire on Dec. 31, 2017, to coincide with expiration of the SPS/TUCO-Tolk CSA.

TUCO purchases coal for SPS under three existing contracts:

  • Arch Coal Sales Co. Inc. Master Coal Supply Agreement. This agreement was entered into on Dec. 31, 2010, and is an evergreen agreement where coal is purchased under Confirmation Notices with specific pricing, quantities, term, and quality. Purchases can be used for either Harrington or Tolk coal needs.
  • Peabody COALSALES LLC Master Coal Supply Agreement. This agreement was entered into on Dec. 15, 2010, and is an evergreen agreement where coal is purchased under Confirmation Notices with specific pricing, quantities, term, and quality. Purchases can be used for either Harrington or Tolk coal needs.
  • Cloud Peak Energy Resource LLC Master Coal Supply Agreement. This agreement was entered into on Nov. 1, 2010, and is an evergreen agreement where coal is purchased under Confirmation Notices with specific pricing, quantities, term, and quality. Purchases can be used for either Harrington or Tolk coal needs.

SPS expects that its non-mine and non-freight coal costs for the period Jan. 1, 2018, through June 30, 2018, will be consistent with the costs incurred under the SPS/TUCO CSAs during the period July 1, 2017, through Dec. 31, 2017, because these costs will be similar regardless of whether SPS or another eentity performs coal-handling services, said Romer.

NexGen Coal Services Ltd. is TUCO’s parent company. The SPS/TUCO-Harrington and SPS/TUCO-Tolk CSAs are set to terminate at the end of 2017.

Asked if there have been any decisions for coal procurement post 2017, Romer said: “SPS has not made a long-term decision. For 2017, SPS has extended the Harrington CSA to coincide with the ending date of the Tolk CSA, December 31, 2017. This extension provides operational flexibility for coal purchases, rail car movements and other issues that may arise during the year. At this time, SPS has not made any decisions regarding its plans for coal procurement and handling following the expiration of the Harrington and Tolk CSAs but is considering a number of options to meet its coal procurement and handling requirements.

“When considering the various options, SPS is focused on costs to customers, reliability of fuel supply, flexibility to address changing environmental and regulatory conditions, and operating the fuel handling system in a reasonable and prudent fashion. … The options that are currently being evaluated include on one end of the spectrum SPS assuming all coal handling responsibilities in-house and on the other end of the spectrum having a third party manage the coal procurement and coal handling activities for SPS.”

Harrington is a three-unit, 1,018-MW plant located northeast of Amarillo, Texas. It burns low-sulfur coal supplied primarily from Wyoming’s Powder River Basin.

Tolk is a two-unit, 1,067-MW plant that fires similar coal.

Tolk’s projected lifespan just got shorter due to various issues

David T. Hudson, President of Southwestern Public Service, said in Nov. 1 companion testimony that this applied-for rate increase in part reflects that it is unlikely SPS will be operating its Tolk Generating Station beyond 2030. “Today, SPS’s rates are set based on the assumption that the two Tolk generating units will operate into the 2040s,” Hudson added. “That’s not a realistic assumption anymore. The reduction in the service lives results in an increase in SPS’s depreciation expense in this ccase because SPS will be recovering its investment in Tolk over a shorter period of time.”

He noted that In December 2015, the U.S. EPA issued a final Regional Haze rule that disapproved the Regional Haze plan originally developed by the State of Texas. This ruling applies to Tolk, which has two coal units that have operated without SO2 scrubbers since they were placed in service in 1982 and 1985. This plant is located just east of Clovis, New Mexico, in Bailey County, Texas.

Although SPS, the State of Texas, and others have sued the EPA in federal court and received a stay of the new EPA Regional Haze rule pending appellate review, that rule could impose approximately $400 million in capital costs and $12 million of additional annual operational expense due to the requirement for dry scrubbers on both units at Tolk, Hudson wrote. To put those numbers in perspective, Tolk’s total net plant asset balance as of June 30, 2016, was only $346 million.

Additionally, the two Tolk units require increased water use with the addition of the dry scrubbers. Thus, if the Regional Haze rule is ultimately upheld and enacted, it would lead to significant additional investment to design, engineer, construct, test, and operate dry scrubbers on both Tolk Units 1 and 2 and to secure additional water before December 2022 to continue operating the Tolk station. Litigation regarding the Regional Haze rule is expected to continue into early 2018.

In addition, SPS faces the possibility of additional retrofit requirements at its other coal-fired power plant, Harrington. The EPA is scheduled to propose a new rule to control SO2 by Dec. 9, 2016, and that rule could require SPS to install dry scrubbers on two of Harrington’s three units at an estimated cost of $300 million-$400 million.

The depletion of available groundwater from the Ogallala Aquifer in the area around Tolk is a concern. SPS is struggling to find sufficient groundwater to use in the cooling cycle at the Tolk station. This plant is seeing significant groundwater declines, and SPS has drilled more and more wells but still cannot maintain a sustained level of water production to meet baseload power operations. This is the same groundwater well issue being observed in the region, especially just west across the state line in eastern New Mexico. A viable, long-term solution to the water availability issue could lead to additional capital expenditures as SPS must replace lost production from the Tolk Generating Station, Hudson said.

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.