Use of decrement helps boost NIPSCO’s recent coal burn

Northern Indiana Public Service Co. continues to use decrement pricing in the power markets to boost its lagging coal burn and has had no issues with the recent bankruptcies for two of its coal suppliers, Peabody Energy and Arch Coal.

Dennis S. Rackers, the Director, Fuel Supply, for Northern Indiana Public Service Co. (NIPSCO), made those and other points in a a Nov. 18 filing of the utility’s latest fuel cost adjustment case with the Indiana Utility Regulatory Commission.

For the three months ended Sept. 30, 2016, NIPSCO’s fuel requirements for its generating units were supplied by coal (75.01%) and the remainder by natural gas (24.99%). 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.

NIPSCO purchased all coal for the fuel review period under five term supply contracts with: Arch Coal Sales Co. (PRB coal); Peabody COALSALES LLC (PRB coal); Peabody COALSALES LLC (ILB coal); Sunrise Coal LLC (ILB coal); and Consol Pennsylvania Coal Co. (Pitt 8 coal).

NIPSCO continued to decrement its offers to MISO’s day-ahead wholesale power market for Bailly units 7 and 8 and Schahfer units 17 and 18 in the reconciliation period. In the forecast period (January-March 2017) this practice will continue only for Schahfer units 17 and 18.  Decrement pricing involves adding costs of factors like coal stockpiles to power market bids, thus making those units of lesser cost in the power markets.

NIPSCO coal consumption increased with the start of decrement pricing in May 2016 and warmer temperatures through the July-September 2016 reconciliation period. Increased consumption has resulted in increased demand for NIPSCO’s coal car fleet and only one set of cars was in storage at the end of September 2016. The lease for two trains in NIPSCO’s current twelve-train fleet expired on Sept. 30, 2016, and those trains are being returned to the lessor in the fourth quarter of 2016. The lease for three other trains will expire by Jan. 1, 2017, and NIPSCO continues to assess its future need for these rail cars.

Continued use of decrement pricing for Units 17 and 18 at R. M Schahfer Station during the forecast period and the balance of 2017 should allow NIPSCO to meet its contractual obligations with coal and transportation providers, Rackers noted. Coal inventory levels are forecasted to remain relatively high for Schahfer Units 17 and 18, but should slowly settle back toward the target levels for the balance of the coal fleet in 2017.

Rackers wrote: “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 our 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 September 2016. The maximum burn represents the average daily burn tons for each unit in the month with the highest consumption over each of the last 10 years. This max-days burn measure has less relevance when compared with the current 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 157 days at the end of September 2016.”

The delivered cost of coal for the twelve months ending Sept. 30, 2016, was $48.45 per ton or $2.360 per million Btu. The delivered cost of coal for all coal shipments during the reconciliation period of July-September 2016 was $47.81 per ton or $2.323 per million Btu. The delivered cost of coal for contract coal shipments during the reconciliation period was $47.81 per ton or $2.323 per million Btu. There were no spot coal shipments during the reconciliation period.

The average spot market price of coal during the reconciliation period was $10.38 per ton for PRB coal, $28.86 per ton for ILB coal and $37.45 per ton for Pitt8 coal. NIPSCO tracks spot market pricing by reviewing various daily and weekly coal publications. These prices do not include transportation charges.

The average spot market prices for delivery in the first quarter of 2017 as of Nov. 7, 2016, were $11.84 per ton for PRB coal, $32.50 per ton for ILB coal and $48.94 per ton for Pitt8 coal. These average spot market prices do not include the cost of transportation.

Said Rackers about overall coal market conditions: “Low natural gas prices and increased renewable generation continue to depress demand for coal-fired generation nationwide, but above average temperatures in the eastern U.S. led to increased electric demand and coal burn during the quarter. The total coal inventory in the eastern U.S. dropped from 99 days-burn at the end of June to 85 days at the end of September 2016 as measured by consumption in the trailing 12 months. As a result, there has been some increase in coal demand with ILB and Pitt8 prices moving up about $4 and $12 per ton, respectively.

“Rail carriers continue to report that their coal shipments are well below 2015 volumes. At least one carrier reports that total car loadings for all rail freight through September 2016 are lower than any year in the last ten excluding 2009.”

Two of NIPSCO’s coal suppliers filed for Chapter 11 bankruptcy protection. Both Arch Coal (filed on Jan. 11, 2016) and Peabody Energy (filed on April 13, 2016) continue to perform and meet their contractual obligations, Rackers said. Arch Coal emerged from bankruptcy on Oct. 5, 2016. Peabody continues with its restructuring efforts, but the bankruptcy is not expected to impact NIPSCO’s fuel cost or coal shipments.

NIPSCO’s delivered cost of coal during the reconciliation period was $47.81 per ton and $2.323 per million Btu. The cost per ton decreased $0.20 but the cost per MMBtu was essentially unchanged from shipments in the second quarter of 2016. Shipments of both lower cost PRB and higher cost ILB coals increased relative to the second quarter, but the change in total delivered cost for the third quarter was essentially nil because the two cost directions cancelled one another.

NIPSCO’s cost of coal to be burned for generation in the forecast period of January-March 2017 is estimated to be $51.06 per ton and $2.493 per million Btu.

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.