By Steve Fiscor, Editor-in-Chief

Coal-fired power generation has historically been an inexpensive source for electricity. This situation, however, has already started to change—a trend that will continue. To comply with recently proposed rules from the Environmental Protection Agency (EPA), utilities now face a serious decision: install expensive pollution control equipment or close coal-fired power plants. From a feasibility standpoint, the decision seems to be cut and dry. Two other variables, the future costs for natural gas and state of the grid, complicate the decision.

Delivering the Keynote at the 2012 International Coal Preparation Confer-ence & Exhibition, which took place during May 2012 in Lexington, Ky., Kimberly Chilcote, manager coal procurement, American Electric Power (AEP), offered a sobering message to the U.S. coal business. She offered a utility perspective on the train wreck of EPA regulations and the timeline for implementation. She also discussed the competitive disposition of natural gas. While most of her message was not good news for the 200 coal operators and processing professionals in the room, she did offer a few potential outcomes that would reward continued reliance on coal as the fuel of choice for electricity generation.

While most utilities had long term plans to upgrade pollution control equipment or close older plants, the proposed EPA rules have compressed the timeline for enacting those plans, Chilcote explained. Furthermore, the role of natural gas as a long term reliable low cost supply has increased with the discovery and exploration of shale gas. These market forces are having an impact on the role coal will play in the future of power generation.

Headquartered in Columbus, Ohio, AEP provides generation, transmission and distribution services to approximately 5.3 million customers in 11 states. It has 39,000 circuit miles of transmission lines, including 2,116 miles of 756 kV lines, the backbones of the electric interconnection in the United States.

The company operates in two manners, regulated and competitive. Most of the utilities that AEP owns operate as regulated utilities, meaning they pass certain costs along to customers and the process is governed by state commissions, Chilcote explained. The company owns AEP Texas, which is a competitive (unregulated) utility and AEP Ohio is now considering the competitive market.

With 40,000 megawatts (mw) of generating capacity, the company is one of the largest power producers in America. “We are one of the largest electric power generators and the largest coal consumer,” Chilcote said. “For AEP, coal consumption has recently averaged 65 to 70 million tons per year. At its peak, coal consumption reached 80 million tons or more. Unfortunately in 2012 a new chapter in this AEP story begins. Coal consumption for 2012 will probably amount to a little more than 50 million tons.” Chilcote singled out low natural gas prices and the mild winter this year as the primary culprits.

Going forward, however, the EPA regulations will be the major limiting factors for the continued use of coal. “AEP in general is not opposed to the proposed EPA rules,” Chilcote said. “The company is concerned about the timeframe and implementation process. These rules will have a significant impact on the coal industry. Certain states will feel the impact more than others, especially the heavily industrialized states that rely heavily on coal-fired generation.” The top 10 most-affected states would be: Illinois, West Virginia, Ohio, Alabama, Michigan, Indiana, Pennsylvania, Tennessee, Kentucky and North Carolina.

There is a common misconception in the U.S., which is promoted by environmental advocacy groups, that the air is polluted. In reality, Chilcote explained, the quality of the air in the U.S. has improved substantially over the last few years. Mercury, CO2, ozone, lead, NOx, particulate matter and SO2 have all decreased. “This has happened with no additional rules since 1990,” Chilcote said.

Recently Proposed Environmental Regulations from the EPA
The first recently proposed rule has had many renditions. It started as the Clean Air Interstate Rule, then became the Clean Air Transport Rule, and now its referred to as the Cross State Air Pollution Rule (CSAPR, casper in utility speak). “The goal of all of these rules has been to reduce the emissions that cross state lines, especially those headed toward the East Coast,” Chilcote said.

CSAPR would reduce SO2 and NOx by 73% and 54% respectively from 2005 levels. It was proposed in July 2011 with an implementation date of December 2011. “As a utility, we had six months to comply and frankly that is not enough time to develop a strategy,” Chicote said. “This is a federal plan. The states had no input. The EPA’s estimated compliance costs of $2.4 billion annually would be passed along to ratepayers. Fortunately, a federal court ordered a stay on December 30, 2011. They are currently conducting hearings and the timing for this rule is unknown.”

As originally stated, this rule would impact 28 states and the District of Columbia. AEP has assets in this region. CSAPR would have been implemented in two phases. The first was supposed to start in 2012 with an initial reduction and then another reduction was slated for 2014. On average, state budgets in the finalized CSAPR rule are significantly lower in 2012 and 2014 vs. the proposed rule (See Table, p. 34). The timeline to comply would have been very compressed.

The rule that will have the most significant impact on coal use will be the Mercury and Air Toxics rule, which is also known as the Maximum Achievable Control Technology rule or Utility MACT. The final rule was issued in December 2011. “Under MACT, every plant must meet the same emissions levels as the top 12 plants,” Chilcote said. “It’s a pretty strict rule and compliance will be difficult.”

There are MACT standards for mercury, other metals and acid gases. The metals are measured as particulate matter (PM) and the acid gases as measured as SO2. The estimated annual cost to comply would be $9.6 billion annually. Compliance is required three years after the final rule (April 16, 2015).

Regarding mercury, 30% comes from outside the U.S., Chilcote explained. Power plants generate about 2% of the mercury emitted into the air. Most of it occurs naturally through volcanoes and geysers. “What we will see with this reduction as far as mercury is minimal,” Chilcote said. “In addition to mercury, the rule also covers nine toxic metals and three acid gases. It is pretty far reaching. It will hit 46% of the electric generation in the U.S., which would be1,350 coal- and oil-fired units at 525 plants. It will have a significant impact.”

More rules are being implemented by the EPA, including ash, CO2, PM and water. “All of these rules are going to force electric utilities to do one of two things: install pollution control equipment or close the plants,” Chilcote said. “The pollution controls include scrubbers, SCRs [selective catalytic reduction systems], activated carbon injection and fabric filters. All of which cost more money. Utilities need years to design, permit and install this equipment.”

AEP has voiced its concerns. The company believes the time for implementation (three years) is an unrealistic schedule. Retrofits of emissions controls take more than three years to complete. The costs in both capital investment and economic impact in communities will be significant.

Grid reliability will also be a concern. There will be significant reduction in generation due to retirements and retrofits (outages). There is insufficient time to accommodate new generation development and grid modifications. Rate payers will see a dramatic increase in electricity costs.

In addition to the unrealistic timeline and the exorbitant costs, there are concerns regarding men and material. “If all of the utilities are taking the same action, there is not going to be enough people and steel to get this equipment built and installed in the next three years,” Chilcote said.

AEP believes the EPA should phase in the proposed rules over a longer time. In that case:

  • Environmental improvement would be achieved;
  • Grid reliability would be maintained;
  • The communities AEP serves and its facilities are protected; and
  • Cost are kept as low as possible.

From 1990-2012, AEP invested $7 billion, which has amounted to an 80% reduction in NOx and 73% reduction in SO2 (See Impact of Pollution Control Investments). “From 2014-2020, the additional increment in reduction in SO2 and NOx will be very minor and the additional cost will be $6-$7 billion,” Chilcote said. “We are going to spend the same amount of money again to get a fraction of the original reduction.”

Abundant, Low-cost Natural Gas
If the impending EPA rules were not enough to make operators reconsider the coal business, it now has to compete with record low natural gas prices. This year gas prices have been lower than they have been since the 1990s, Chilcote explained. “So, as a fuel, gas has now become a significant player in utility markets,” Chilcote said.

The shale gas play has been big news, especially in the Midwest. New technology is allowing drillers to retrieve gas that’s was once stranded. Much of the AEP service region overlies many of the gas plays, especially the Marcellus and Utica shale formations.

Gas consumption and production continues to grow, according to data from the U.S. Energy Information Administration (EIA). This was one of the mildest winters on record and residential gas usage was down 3.9%, Chilcote explained. “Gas-fired electric generation, however, was up 16%,” Chilcote said. “That 16% was taken away from coal.”

Gas production is up 7.9% from last year, according to the EIA. “Right now, the U.S. has 2,479 billion cubic feet (Bcf) in storage, which is 934 Bcf above the five year average,” Chilcote said. “There is more gas being produced and there is more gas in storage, which will dampen gas prices.”

At the Henry Hub, the average price for March was $2.18 per million Btu (MBtu), that’s down $0.32/MBtu from February. “The big question is: Will gas prices stay this low?” Chilcote asked. “Already, the projection for 2012 gas price is estimated at $2.51/MBtu, the original estimate from 2011 for 2012 was $3.17/MBtu. For 2013, the forecast is $3.40/MBtu which is down $0.56/MBtu from the original estimate.”

Chilcote said AEP does not believe gas prices will stay this low forever. “Prices will eventually climb again, but when?” Chilcote said. “There is a lot of speculation on this subject. Will it be this year or next year? We believe it will be in the next three to five years.”

AEP’s annual coal burn dropping from 65 million tons to 50 million tons was mostly due to gas displacement. “The good news, if there is any good news, is that’s all of the gas displacement that is going to occur,” Chilcote said. “Gas has taken a share and it won’t be able to take much more until more gas-fired power capacity is built. There are a few gas plants being built, which will come online in the next few years, but there is not a lot of gas-fired plants being permitted and built right now.” The coal industry has lost 10 million tons at AEP, but going forward the 50 million tons or more should be a fairly stable level.

AEP Today & Tomorrow
AEP’s 2012 projected burn reflects a fairly diverse system. “We buy coal from every basin,” Chilcote said. “In the West, we primarily burn subbituminous coal and lignite. We have brought some coal from the Powder River Basin into the East. Our CAPP [cenral Appalachian] burn is really going to decline in the next few years, especially with scrubbers. We see our biggest growth potential in northern Appalachia [NAPP] or the Illinois Basin. Right now we have not purchased a lot of Illinois Basin coal.”

When AEP began installing scrubbers in 1990, coal was king at the company. AEP had no natural gas generation in what is now referred to as the company’s seven-state eastern footprint after the 2000 merger with Central & South West added four new states. In the last decade AEP has added more than 3600 mw of natural gas generating capacity in its eastern footprint. “During the 1990s, companies bought, built, and eventually stranded gas-fired units,” Chilcote said. “AEP purchased several of those assets and built its gas portfolio. The company added 2,000 mw in 20 years, but coal’s share of generation dropped from 75% to 65%.”

When AEP assesses its system, it’s easy to see the company has a lot of older units. They were built in the 1940s and 1950s. “As a utility, it doesn’t make sense for us to invest the money to install the pollution control equipment on these units,” Chilcote said. “We have more than 5,000 mw scheduled to retire due to all of the proposed EPA rules. We would have to retire these units eventually, but we will now be forced to most likely retire these by 2014. When all of these units retire, it will be questionable whether the grid will be able to handle it.”

First Energy (another electric utility serving Ohio) declared it will have to shut a few units in 2012. During the first part of May, PJM Interconnection, which regulates the electric market in that part of the U.S., told First Energy it cannot shut those units because the grid could not handle it (See Breaking News, p. 4). “There is a lot of work that needs to be completed on the grid between now and when these AEP units are scheduled to close,” Chilcote said. “It will be interesting to see if this work can be completed in time for these units to close.”

By 2020, AEP coal capacity will shrink further with a 25% reduction coal-fired assets. “It’s not great picture for coal,” Chilcote said. “Coal will still be king—kind of. Gas will not have taken over, but it will have an even larger portion of the generating mix.”

Of the units that U.S. utilities are planning to retire, all of them are coal-fired units. Many of them burn CAPP coal. In the next few years, how much coal is burned for electric generation is definitely going to change. EPA regulations will force utilities to install pollution control equipment or close plants. Natural gas will continue to be a competitive threat to coal use. Although both of these will have an impact on the coal burn, America will still need coal to keep electricity as affordable as its rate payers have come to expect.