Utilities Waiting for Court Decision on New Clean-Air Standards

The good news for the region’s coal-fired power plants—and the customers who buy the electricity they generate—is that a federal court has stayed implementation of clean-air regulations that could have taken those plants out of service until expensive improvements have been made.

The bad news? It’s a stay, not a ruling. Although it’s unlikely that the Cross-State Air Pollution Rule—“Caspar,” to those in the trade—will go into effect this year as scheduled, the Environmental Protection Agency still hopes to see those standards in place by 2014.

For the Kansas City region, which relies on coal generation for roughly 80 percent of its electricity, the implications of implementation would be significant.

“If Caspar were to go into play, I don’t think anybody could get systems in place, even before 2014,” said Bob Adam, acting manager of electric supply for the Board of Public Utilities in Kansas City, Kan. “I don’t think there are enough available craftsmen and equipment to get that many units converted over to the new control standards.”

Some units likely would have to be taken out of service, he said; otherwise, a utility would have to find allowances available for purchase to keep burning coal.

The rule, issued last July, would require 28 states to cut power plant emissions of nitrogen oxides and sulfur dioxide that cross state lines. It covers 3,631 electricity-generating units—nearly 1,000 of them coal-burning—in Midwestern, eastern and southern states.

Area utilities had said before the stay that the short time frame for refitting plants with emission-control devices would require them to be taken out of service, raising the specter of blackouts, or at least brownouts, during the high-demand summer cooling months ahead.

That won’t happen—at least not in 2012. And Chuck Caisley, vice president of public affairs for Kansas City Power & Light, said he thought it unlikely in any case. There is enough capacity in the region, he said, to cover demand. “The bigger issue is with the Southwest Power Pool,” Caisley said. “If something were to happen that were to decrease supplies in other markets, that could have an impact here.”

The D.C. Circuit Court of Appeals, which is hearing the case, is expected to announce the decision of the three-judge panel by this fall.

 

With prices above $100 a barrel even before the traditional vacation driving season is upon us, you still hear the occasional references to “peak oil” and the long-term prospect of dwindling supplies.

Nobody, though, is throwing out the term “peak gas” when discussing what’s happening in another sector of the fossil-fuels energy market—natural gas. By late April, natural-gas futures for May delivery had fallen below $2 per 1,000 cubic feet, hitting 15-year lows. That’s down nearly 88 percent from a late 2005 spike of $16 per mcf.

But energy this cheap—and abundant—doesn’t exist in a vacuum. The recent plunge in natural gas prices has prompted utility companies nationwide to defer plans for expanding or improving power plants that are coal-fired or nuclear-generating—even renewable-energy projects like wind farms, despite the boost they get from public dollars through green-policy incentives, have been shelved.

About the only energy segment not significantly affected by the natural-gas downturn has been transportation fuels. Gasoline and diesel fuel, even after a recent 10 percent retreat, are entering the vacation season at historically high pump prices.

Multiple factors got us to this point. The unusually mild winter experienced in much of the nation produced a steep drop in natural-gas consumption. Storage facilities, in turn, are holding record high levels, even before the annual run-up to consumption in the fall. Some of the world’s biggest drilling companies have taken hundreds of millions of cubic feet of production out of service until prices recover, and rig counts have been falling.

And all of those developments have come on top of a huge increase in gas production at shale fields through use of hydraulic fracturing, horizontal drilling and other gas-recovery efficiencies. Calculators have been running on hyperdrive trying to keep up with increases in estimates of America’s recoverable natural gas resources. As of now, industry executives say, we have twice as much natural gas under our feet as the Saudis have oil under theirs.

That’s producing change on a lot of levels.


How Low Can It Go?

But, as energy-sector professionals say, the best cure for low prices is … low prices. There’s no surer way, they say, for $2 gas to become $4 gas—or $4 to hit $8—than for very large consumers of power to switch into natural gas. Greg Crow, energy logistics manager for Burns & McDonnell, sees the current prices as an effective floor. After all, they can’t drop by more than two more dollars per mcf from this point.

“I think we’re there,” Crow said. “This isn’t sustainable for gas producers. They are probably gravitating toward production areas where they can capitalize on other revenue streams that are byproducts of natural-gas production” such as benzene or toluene. Producers can make money off those compounds, even if they have to sell the gas at a small loss until prices recover.

“We should see this pendulum start to swing the other way, where the daily supply of production will come back in line with demand,” Crow said. “Ideally, when we get the economy turned around, we should start to see the demand come back up.”

In addition, the United States—a nation that for decades has been wringing its hands over reliance on foreign oil—has recently found itself in the unanticipated position of being a net exporter of hydrocarbon-based energy. In addition to increased shipments of coal going overseas, natural gas terminals on the coasts have been refitted to accommodate export operations, rather than imports.

The real potential game-changer, Crow notes, is that even at $5 per mcf—slightly above the industry-standard break-even point—the commodity cost for natural gas as a transportation fuel is just 62 cents a gallon. You can see the potential savings when comparing that with roughly $2.62 cost for the oil that goes into a gallon of gasoline being sold at the pump for $3.60.

A massive shift in fleet transportation conversions, the wholesale manufacture of vehicles powered by natural gas or a wave of gas switch-outs at electric power plants would quickly return price levels to historical norms, experts say.


The Utilities’ Perspective

Executives with utility companies in the region say lower natural-gas costs will help consumers long-term, but at this point, the impact of current gas prices has been minimal. Kansas City Power & Light and Western Resources, parent of Topeka-based Westar Energy are by far the market leaders feeding the power appetite in the Kansas City region, and that appetite is sated by coal.

Of the two, Westar is in a better position to capitalize on natural gas savings; nearly 43 percent of the company’s capacity of 6,869 megawatts comes from eight plants powered by natural gas. Kansas City Power & Light, by comparison, derives 17 percent of its generation from five natural-gas plants.

“We planned well,” says John Bridson, vice president of generation for Westar. “We have a good, diversified portfolio of generating capacities—about 50-50 coal and natural gas, with a small amount of nuclear and renewables. So whenever there is a change in the marketplace, we can adjust to the lowest-cost generation, which helps our customers.”

Like KCP&L, Westar thrives on low-sulfur coal from Wyoming’s Powder River Basin. And, because Kansas is close enough to the source to hold rail charges to roughly half the overall cost of coal, plants in this region can continue to burn coal even when natural gas hits these levels. The same can’t be said for coal plants in the east and south, which must pay more for shipping or burn less-efficient coal mined from east of the Mississippi.

Throughout the past year, as prices have plummeted, utility executives have been assessing where natural gas prices might be heading, and whether they could start capitalizing on that trend. “But we’ve reached a point in the last few weeks, at $1.90 per million BTU, where some gas units are becoming very competitive with coal units,” Bridson said.

KCP&L’s Chuck Caisley, vice president for marketing and public affairs, said the fundamentals of generation for the utility make the decision on choice of fuels an easy one : “Even at these prices” for natural gas, Caisley said, “it’s still cheaper to generate electricity with coal.”

Jason Fulp, spokesman for Missouri Gas Energy, said the price of natural gas is largely a moot point for the utility; its cost of gas is a combination of market rates plus adjustments authorized by the state’s Public Service Commission to produce a rate of roughly $5.28 per mcf. The utility is allowed to adjust rates twice during each heating season to reflect changes in gas prices, and the adjustment factor is a kind of lagging indicator that allows MGE to catch up on higher costs of gas not covered by previous PSC-approved rates.

Kansas Gas Service, a division of OneOk, Inc., is in much the same position, passing throught he costs to end users of natural gas. But to encourage use of gas as a power alternative, the company is collaborating with retailers to place gas-fired appliances on showroom floors, hoping to fan consumer interest.

 

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