Coal, electricity, EPA and your wallet

By Frank Goad

Kentucky electric utilities are spending billions of dollars to comply with federal environmental strictures regarding coal use but say they remain committed to coal-fired power generation for the long term.

LG&E and KU’s E.W. Brown Plant in Harrodsburg utilizes three generations of electricity-producing processes – a hydroelectric plant, three fossil-fueled generating units and seven combustion turbines. The three coal-fired generators can produce 749 megawatts of electricity, more than one-fifth of KU’s total capacity. An average of 1.5 million tons of coal is burned annually at E.W. Brown Station. (LG&E/KU photo)
LG&E and KU’s E.W. Brown Plant in Harrodsburg utilizes three generations of electricity-producing processes – a hydroelectric plant, three fossil-fueled generating units and seven combustion turbines. The three coal-fired generators can produce 749 megawatts of electricity, more than one-fifth of KU’s total capacity. An average of 1.5 million tons of coal is burned annually at E.W. Brown Station. (LG&E/KU photo)

Coal regulations are adding to costs for Louisville Gas & Electric, the largest state electric utility, said Chris Whelan, vice president for communication. LG&E is making one of the largest investments in the company’s history, upgrading coal-fired plants to make them more environmental friendly.

Kentucky Power Co. opted to close its 40-year-old Big Sandy coal-fired plant near Louisa and seek electricity from West Virginia after objections to the pass-along costs for 173,000 Eastern Kentucky customers of upgrading that facility and operating it long enough to generate a payback.

Power costs for consumers across the state have yet to be determined, but they are going to increase.

LG&E is spending $1.4 billion to upgrade scrubbers and add a baghouse system for particulate matter at its Mills Creek plant. It is spending another $896 million to upgrade baghouse particulate-matter systems and emission controls at all of its coal-fired units at Ghent and E.W. Brown.

The utility has closed coal-fired power generation at its Cane Run, Green River and Tyrone plants, and it is building a 640-megawatt natural gas-fired power plant at Cane Run. When the new gas unit at Cane Run is factored in, LG&E investment tops $3 billion, Whelan said.

These are big changes for a state and industry that has relied on plentiful coal resources to produce electricity at rates among the lowest in the nation. LG&E recently created a new vice president of natural gas operations, putting Lonnie Bellar into that job.

In spite of a distinct shift toward natural gas, however, LG&E officials say coal remains key to its plans for as far into the future as it can see. Bringing the new gas-fired Cane Run plant online will decrease coal’s percentage of all company power generation only from 95 percent to 90 percent.

However, Kentucky’s coal industry is definitely feeling heat from the U.S. Environmental Protection Agency, which has been reluctant to issue mining permits – and that was before President Obama made another major environmental policy speech last month indicating he wants even less coal use.

Natural gas is plentiful and cheap

Over the years, production costs to physically mine have decreased because of better and better heavy machinery for use underground and because of cheaper methods such as surface mining. But costs for everything else have increased, especially complying with EPA regulation.

Coal
U.S. coal production has remained relatively stable since 1990, affirming its importance to industry.

Meanwhile, in the past five years marketplace pressure has built from cheap U.S. natural gas. Prices have fallen because of advances in drilling and shale gas production using hydraulic fracturing (or “fracking”) that have created abundant supplies as far into the future as industry watchers can project.

In June 2013, natural gas prices were as low as $3.72 per million BTU in June, which makes it cheaper than Appalachian coal by energy yield. The U.S. Energy Information Agency (EIA) reports natural gas imports are at their lowest levels since 1997, prices are back to 1999 levels, and some businesses and industries that have long used coal have converted to natural gas to reduce input costs and the complications of EPA regulation compliance.

Nevertheless, U.S. coal production has remained relatively stable since 1990, affirming its importance to industry. While coal exports have risen slightly over the last decade, imports have decreased. Coal detractors say the best, lowest-sulfur-content Appalachian coal – which has a cleaner emission profile – is gone because the older mines are largely depleted. Detractors argue the region’s remaining best deposits are thinner, less productive and simply harder to mine. They point to increased demand for coal in places like Illinois and out west in Wyoming’s Powder River Basin.

Probably the most significant battle lines drawn at EPA regard regulations covering the by-products of burning coal, gas and other carbon-based fossil fuels. Carbon dioxide emissions are considered the main contributor to global climate change. The EIA reported coal and natural gas produced almost identical amounts of carbon dioxide emissions last year and in the first quarter of this year … but that’s where the similarity ends and the anger over EPA regulations begins.

There is no doubt that EPA regulation compliance by power-generating companies has a price tag, but how much is it, and how much is passed on to businesses? The answers vary depending on whom you ask, and on which side of the debate they stand.

One side claims penalizing coal harms our economy and kills jobs. The other argues not cleaning up coal residues cripples people’s health and the environment because of the heavy metals (e.g., mercury) and poisons (e.g., arsenic) that are in coal ash and that are released through the smokestacks – or released in the water used in scrubbers.

All agree that no matter the outcome, everyone’s costs will rise.

Coal’s supporters say that the increased regulation will have devastating effects on the U.S. economy and especially in Kentucky. A consulting group, National Economic Research Associates, said that seven of the EPA’s proposed regulations would cost the electric utility sector roughly $200 billion in compliance costs, and destroy at least 544,000 jobs annually.

The debate grew louder recently, stoked by a speech given by President Obama on June 25 at Georgetown University. He announced he was directing his administration to launch the first-ever federal regulations on heat-trapping gases emitted by new and existing power plants “… to put an end to the limitless dumping of carbon pollution.” That puts the crosshairs directly on Kentucky’s power plants, 95 percent of which use coal.

Utility companies, coal mines and other industry associations loudly decried that proposed new federal mandate as unnecessary, onerous and “job killing”; environmental groups praised the action and countered by saying it will create more jobs than it kills. Natural-gas producers are smiling because they supply a cleaner alternative to coal, to which power producers can adapt many current plants. Natural gas is benefitting from new production technologies and higher domestic production rates that started a slight downward price trend.

Cleaner air cost estimates vary – a lot

The EPA air quality regulation to which most industries must comply is the National Emissions Standards for Hazardous Air Pollutants (NESHAP). There are over 125 specifically named industries ranging from Aerospace to dry cleaning to wool fiberglass manufacturing, and they all use electricity and they all serve our country’s needs. The trickle-down expenses from the utility companies’ race to comply with EPA regulations will add new costs for them.

Last December, the National Association of Manufacturers passed along estimates of the annual compliance cost for all the regulations upgrades. On the low end, the EPA estimates compliance costs range from $36 billion to $111.2 billion. Industry estimates range from $63.2 billion to $138.2 billion.

Those are big numbers, but they do not include capital expenditures that are four or five times higher. EPA estimates for capital expenditures needed to fulfill all six regulations range from $174.6 billion to $539.3 billion. Industry estimates that capital costs will be from $404.5 billion to $884.5 billion.

Another complicating factor is that over half of the nation’s power generating capacity comes from plants that are outdated and some need substantial repair work. Nearly three-quarters of coal-fired power-generation capacity, contributing 46 percent of the U.S. electricity supply, is at least 30 years old and uses outdated, inefficient technology. Some plants need to be retired immediately, and within 20 years nearly all of them will need to be replaced.

How much is too much?

Coal supporters say increased regulation will have devastating effects on the U.S. economy and especially in Kentucky.
Coal supporters say increased regulation will have devastating effects on the U.S. economy and especially in Kentucky.

So, how much does this cost the average business? The numbers vary widely, but those using the most electricity will foot the biggest portion, and everyone will find compliance costs in their utility bills sooner or later.

In one instance, the Big Sandy generating plant near Louisa, Ky., owned by Kentucky Power Co. (KPC), was slated to get new scrubbers to remove ash and other particulate from the 80-90 railroad cars of coal it burns daily. The upgrades would cost nearly $1 billion, which would take 15 to 30 years of operation to pay off. However, because the Big Sandy plant dates to 1963, keeping it running would require repairs and other upgrades. All these costs must be passed down to the 173,000-plus customers it serves. Simple math means that each customer would have to pay more than $5,700 for the billion-dollar scrubber upgrade alone. After being challenged, Kentucky Power Co. withdrew the application to upgrade the plant.

That’s only one example, and around 92 percent of Kentucky’s power plants run on coal.

Across the country, plans by utility companies to build or modify aging coal-fired plants are being put on hold or scrapped altogether. Given that there are more than 100 coal-fired plants built between 1920 and 1949, and over 730 built between 1950 and 1969, many plants are at a crossroads and their operators are under intense scrutiny from environmental watchdog groups and often their industrial customers.

For instance – and perhaps oddly – the Big Sandy upgrade was opposed by an industry group called the Kentucky Industrial Utilities Customers that represented major Eastern Kentucky employers, including AK Steel, Air Products and Chemicals and Marathon Petroleum. They opposed prolonging the coal plant’s life and submitted expert testimony urging the Kentucky Public Service Commission to reject Kentucky Power Co.’s proposal because of its impact on ratepayers. The huge amounts of electricity they use meant they’d be paying a big share of the $940 million scrubbers upgrade.

In 2011, KPC’s parent company, American Electric Power, stated that the burden of meeting many federal pollution standards would likely cause it to close many coal-fired plants in favor of other options, including natural gas. Consumers and advocate groups protested KPC’s plans to raise rates 30 percent to cover the scrubber’s costs. This sort of resistance is occurring across the country as other utilities seek ways to provide clean power.

A variety of conflicting agendas are meeting head-on. The resolution will impact the estimated 73,000 people employed directly or indirectly by Kentucky’s coal industry plus the many tens of thousands more who work for power-hungry industries drawn to a state with low electricity rates due to its coal resources.

Natural gas is now presenting itself as an alternative to coal, but LG&E’s Bellar notes that there is regulatory uncertainty for gas also. Environmental concerns about fracking, whose widespread usage is still new, could yield future EPA restrictions that would change the landscape again.

Frank Goad is a correspondent for The Lane Report. He can be reached at [email protected]

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