Utilities and railroads share blame for crimping the coal supply chain. An industry study highlights the chief issues signaling a yellow light for progress.
By Lee Clair and Pete Fordham, Norbridge, Inc.
Coal produces more than half of the electricity used in the United States. But, ongoing changes in energy markets – particularly for natural gas and oil – are adding to coal’s allure as the backbone fuel of the future. While nuclear power and renewables are frequently discussed as alternatives, many experts believe neither can come to market soon enough, or in sufficient volume to quench the United States’ thirst for coal energy in the near future. This has resulted in 140 coal plants now being proposed for construction, according to the U.S. Department of Energy (DOE).
Recent studies highlight the wide range of possibilities. The Energy Information Administration (EIA) Annual Energy Outlook for 2006 indicates that coal consumption and transportation requirements are expected to increase by more than 700 million tons through 2030. And a study by the National Coal Council, recently presented to the Secretary of Energy, outlines potential uses of coal that could translate to an additional 1.3 billion tons of annual consumption, more than double the current usage.
In either case, the effectiveness of the coal transportation supply chain – including a wide range of participants such as coal mines, transportation providers (rail, barge, truck and vessel) and coal consumers (utilities, independent power producers, steel plants and other industrial users) – will be tested as demand grows.
Over the past year, many utilities have had trouble keeping their coal inventories at desired levels. While the problems experienced in 2005 have begun to ease, some utilities continue to report recent problems with stockpile levels at specific plants. Recent examples: Otter Tail Power reported cutting back generation at its Big Stone Plant in Milbank, South Dakota to 75 percent of normal since its stockpile had dropped to a 10-day supply. Basin Electric Power Cooperative indicated that the stockpile at its Laramie River Station in Wheatland, Wyo., was down to six days from its usual 30 days. And Westar Energy reported that the stockpile at its Lawrence Energy Center in Lawrence, Kan., was running roughly 75 percent of its normal size, about a 10-day supply
Continued concerns have generated a recent call to action from a wide range of sources. In early May, four large electric utility associations – the Edison Electric Institute, American Public Power Association, National Rural Electric Cooperative Association and Electric Power Supply Association – along with the Association of American Railroads-called on the Federal Energy Regulatory Commission to hold a public workshop to examine efficiencies and problems in the full range of the coal transportation supply chain, including production, transportation and consumption.
Some utilities have chosen to turn to the courts and government for solutions. In the past several months, both Entergy Arkansas and WE Energies, a subsidiary of Wisconsin Energy, have sued Union Pacific. EEI, APPA and NRECA also recently asked FERC to investigate the problem of rail coal delivery failing to keep pace with coal usage.
Other utilities are leveraging a wide range of responses to current and impending supply chain problems. Some utilities are reviewing their coal supply chain to identify problems and opportunities for improvement. Others, such as NIPSCO, have increased coal blending to better manage coal from a variety of sources and reduce dependence on specific coal producing regions. And others, such as Westar, are looking at improving their coal unloading equipment. According to the trade press, Westar is looking at installing a rotary unloading system at its Lawrence Plant that could cut unloading time from the current 20 hours to about four hours.
In addition, utilities are evaluating future coal plant siting taking into consideration concerns over coal supply and infrastructure constraints. There is also growing interest in mine mouth power plants, such as Peabody Energy’s proposal to build a 1,500 MW Prairie State Energy Campus in southern Illinois and an identical Thoroughbred plant in Kentucky. TXU also said recently that it wants to add 2,200 MW of lignite capacity over the next few years, in part by adding mine mouth capability in Texas.
Barges represent a viable, if limited, delivery option for some coal-fired power plants.
However, many factors go into the siting of power plants, such as availability of land, environmental factors, proximity to population centers and availability of transmission lines, to name just a few. While coal supply factors are increasing in importance, they are not usually the only or even the deciding factor. Many utilities and power plants are not located near coal supply regions, so mine mouth plants are not always an option. And while utilities strive for coal transportation diversity at their power plants – access to multiple railroads, barge, truck or other options – such diversity simply is not possible for many that have only one transport option.
Another question is where to build new coal plants: near mines or close to load centers? The question for utility planners to consider then becomes, is it more cost effective to transport coal over long distances, add new transmission lines or upgrade existing lines?
In general, the rail industry answers negative comments being leveled at them by coal suppliers and users by saying they are aggressively seeking solutions. Current plans and expenditures to increase capacity lend credibility to their claim.
Four primary Class I railroads move coal in the U.S. Class I designates the largest freight-hauling railroads based on revenue. They are Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) in the west, and CSX Transportation and Norfolk Southern (NS) in the east. Kansas City Southern (KCS), Canadian National (CN), and Canadian Pacific (CP) are also Class I railroads; they, too transport coal. Together these Class I railroads plan to invest more than $8.2 billion in 2006 to improve rail performance, an increase of 21 percent compared with 2005. The investment is also $1 billion more than the previous record for industry spending set in 1998. The investment will be used to lay new track, buy new equipment and make other infrastructure changes – much of which is targeted at transporting coal.
BNSF and UP recently announced plans to begin another capacity expansion project on their jointly owned rail line that accesses coal in the Powder River Basin (PRB) of Wyoming. Growing demand for western coal has resulted in significant volume increases on the joint line during the past 20 years. In 1985, the joint line handled 19 million tons of coal. By 2005, it was moving 325 million tons. The planned investments should enable the line to handle more than 400 million tons a year.
Class I railroads plan to spend more than $8.2 billion in 2006 on track improvements. Some utilities plan facility upgrades, but many do not.
Both railroads have agreed on preliminary work to construct more than 40 miles of third and fourth main line tracks, at a cost of about $100 million, over the next two years to meet current and future forecasted demand for Wyoming’s PRB coal. This project is in addition to the construction of 14 miles of a third main line track completed in the spring of 2005 and an additional 19 miles of the third main line currently under construction and scheduled for service in September. The total cost of this nearly 75-mile capacity expansion will be about $200 million, to be split between the Union Pacific and BNSF.
The Dakota, Minnesota and Eastern (DM&E) Railroad, a Class II railroad that operates primarily in South Dakota and southern Minnesota, but extends into Wyoming, Nebraska and Iowa, has been working since 1997 to expand its rail lines into the PRB. The expansion, which would be the largest rail construction project in more than a century and take about three years to complete, would consist of 281 miles of new track, the upgrade of 598 miles of existing track and other infrastructure improvements. The proposed $2 billion project has been approved by the Surface Transportation Board. DM&E is now working to arrange project financing. If completed, the DM&E would offer an alternative rail route for some customers to move PRB coal.
Preparing for Growth
To better understand the challenges being faced in coal transportation, Norbridge, Inc. interviewed fuel procurement and transportation managers at 16 utilities. These utilities include some of the nation’s largest coal users, and also reflect diverse coal consuming regions throughout the U.S.
Norbridge conducted the confidential study from November 2005 to February 2006 to better understand how utilities are preparing to manage the impending growth in coal volumes. The objective of the study was to bring issues and opportunities into focus while there is time to consider options and plan responses.
The survey sought answers in three critical areas:
- Is the equipment fleet adequate to handle the expected large volumes of coal?
- Are unloading facilities capable of handling forecasted volumes?
- Are process (cycle) times in the overall coal transportation supply chain – from mines to power plants and back again – efficient and effective enough to meet future needs?
Over half the utilities surveyed indicated that they are already facing railcar shortages. In this context, some utilities are taking action to prepare their equipment fleets for future needs. Specifically, eight of 16 utilities surveyed have increased the number of railcars they either own or lease in the last three to five years, while six utilities plan to increase their fleet in the next three to five years. And nine utilities with bottom-dump cars indicate they are focused on making sure that car doors are closed and empty cars are ready to load when they leave the power plants and head back to coal mines.
However, many utilities are not taking action. Eight utilities said they added no equipment in the last three to five years, and 10 utilities reported having no plans to add new cars in the next few years. Many utilities also indicate that important equipment issues are not being addressed:
- Slow process times – Few utilities are analyzing ways to improve process times to get equipment in and out of power plants faster
- Outdated equipment – Utilities are frequently “locked” into long-term leases with aging cars, often due to shortages of capital for buying or leasing new train sets
- Small cars – Many utilities have smaller cars, capable of loading 263,000 pounds of coal rather than the current standard of 286,000 pounds
- Increased repairs/maintenance – Older cars tend to have more problems and require additional maintenance
- Limited performance measures – Few utilities have a robust set of performance indicators in place for managing their coal transportation equipment; most monitor equipment cycle times (loading, unloading, empty dwell times and time in transit), but little else.
Facility Management Results
To prepare for expected coal volume increases, utilities will need to begin updating their coal unloading facilities. However, only six of 16 utilities surveyed have updated track, sidings or unloading facilities in recent years, while the other 10 have not.
As a result, many utilities are facing poor productivity due to outdated facilities. Some facilities date back to post-World War II, without any significant upgrades. Many utilities indicate they don’t address problems until after they occur. The study also shows that investing money in coal operations is a low priority at many utilities and that, in general, utilities have few performance measures to track facility performance
Process times throughout the entire supply chain will need to improve to meet expected demands. However, at power plants, only five utilities indicated that cycle times at their unloading facilities had improved in recent years; 11 utilities indicated that times have stayed the same or grown worse. In fact, many utilities said they pay little attention to improving process times due primarily to lack of capital, other priorities and the belief that process times are controlled by transportation providers and therefore are beyond utility control.
Particular concern exists about transit times from power plants to mines and back again, particularly when it comes to the railroads. On a scale of 1-10 (with 1 meaning poor and 10 meaning excellent), railroads were rated 5.0 for time in transit, well below other modes that ranged from 8.3 to 8.8. (For transit time consistency, the study rated railroads as 4.8, while other modes were rated from 8.2 to 8.6.) Railroad communication and responsiveness to issues and problems also rated significantly below other modes.
Frequent comments also were made about railroad asset availability. Many utilities expressed concern that railroads are short of the crews and the cars needed to meet future transportation needs.
Some of the study results are encouraging because they show that selected utilities are taking action to meet future coal handling needs. These utilities are upgrading facilities, buying equipment, improving cycle times and leveraging performance measures to monitor performance. Other results are troubling. Utilities reported car shortages, outdated equipment and facilities, maintenance problems, slow process times and limited use of performance measures. Utilities also indicated little focus on addressing these issues due to lack of capital and the absence of teamwork among supply chain participants to collectively address problems.
If coal demand and transportation needs rise as rapidly as forecasted, problems such as these may present a significant challenge to coal producers, transporters and coal consumers, and may create difficult bottlenecks in the system.
These problems can be addressed, time is a critical factor. Many of the problems are physical; overcoming them will require time and capital. In the interim, effort is needed to understand the capacities and capabilities of our coal supply chain and how we can get the maximum out of the current network. The most likely short-term benefits could come from the various participants working together to develop new efficient processes that take advantage of the capacity that already exists and is being developed.
While coal is once again considered the “fuel of the future,” this perception could quickly change. If transportation and logistical bottlenecks occur and are not rapidly addressed, customers over time will shift their attention away from coal and search for alternative energy sources to meet their needs.
Lee Clair is a partner at Norbridge, Inc. a management consulting firm that focuses on providing value to energy and transportation providers, including utilities, coal companies and railroads in the fields of operations, strategy, and supply chain management.
Pete Fordham, is a principal at Norbridge with 20 years of consulting and industry experience, with significant focus on strategy, operations and improvement in the coal supply chain.