Robert L. Reymond, PE, Burns & McDonnell
David Fiorelli, Tenaska
Mike Morris, American Electric Power
Dawn Farrell, TransAlta
On July 6 the U.S. Environmental Protection Agency proposed a rule that would require significant reductions in sulfur dioxide (SO2) and nitrogen oxide emissions (NOx) that cross state lines. The rule, known as the Transport Rule, would replace EPA’s 2005 Clean Air Interstate Rule and would require 31 states and the District of Columbia to improve air quality by reducing power plant emissions. Along with the proposed rule and mainstream press coverage labeling coal-fired generation as “dirty,” the industry seems to be under continued scrutiny. Having weathered an economic downturn as well, the industry, like many others, is on an uphill climb to recovery.
Power Engineering magazine Associate Editor Brian Wheeler moderated this year’s Coal Executive Roundtable, which discussed how the economic downturn has played a role in coal-fired generation, technology developments, environmental and public policy and how communicating the benefit of coal-fired generation can be improved.
Participants included David Fiorelli, president and CEO, Business Development Group of Tenaska; Robert Reymond, associate vice president, Energy Group at Burns and McDonnell; Dawn Farrell, chief operating officer, TransAlta and Michael Morris, chairman, president and CEO of AEP. For a full transcript of the roundtable, visit the Power Engineering website at www.power-eng.com.
The first question is going to be focused on the economy and recovery with the coal-fired industry. Have you all seen a recovery underway?
Robert Reymond: First of all I am not an economist, but I think there may be some positive signs. Personal opinion, I think it could go either way.
David Fiorelli: From our perspective, we maintain a market analysis group with part of its focus being on the economy. So while we believe a recovery is under way, we don’t see it as robust. We think it is more likely to remain at a lower, slower growth rate than what would you would have seen historically or what would be considered more normal.
Dawn Farrell: I think that it is important to note that there has not been as much of a downturn in Canada as maybe what my counterparts may have seen in the United States. But I think things have definitely slowed down from the last 10 years and we are seeing some improvements, however slow, but it is not coming off a really low base. Particularly here in Alberta where we have quite a bit of oil sands and oil development going on in the province. We have seen a lot of activity here continuing in the province.
Michael Morris: It’s a sputtering recovery at best. What we call our eastern footprint—stretching from Virginia to Indiana to Michigan down to Kentucky and Tennessee—we are seeing flat industrial sales. In our western footprint, which is Texas, Oklahoma, Louisiana and Arkansas, we continue to see some recovery. Much of that is driven by the energy industry, much is driven by the shale gas development as well as oil development on-shore and the Texas economy has probably suffered less than others.
So what are the prospects for growth and recovery over say, the next 12 to 18 months?
Morris: Particularly here in the eastern footprint, we don’t see a lot of industrial growth. We are hoping for recovery from the declines of last year so growth isn’t really the right term. We are looking for maybe a 1 to 1.5 percent change in energy demand in 2011 versus 2010.
Fiorelli: We think the most likely scenario is a slow recovery and a slow growth rate over the next 12 to 18 months. But we are not discounting the possibility of some downside risk around European finances that could cause a move back into a so-called “double dip” recession. We think there is a one-in-three chance that it could go that direction.
Reymond: I might put it a little higher than a one-in-three chance, I think it is more 50-50, unfortunately. It seems the federal reserve has very little ammunition left to do anything.
Farrell: I think that they are low to moderate. I think we will see growth and I don’t think we will see further deterioration of demand. I think it will be slow though coming out of the recession.
How specifically have capital expenditure budgets for coal-fired generation been affected by the downturn?
Reymond: I think clearly utilities are and have been for a year or two in kind of a retrenching mode where they are not putting a lot of new projects on the drawing board. You have to look at the uncertainty in the economy, but also in the regulatory frameworks surrounding power projects in general and coal projects specifically, to explain that very few projects are going to be moving forward under that environment.
Fiorelli: I think it is pretty instructive to look at the massive number of proposed coal plants that have been canceled. In the United States, 55,000 MW of proposed coal plants were canceled in 2007, 2008 and 2009, with over 100,000 MW canceled since 2001.
Farrell: In our jurisdiction, our coal-fired plants are under long- term power purchase arrangements and so we have a requirement to provide a certain availability to the customers. So we have to spend relative to that requirement or we face large penalties in our contract. In probably the last five years, we probably would have spent a little bit more in our coal plants because we got the benefit of any availability that we could above the contract level in the market place. But because market prices are now lower than they had been, we have now cut the capital budget back to spend just what we need to provide the availability.
Morris: There are two things that are really affecting the cap-ex on the existing coal fleet. One, of course, is the economic downturn. The second is the proliferation of shale gas, which has put downward pressure on gas and electricity prices. So capital expenditures at the existing coal fleet, particularly on the smaller, less efficient units, have been reduced substantially. If you were going to do a major refurbishment on one of your smaller units you surely have left that over for another day and maybe never. Cap-ex on the larger fleet and the current retrofits and the carbon capture and storage undertakings continue.
With those existing plants, are maintenance and outage schedules being adjusted?
Fiorelli: A number of factors in decisions to cancel new coal construction go well beyond the economy and include things like legislative uncertainty, environmental opposition and a perception that natural gas may be more plentiful than was expected five years ago.
Reymond: I think that also the constraints from the capital market is another factor.
Fiorelli: I would say not only constraints from the capital markets certainly worsened over the last few years, but that was compounded by pretty significant capital cost increases.
Farrell: Our maintenance and outage schedules are not being adjusted. We are not pushing outages out trying to save money. Generally what I find is that you don’t save any money doing that, you just spend it later in forced outages and that is just a bad equation all around.
Morris: We typically do maintenance before shoulder months and we did that this year. But now, at AEP we have laid up probably 1,800 to 1,900 MW of coal-fueled generation and we will just have to see what unfolds.
Natural gas seems to get much better press and greater public support than coal, which has been labeled as dirty. How would you grade the industry in terms of communicating the benefits of coal-fired generation and how can it be communicated better?
Farrell: I think overall what the industry has to do a better job of in terms communicating is making sure that people are very clear on how low cost coal is. Alberta has over 1,000 years of coal, which is abundant and affordable and I think sometimes that gets lost in the debate. I think the second thing is really improving on where we are on some of our carbon capture and storage initiatives.
Fiorelli: In addition to the cost advantage, we really need to hammer on the energy security advantages. We have a massive domestic coal supply and we really have to use it to ensure that we have the energy supply we need in this country. We don’t need to portray coal as the only answer, but it is critical that it be a key part of the answer.
Reymond: I agree exactly with both what Dave and Dawn have said. But coal is absolutely going to be part of the solution globally regardless of what the United States does or doesn’t do.
Morris: I think we are getting better. We are a member of ACCCE (American Coalition for Clean Coal Energy) and I think that having a single-focus organization speaking about coal and its benefits, with some national advertising, has made a difference. One of the things that we don’t need to do, and one of the things that we at American Electric Power work hard not to do, is perpetuate a battle of the fuels. It is senseless.
And how can it be communicated better?
Morris: As I pointed out, ACCCE and local utilities need to continue to demonstrate to their constituents that coal-fueled electricity is why their rates are low. We need to keep pointing out to everyone that clean coal is a reality and that more clean coal is coming to the market.
Farrell:. One of the things that people are starting to talk about here is that people want electricity and they can see what is going in Toronto right now with a shortage. They want electricity and our challenge is to provide them with electricity with the lowest environmental impact and coal can achieve that, stay cost effective and create energy security; and I think we really have to get those messages out.
Environmental rules are tightening on emissions from power plants. Let’s discuss the range of possible options, which include installing additional control equipment, retrofitting plants to fire natural gas or closing units altogether.
Fiorelli: I think it is a bit early to know what effect the proposed Clean Air Transport Rule is going to have here in the states. But clearly it is going to have an impact on existing units and also on new units if it makes its way through the process without being successfully challenged like its previous incarnation was. I don’t think any one answer is a one-size-fits-all answer. Some older, smaller units are more likely to be retired. The newer, larger units are more likely to have additional control equipment, for example, but it is going to be a very unit-specific decision.
Reymond: Agreed Dave, and our outlook on that market specifically is that with the new Clean Air Interstate Rule and also with other legislations coming out such as New National Ambient Air Quality Standards and next March the utility boiler MACT rule, we expect that virtually every unit that does not already have the full amount of controls equipment on it is going to be impacted by either needing to add equipment or shutting down the smaller, older, less efficient units.
Morris: It is clear that this administration is on a path to remove coal-fired electricity from the mix of energy supply in this country. They are on a path that is going to set the U.S. economy back maybe a decade or more. For many of the larger generating units that have already been retrofitted to meet Clean Air Act standards, we will continue, as will others, to invest the capital required to bring them up to whatever standards are developed. But, in the process, companies like ours will probably shut down 10, 15 or 20 percent of our existing coal fleet because the new emission rules are simply not accomplishable at a price point that would make any sense. When you take that kind of a reduction and the timelines that it takes to replace that kind of capacity into a realistic schedule, you are going to have a mismatch of supply and demand. The price of energy will escalate appreciably; and you can see a time within the next decade when energy shortages roll through the U.S. economy as they do today in Venezuela, South Africa and North Korea.
Farrell: Here in Canada what the government has done is given us 45 years on carbon for all the coal stock. With 51 coal plants in Canada, all of those coal plants are allowed to operate for 45 years from the date they were commissioned without having any CCS or carbon technology attached to them. In the 46th year they have to get their carbon down to the level of a combined-cycle plant, so they have to get down to 0.36 per unit. It is unlikely they would retrofit with gas because that is not cost effective or they can put post-combustion CCS at the site. Some of the maybe smaller, older units may end up being retired. But there is an equal chance those units will be life-extended with CCS or continue to utilize the coal resource by replacing those units with new coal with CCS incorporated in it.
And is there a concern about possible stranded investment?
Farrell: On some of the units we have long-term coverage arrangements; for example on our units here in Alberta. And what we are doing is working with the government to where we think there might be stranded investments to see how we can recover those.
What about in the U.S.?
Morris: No, not at all. For any generation that I shut down because of a federal rule, the stranded capital will continue to be recovered. Utilities will recover that stranded capital and the U.S. economy will pay for it.
A range of “cleaner coal” technologies could be adopted, including circulating fluidized bed, super and ultra-supercritical boilers and integrated gasification combine cycle. How realistic is the widespread conversion of current pulverized coal boilers to these technologies? And what will have to happen for these technologies to gain widespread adoption given the current regulatory, environmental and public policy climates?
Morris: You really can’t take a subcritical plant and make it supercritical. So, you are talking about replacements. That is probably what you will see, although with the current price differentials between coal and natural gas, you will probably see more companies building combined cycle natural gas facilities as replacements because they are considerable cheaper than any of the other options, particularly when you look at the shale gas supply today.
Reymond: I think there is a significant solution gap in that area. I think capture is not commercially available yet; it may be in a few years. Assuming that it is, I have seen conflicting information but I haven’t seen anything that definitively proves to me that there is a great solution for long-term sequestration of carbon from the combustion of coal.
Fiorelli: Focusing on conversion of current PC boilers to cleaner coal options might be the wrong question because I think these new cleaner coal technologies are going to be deployed in new generating facilities. Conceivably, one of these new generating plants could be installed at an existing coal site to take advantage of the significant infrastructure that is in place. So a site could be converted from perhaps an old pulverized coal plant without controls to a newer, more modern technology like a CFB or IGCC. I think one thing we will need before the technologies gain widespread adoption is more certainty around the regulatory, environmental and public policy issues. We know there are going to be further EPA rulemakings. Then the specter of carbon legislation remains a significant uncertainty that will make it very difficult to commit the type of capital investment that any new clean coal technologies require.
Farrell: Just like Tenaska, we are also looking at putting a post-combustion storage facility on one of our new coal plants, which is going to start up next year. And really those kind of projects that we are all doing are the projects that will prove up the cost for CCS over the long term. I think the thing that is most important about CCS though is that you have to have the coal resource and you have to have the storage facility in the same place. In our Alberta facilities we have enough storage for our plants underneath the plants in cavern storage. Our Hanaford plant in Centralia, Wash. where we have a 1,400 MW plant we actually have no way to store the carbon there. So in that case, the more likely solution is a conversion of a coal plant using the site value to go to a large-scale gas plant.
So, it doesn’t make sense to convert an older plant with new technology? It’s smarter to build a new plant with new technologies?
Reymond: Well I don’t think that is what any of us are saying. I think what we are just clarifying is that there may be post-combustion carbon capture technologies that can be widespread retrofitted to existing projects. In fact, I expect that to be the case. I expect that there will be technologies that can be retrofitted. But those would not be the technologies like IGCC or the older supercritical that you mentioned. Those are part of the project, not a retrofit.
Farrell: The current Rankine Cycle of coal plants that are around North America today have sort of a 34 to 35 percent efficiency. So if you start talking ultra-supercritical boilers you are talking more like 40 percent efficiency and usually if you go to a ultra-supercritical boiler you go to a whole new plant. So that is kind of a separate issue from the capture. On capture, there is pre-combustion and post-combustion technology. So if you have an old plant you can put a new capture unit on it and capture the CO2. And that is really what a lot of us are working on today because we are assuming that a lot of these large plants that are not that old, if there is tougher carbon legislation, we are going to have to capture the CO2. I think it is worth pointing out here though the jury is still out in Canada as to whether or not natural gas will get away without having to capture any of the CO2. This is certainly a move in Europe right now to put post-combustion capture on natural gas which is actually more expensive and more difficult. What we don’t want to be doing is shutting down coal plants, converting them to gas and having to CCS technology on gas. So we need a lot more certainty in this whole area.
What’s your guess for when carbon capture and sequestration becomes commercially viable? Related to that, when do you think rules and regulations will be written to accommodate widespread use of carbon sequestration?
Farrell: Every year that I have been involved in this with 25 years in the industry people have been saying that this is going to be the year that we do it. So 25 years in a row, I don’t know; one of these years it is going to happen, I guess.
Reymond: For the U.S. we have elections in November that could completely change the picture and the answer.
Farrell: And we have a minority government that may have an election in the fall that could change the answer.
Fiorelli: I don’t think CCS will become commercially viable until rules and regulations are established to require reductions in CO2 emissions and put a price on those reductions sufficient to support the very significant capital required to implement CCS.
Farrell: I agree with that. I think what is happening now with some early programs is that it is helping us make it viable, but it wont be competitive and viable until it is necessarily needed because there isn’t a national price for carbon.
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