Governors' Wind Energy Coalition

Duke Energy Corp. is charging Indiana customers millions of dollars more than it should to dispatch Indiana coal plants and bypassing cheaper, cleaner alternatives, according to environmental groups.

The groups, including the Citizens Action Coalition, the Sierra Club and Advanced Energy Economy, submitted testimony from analysts and economists last week in a closely watched case before the Indiana Utility Regulatory Commission involving Duke and how it runs its coal plants as part of the broader Midwest power grid.

“Duke is ignoring economic signals and dispatching plants at higher prices that, ultimately, the utility consumers have to eat,” said Kerwin Olson, executive director of the Citizens Action Coalition, an Indiana environmental and consumer group.

The review by the commission is among several cases where state regulators are scrutinizing the utility practice of committing coal units to operate in energy markets versus letting economics dictate when they run.

Regulators in Minnesota and Missouri are also looking at the impact of how utilities operate their coal fleets.

The case comes at an interesting time in Indiana, where the Legislature is in the midst of a two-year study on the impact of transitioning away from coal to cleaner energy. Earlier this year, lawmakers passed a bill aimed at slowing the transition (Energywire, March 11).

Even before the Legislature’s task force resumes hearings later this year, two of the state’s investor-owned utilities, Northern Indiana Public Service Co. and Vectren, have committed to shut down most or all of their coal fleets in favor of wind, solar and energy storage to the benefit of consumers.

Advocates said a decision by regulators to disallow fuel costs related to the uneconomical operation of those coal plants could likewise help nudge Duke to speed up the transition to cleaner energy.

Dylan Reed of Advanced Energy Economy said the operation of uneconomical coal generation is a “perverse incentive” that both costs utility customers and crowds out development of cheaper, cleaner energy resources.

“There’s hundreds of millions of savings on the table by investing in advanced energy resources,” he said.

Duke representatives didn’t respond to email and phone requests for comment yesterday afternoon.

In previous testimony, however, utility officials said they take care to dispatch power plants in the best interest of customers and added that it’s impractical to cycle coal plants on and off based simply on their real-time economics.

That’s in part due to long lead times needed for large coal-fired power plants to start up. With some units, for instance, it can take more than 24 hours to bring a unit online.

A $40M loss?

Although the commission’s review of Duke and its coal fleet is narrow in scope, the broader implications of a decision could be significant.

Estimates of how much consumers stand to save varies. Robert Stoddard, managing director of Berkeley Research Group LLC, a consultancy hired by the Washington-based Advanced Energy Economy, estimates Duke operated coal plants at a loss of $40 million over six months.

“These losses arise simply because the incremental cost of generating energy at these plants — principally the cost of the coal burned — exceeded, on average, the market value of that energy,” Stoddard said in testimony.

Stoddard and other experts hired to analyze Duke’s coal fleet operation asked Indiana regulators to disallow recovery of the additional costs.

Duke has “systematically chosen to generate power from its own facilities rather than buying power from the wholesale market,” he said. “In so doing, Duke incurred higher costs entirely at its own discretion.”

Testimony identified uneconomical operation at three of Duke’s Indiana coal plants, including the 3,100-megawatt Gibson station, one of the nation’s largest.

But it was the 618-MW Edwardsport coal-to-gas plant, pitched as a “technological marvel” when it was proposed 15 years ago, that was most frequently operated at a loss, according to analyses.

Edwardsport, which came online in 2013 at a cost of $3.5 billion — nearly double its initial cost estimate — has long been a source of friction between Duke and environmental and consumer advocates.

Devi Glick, an analyst at Synapse Energy Economics, estimated that Duke’s operation of the Edwardsport plant led to a net loss of $7.6 million from September through February.

Glick said millions of dollars in costs could have been avoided and the utility could have run Edwardsport profitably by using natural gas instead of synthetic gas made from coal.

The typical Duke residential customer pays almost $15 a month just for the Edwardsport plant, not including fuel. Until recently, the amount was broken out as a separate surcharge.

Another contributor to excess costs, consultants said, is the fact that Duke is oversupplied with coal, which contributes to running coal plants more often than they should be.

Duke tries to manage its coal inventory to keep a 45-day supply, but by the end of November the utility had a 60-day supply, or 3.2 million tons, stored at plant sites, according to testimony from Edward Burgess, a consultant hired by the Citizens Action Coalition. In addition, the utility had almost 800,000 tons of coal stored off-site.

Despite the oversupply, Duke contracted in September for an additional 500,000 tons of coal to be delivered in 2020, Burgess’ testimony said. Asked why the utility did so, an official responded that with fewer coal suppliers remaining, “it is more challenging to negotiate lower prices.”

The Utility Regulatory Commission is scheduled to conduct a hearing on Duke and the cost of operating its coal fleet next month.