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Interview: Chuck West, Manager, Coal Procurement, American Electric Power

Chuck shares his views on the evolution of the coal industry and explains how American Electric Power, one of the US’ largest generators of electricity, has had to adapt its coal purchasing strategy as a result.

Coal generation could now be viewed as being peak load after wind, solar and gas which is a different story to what was common ten years ago. How has your coal purchasing strategy altered as a result of this?

When natural gas prices fall below the $3.00 threshold (this $3.00 natural gas price is a generalization knowing that the threshold is different for each coal generation plant depending on coal type, transportation cost and plant heat rate, etc.), coal becomes more of a peaking generation source than a base load generation.

In general, when gas prices fall below the threshold, Nuclear Power dispatches first along with renewables, followed by natural gas combined cycle, coal and or natural gas simple cycle generation, then, when necessary, gas combustion turbines.

This peaking generation scenario limits how much coal utilities can purchase under one year or longer contracts.

Coal consumption under these low gas price scenarios can vary by plus or minus 50% month to month and even year to year in some cases. Because of this consumption variability, flexibility is the key for coal consumers. However, coal producers and transportation providers need a rateable delivery schedule to optimize equipment and manpower.

So, we end up purchasing a lower percentage of coal for each plant in line with a minimum burn scenario. Then, the peaks are filled in with quarterly and monthly purchases as needed within the limits of the transportation contracts. Even with this strategy, coal fired power plants must add to and subtract from stockpiles on a regular basis to accommodate the peaking burn schedules.

Flexibility in the coal market is being featured from a few different angles at Coaltrans USA in January 2016. How do you think coal suppliers and transportation companies could be more flexible to assist power generation companies, like AEP, to use coal as a peak load generator?

In the current power market, flexibility in scheduling deliveries throughout the year would significantly reduce movement of coal onto and off of a plants stockpile. This would allow utilities to purchase a greater percentage of their requirements under one year or longer contracts. 

Although no individual supplier in the supply chain can provide the entire flexibility needed to match consumption, some level of flexibility in delivery schedules would allow utilities to adjust to short term changes in demand by adding to and taking off of the coal stockpile without significantly exceeding inventory targets.

The coal industry would say it’s a buyers’ market at the moment, due to such low prices. Would you agree that buyers become more picky with coal specifications in such times and is it really necessary or could they do more to help struggling coal miners?

In this market where coal generation is competing with an abundant low priced natural gas energy source, the most important coal specification is the delivered $/MMBtu. However, it is also important to accommodate the times that generation peaks require 100% output from a coal plant.

Coal generation plants with blending capability and separate stockpile areas can purchase lower quality coal to be consumed during low demand and/or low power price periods if it can be done without increasing maintenance costs or exceeding environmental permit levels even if generation output is decreased. Then, the blend could  be returned back to the design coal quality with short notice when needed to meet higher generation demand.

It seems silly to consider insufficient coal supply due to a global glut of it at the moment but looking forwards, to what extent are you worried that coal supply will not be sufficient in the future due to a smaller choice of suppliers and a refusal of them to produce and sell it at such low prices?

As a fairly large consumer of coal from almost every basin, we are very concerned about the supply of coal in the future. The main concern at this time is for Central App coal because of the higher mining cost, current bankruptcy filings, production cuts and mine closures that have dominated the news for the last year.

That doesn’t mean we are not concerned about the Northern App, Illinois basin or PRB coal suppliers. Each basin has over supply issues. However, the problems in Central App coal production are exacerbated by a high mining cost structure that makes it unlikely that coal prices will increase to sustainable levels when coal production is right sized to meet demand as long as natural gas prices remain below $3.00/MMBtu.

Then, if or when natural gas prices increase creating an increase in demand for Central App coal, it is unlikely that the remaining coal producers will be able to respond. And, Central APP coal is the hardest quality of coal to replace because of its low sulphur content and ash characteristics. This all makes a potential shortage of Central APP coal much more of a concern for the future.

What are you looking forward to most at Coaltrans USA 2016?

For the most part, I am looking forward to interacting with other coal industry professionals and finding out if there concerns and problems are similar to those of American Electric Power.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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