By Bill Estep
August 5, 2018 - A utility that serves Eastern Kentucky and burns coal to produce electricity has sold $17.6 million worth of coal it didn’t need, offering yet another example of how the relatively low cost of natural gas has undermined the region’s economy.
The coal was to be used at a power plant in West Virginia co-owned by Kentucky Power, which has 168,000 customers in 20 Eastern Kentucky counties. The plant, though, could not generate electricity as cheaply as competing facilities fueled by natural gas, according to information filed with the Kentucky Public Service Commission.
As a result, the regional power-grid manager was not ordering electricity as often from Kentucky Power’s Mitchell plant. That meant coal the company had to buy under a long-term contract was piling up.
In late January, there was a 53-day stockpile of one type of coal at the plant, while the company’s target level was a 15-day supply, the PSC said in an order.
The PSC was considering a request from Kentucky Power to sell excess coal.
Kentucky Power received approval and recently notified the commission it had agreed to sell a total of 400,000 tons of coal to a Connecticut-based trading company for $44 a ton by the end of the year.
The sale comes amid a changing energy landscape in the country.
In 1990, coal-fired power plants generated about 52 percent of the electricity in the country, while natural gas produced about 12 percent,according to the U.S. Energy Information Administration.
By the end of 2017, coal’s share of national electricity generation had dropped to 30 percent and the share for natural gas had grown to 32 percent, while renewable sources such as wind energy had climbed to 17 percent.
The agency predicted the share of electricity generated using natural gas would edge even higher this summer, to 37 percent.
The switch has been hard on areas where coal traditionally underpinned the economy, particularly in Eastern Kentucky and nearby areas of Central Appalachia.
As coal-fired power plants have closed in the face of greater use of natural gas, the number of coal jobs in Eastern Kentucky dropped from 14,000 at one point in 2011 to just 3,835 in the first three months of this year, according to the state Energy and Environment Cabinet.
Floyd County Judge-Executive Ben Hale said it’s a conservative estimate that those 10,000-plus lost jobs had an average salary of at least $50,000.
That would mean the loss of $500 million in income in a cluster of about 15 counties.
“That’s a heck of a lot of money out of our economy,” said Hale, a Democrat.
The downturn has meant less money not only for families and businesses, but also local governments and schools because of a drop in revenue from a severance tax on mined coal and a lower property-tax assessment on unmined coal.
Hale said Floyd County used to get about $2 million annually — or $500,000 a quarter — from the mineral-severance tax, but with far less mining in the county these days, it received only $60,000 in the most recent quarter.
Local, state and federal officials, entrepreneurs, Kentucky Power and other businesses are working to create jobs in the region in manufacturing, energy, tourism, teleworks and other sectors, but so far nothing has come close to replacing the lost coal jobs.
“We’re struggling,” Hale said. “We are trying our best to diversify but that is such a slow process to diversify away from the coal industry.”
Natural gas began cutting quickly into coal’s dominance in electricity production within the last decade, after oil and gas producers were able to combine hydraulic fracturing — a process that breaks up rock formations underground — with horizontal drilling.
That unlocked access to vast new reserves of natural gas, and the spike in supply drove down the cost of gas.
In the three years from 2015 to 2017, the cost of natural gas delivered to generating facilities was less than half what it was between 2006 and 2008, according to the EIA.
Other factors have played a role in the decline of coal, including tougher rules put forth in the Obama Administration to protect air and water quality and increased use of renewable energy.
However, studies have pinpointed competition from cheap natural gas as the main reason for the downturn in the use of coal to generate electricity.
The administration of President Donald Trump has searched for ways to prop up coal and nuclear plants, citing a concern that loss of the plants hurts the reliability of the electricity grid, but several groups have pushed back against the ideas, including other energy producers.
The cost of power generation with fossil fuels — coal, gas and oil — is mostly based on the cost of the fuel and the efficiency of the generating unit, said Tyler Hodge, an EIA analyst.
Coal plants historically had the lowest cost, but the low cost of natural gas has helped change the order in which grid operators seek power, called the dispatch curve.
“Natural-gas units are now often on the lower end of the curve and relatively higher-cost coal plants are ‘pushed’ higher up the curve” to where they are not needed, Hodge said.
That dynamic has affected Kentucky Power’s Mitchell coal plant in West Virginia.
“The current market price of gas is setting the market right now and it is cheaper than coal,” said Allison Barker, spokeswoman for Kentucky Power.
The Mitchell plant burns a mix of low-sulfur coal, including about 325,000 tons annually from Eastern Kentucky, and high-sulfur coal from Northern Appalachia.
It buys the low-sulfur coal under short-term contracts, but has a long-term contract to buy the high-sulfur coal from a Consolidation Coal Company mine near the power plant.
The contract calls for Kentucky Power to buy 666,500 tons of the high-sulfur coal this year and 500,000 tons a year from 2019 through 2022, according to an application it filed with the state PSC.
Kentucky Power said it didn’t need all the high-sulfur coal this year because the Mitchell plant could not meet the price to supply power that was being set by natural-gas plants, and that as a result the regional grid operator, Pennsylvania-based PJM Interconnection, was not calling on Mitchell for power as often as in the past, according to a PSC memo.
PJM draws a lot of its power from coal plants — more than 27 percent of the load at midday Thursday, for instance — but some plants are more competitive than others and can offer to supply electricity at a lower cost, said spokesman Jeff Shields.
Kentucky Power agreed to sell the excess high-sulfur coal for about 17 cents a ton more than it pays to buy it.
That was a requirement of the deal. The company had pledged not to sell the coal at a loss.
Kentucky Power said the deal would benefit customers because the gain would bring down the average cost of future shipments of Consol coal.
Kentucky Power’s portion of the coal sale was 200,000 tons because it operates the Mitchell plant with another company, Wheeling Power Company. Both are subsidiaries of American Electric Power Company.
Kentucky Power bought a 50 percent interest in the Mitchell plant to replace generating capacity lost at its Big Sandy power plant at Louisa, where it converted one aging coal-burning unit to gas and tore down the other unit.
The Big Sandy plant was once one of the largest buyers of coal from Eastern Kentucky, taking shipments totaling 1.67 million tons in 2011, for instance, but the changes ended that market.
“We obviously lost at the Big Sandy plant one of our biggest users,” Hale said.