The Politics of Coal to Gas Power Plant Conversions

Xcel Energy operates in an eight state area, with its largest operations in Minnesota and Colorado, through its wholly-owned utilities Northern States Power--MN and Public Service Company of Colorado (PSCo).  NSP-MN provides between 34-45% of Xcel's net income, according to the 2011 I0-K.  Similarly, PSCo provides 45-55% of Xcel's net income. 

With the passage of Colorado's Clean Air Clean Jobs Act, a Democratic Governor, worked with Xcel Enegy and natural gas producers to craft legislation mandating reduction of pollutants such as nitrous oxides by 88% compared to a 2008 baseline, by 2017.  Since Colorado is a large producer of coal, the coal industry opposed the legislation.  PSCo came up with a plan to convert 3,000 MW of coal powered steam boilers to natural gas-fired combined gas turbine technology, powered by GE turbines. 

Over the planning period to 2017, the conversions in Colorado and in Minnesota would have required about $1.3 billion in capital expenditures by Xcel Energy.  Of course, the problem with environmental goodies is that someone has to pay for them, like everything else,  More about that at the end.

According to the 2011 Xcel 10-K, their 2011 fuel costs per MMBtu were:

• $2.06 for coal
• $0.83 for nuclear
• $6.56 for natural gas

With the economic recession, warm winter, high inventories, and production surge from North American shale, spot prices in 2012 have been down to $2.50 for natural gas.  Because of higher efficiencies and lower heat factors, natural gas prices don't have to be at parity with coal for gas to be the preferred alternative.  At current prices, the economics are no contest.

So what is holding back the rational economic transformation?  Politics, as usual.  Xcel's proposed cost recoveries for the $1.3 billion in capital expenditures would have rate payers in CO paying 1-2% more per annum in electric rates over the planning horizon.  In the discussions at the Colorado Public Utilities Commission, this was deemed unacceptable.  Also, there was a blizzard of irrational comments to add more scrubbers to antiquated coal-burning technology instead of going to a more efficient and longer-lived combined cycle gas technology.  Right now, it appears that Xcel is reconsidering its plans and the conversion of 3,000 MW of coal-burning boilers to natural gas has been stalled.

Japan Pulls Together: For Now

Japan has 19 of its nuclear reactors off-line on March 10th, according to the Wall Street Journal. Today that number has doubled, which I believe is higher than any observers initially estimated. Electricity to Tokyo is down 20%.

If anyone owns an international mutual fund with Japanese holdings, most of them have behaved as if the holdings were marked down to zero. Brokerage companies in Tokyo would not be able to do business without power, the thinking went. Instead, peak consumption in Tokyo is 23% below last year, according to the Journal, in a hotter summer. Japanese stocks are broadly back to their pre-crisis levels, according to the Journal story. All of this comes from the same kind of social pulling together that occurred in New York, post 9/11, and which is also characteristic of the Japanese social contract. If you've read this blog on these issues, it's no surprise.

While this is encouraging, some of the ongoing debate is not as uplifting. Like Germany, there is a growing sentiment in Japan to completely and immediately wean itself from nuclear power. The blame for much of this sentiment can be laid at the doorstep of the industry itself, because of its poor communications, stakeholder relations, and too cozy association with business lobby groups. That can be fixed, but will it?

In the short run, Japan is said to be firing up decommissioned coal and natural gas capacity. Japans is already the largest importer of thermal coal, which is the worst fuel from a greenhouse gas emissions standpoint. Japan is also a very large importer of LNG, and this fuel is environmentally preferable to coal. Both of these measures are short term, however.

Completely shutting down the nuclear sector, and increasing renewables, particularly solar, will have significant costs. Hopefully, these issues will be more reasonably and rationally debated in Japan, as opposed to our "get out the machetes" politics. This is where the Japanese political leadership will be challenged, now that the people of Tokyo have done their part individually and collectively to meet the challenge of reduced power supplies.

LNG is relatively cheap now, and the yen is relatively strong, so perhaps there is a way to increase imports and stockpiles of LNG in preference to coal. Both GE and Siemens have dual fuel, high efficiency power plant turbines with modular designs which might have decent economics when compared to the hybrid alternative of shutting down nuclear and substituting thermal coal. Chinese solar panels are in plentiful supply, if analyst reports are correct.

Shigeru Ban has advised Japan to start rebuilding housing quickly,with cost and energy-efficient structures that respect the landscape. On the energy front, our advice would be similar: a little bit of thought about long-term implications, but pull together and fix the problems with solutions that work economically and environmentally.