Kentucky electric utilities eye diversification amid coal decline, regulations

Published on June 06, 2016 by Tracy Rozens

Kentucky’s coal-fired electricity generating utilities are struggling to stay competitive by converting their power plants to other sources of fuel amid a downturn in the nation’s coal industry and in response to stringent environmental regulations.

“Utilities are generally looking a bit more toward diversifying their fuel sources today, with natural gas being relatively inexpensive,” Gregory Dutton, who serves as Of-Counsel with the Louisville law firm of Goldberg Simpson and who specializes in utilities and environmental litigation, said in a recent interview with Daily Energy Insider. “Part of that too is a fear for future regulation and possible economic consequences of burning or emitting carbon.”

The Louisville Gas & Electric Co. (LG&E) and the Kentucky Utilities Co. (KU), part of the PPL Corp., opened the state’s first natural gas combined cycle generating station, Cane Run 7, last year after it had operated as a coal-fired plant since 1954.

American Electric Power’s Big Sandy Unit 2 coal-fired power plant near Louisa, Kentucky, also stopped producing electricity in 2015 to comply with environmental regulations. Big Sandy Unit 1, however, is being converted to operate on natural gas.

Kentucky remains the third largest producer of coal in the United States. In 2015, 87 percent of Kentucky’s net electricity generation was produced by coal and seven percent by natural gas, according to the U.S. Energy Information Administration.

More coal-fired power plants are expected to close in the next several years.

Approximately 85 percent of the coal mined in Kentucky in 2015 was used to generate electricity at 89 power plants in 15 states, the Kentucky Energy and Environment Cabinet said.

“Of this amount, three percent went to power plants that retired coal-fired generating capacity in 2015 and another 13 percent went to plants that will close capacity before 2019,” the agency said in its first quarter coal report.

Historically, Kentucky has enjoyed inexpensive and stable electric rates due to its access to large supplies of coal-burning power. Those steady rates have helped underpin the state’s manufacturing sector.

“We use a higher percentage of our electricity to power manufacturing than any other state in the country,” Dutton said.

Federal regulations targeting the state’s main source of fuel, however, may be changing that attractive rate environment.

“One of the concerns here is that with the decline of coal, not just in eastern Kentucky, but everywhere, is what is that going to do to our electric rates, and what is that going to do to our manufacturing sector,” Dutton, who was recently elected vice chair of the Kentucky Bar Association’s Section of Environment, Energy and Natural Resources Law, said. “You are putting billions of dollars of environmental controls on currently existing power plants. And the only way that gets paid for is through your electric bills, so they’re going up. They are going up steadily and consistently.”

One regulation that comes with a steep price tag for utilities is the U.S. Environmental Protection Agency’s coal combustion residuals, or coal ash, regulation that went into effect in 2015. The rules focus on the safe disposal of coal ash, a major source of industrial waste in the United States.

LG&E and KU have proposed investing $994 million to comply with the coal ash regulations by capping and closing ash ponds and building process-water facilities.

“There have been several other companies that have already gone through the Public Service Commission in Kentucky and got approval to build new coal ash landfills and those were all in the millions of dollars as well,” Dutton said. “You’re talking about over $1 billion statewide in the last year or so as far as utilities seeking approval, not money that was actually spent, but seeking approval to go forward with those projects.”

High production costs and competition from other mines is also hurting coal-fired power plants in Kentucky.

Utilities in eastern Kentucky are buying cheaper coal from other states like Illinois and Indiana. Some coal that is mined in eastern Kentucky is lower in sulfur content and can be burned cleaner than most other coal found in other parts of the United States. Much of the easiest-to-mine coal, however, has been depleted in that part of the state.

“With the onset of more air pollution control regulations, coal-burning power plants have been looking towards more readily accessible dirtier coal because if they’re going to have to clean up the coal after it has burned anyway, they may as well look for the easiest coal to get,” Dutton said.