2004

Is it time to take another look at PRB coal?

By Jerry Eyster

Coal Age,  November 2004

The delivered price of Powder River Basin (PRB) coal to the Ohio River Valley is currently well below the FOB mine spot price of most low sulfur eastern bituminous coals. PRB coal can be delivered to coal-fired generation plants along the Ohio River at a cost in the range of $1.30 to $1.55 / mmBtu (see Table 1).

Table 1.  Delivered price of PRB coal to barge served Ohio River generating plants

	($ / short ton)	($ / mmBtu)
PRB 8,800 coal FOB mine	$7 - $8	$0.40 - $0.45
Rail transportation to river terminal	$11 - $12	$0.62 - $0.68
Transloading to barge	$1 - $2	$0.06 - $0.11
Barge cost to plants on the Ohio River	$4 - $5	$0.23 - $0.28
PRB coal delivered - $ / ton	$23 - $27	$1.31 - $1.53

Source: PA estimates

Even without taking into account the very low sulfur content of PRB coal, its delivered price is equivalent to less than $39 / ton at the mine in Central Appalachia. While the Central Appalachian coals are available for lower prices on a multi-year contract basis, it is doubtful that they ca nmatch, let alone beat, the delivered price of PRB coal in the Ohio River Valley.

The financial incentive to consider blending or switching to PRB coal becomes even more significant when the low sulfur content of PRB coals is taken into account. PRB coals generally run between 0.6 and 0.9 lb - SO2 / mmBtu, significantly below the 1.6 lb - SO2 / mmBtu with SO2 allowance prices in the range of $570 / ton.

While there are problems with using PRB coals in boilers designed to burn eastern coals, generating company executives and their financial advisors will probably be taking a hard look at this low cost, low sulfur fuel option. Arch Coal President and CEO Steve Leer recently told Coal Daily, "We are in discussion with a number of eastern power producers, who have indicated an intent to use an increasing percentage of Powder River Basin coal in their fuel mixes."

The increase in shipments of PRB coal by demand region since 1993 is shown in Table 2 (page 34). PRB shipments increased by 113 million tons from 1993 to 1998 with the implementation of Phase 1 of the Acid Rain Program. Blending or switching to PRB coal proved to be a cost-effective means of complying with the Clean Air Act.

Table 2.  Powder River Basin shipments (in millions short tons)

NERC Region	1993	1998	2003
ECAR (Ohio / Michigan)	25	38	43
ERCOT (Texas)	24	30	33
MAIN (Illinois / Wisconsin)	33	67	88
MAPP (Upper Midwest)	36	47	51
NPCC (Northeast)	0	0	1
SERC (Southeast)	19	48	57
SPP (South Central)	54	67	72
WECC (The West)	29	36	37
Exports and other non-reported tonnage	7	7	19
Total	227	340	400

Source: Platts CoalDat adjusted by PA for known non-reporting.

PRB coal use in the southeast (NERC region SERC) and Illinois / Wisconsin areas (NERC region MAIN) increased by 100% and in the Ohio / Michigan area (NERC region ECAR) by 50%.  While PRB penetration into markets east of the Mississippi River continued to grow after 1998, the rate slowed considerably.  In the five years from 1998 to 2003, PRB coal use increased by 60 million tons or about half the tonnage increase of the previous five years.

This slowdown in PRB use occurred for a number of reasons. Railroad capacity has not kept up with the growth in demand, particularly since the rise in eastern coal prices. The Union Pacific railroad has had its problems meeting existing commitments and has been reluctant to take on additional tonnage. Several power generators have reported that they have been unable to arrange for test shipments or to increase their burn of PRB coal either because they cannot get shipment commitments or locate railcars to handle the tonnage. By most reports, the railroads are close to solving these short-term capacity issues and are now poised to increase their shipments of PRB coal. On a long-term basis, there are no permanent impediments to increased shipments of PRB coal to the Mississippi River or points further east.  If the existing railroads cannot meet demand requirements, the DM&E Railroad stands ready to enter the market to provide additional capacity at competitive rates.

The development of the synthetic fuels market that provides a strong economic incentive to use coals that have been processed through Section 29 certified plants has also provided a strong disincentive to the use of PRB coals. More than 100 million tons of eastern coal is currently tied up with these synfuel facilities, according to the Energy Information Administration. However, the tax provision that provides this economic incentive expires at the end of 2007 and is unlikely to be renewed. Therefore, a significant tonnage of eastern coal will again become subject to the economics of the marketplace by 2008.

Mercury uncertainty constrains expansion
Environmental uncertainties concerning mercury caused a number of potential users to back burner the PRB option until the mercury regulations become known and / or the technologies for removing mercury had been demonstrated. EPA's draft regulations for mercury proved to be highly favorable to the use of PRB coal. While these regulations are currently under reconsideration, it has become clear that while mercury in PRB coal is harder to remove using traditional technologies, trading and new technologies, such as carbon injection, may justify the use of PRB under either trading or a MACT standard.  If carbon injection proves commercially viable, its low capital cost makes the use of PRB coal a low-capital cost alternative to retrofitting scrubbers.

For example, consider a coal-fired unit with barge delivery that is currently urning 1.5 lb - SO2 / mmBtu coal and has the alternative of switching to PRB coal using carbon injection or retrofitting a scrubbers and switching to a high sulfur coal. Assume that the unit has already retrofitted SCRs to control NOx. Therefore, the decision centers on the relative cost of reducing SO2 and mercury.

If the unit blends PRB coal with its current coal, it will have to upgrade its fuel handling facilities and perhaps its particulate controls at a cost of $10 to $50 / kW but it probably will not suffer much of a capacity penalty from using the lower quality PRB coal. If it uses activated carbon to capture mercury, it may be able to capture 60% to 80% of the mercury.

While there will be some increase in operating and maintenance costs, those costs are likely to be more than offset by a decrease in fuel and allowance costs since the 1.5 lb - SO2 / mmBtu coal probably costs more than the PRB coal on a delivered basis and the low sulfur content of the PRB coal will require fewer allowances. This option allows for reduction in emissions at a low capital cost.  For units that are not expected to operate in base load, this may be the optimal strategy. Units that have relatively limited remaining lives also may be good candidates for blending PRB coal, if other site and boiler specific limitations do not make this option infeasible or prohibitively expensive. Alternatively, the unit could switch to 100% PRB coal. The capital costs for such a switch could be substantial but probably would run less than $100 / kW.

Most of the capacity penalties for using the lower heat content PRB coal can be addressed by upgrading pulverizer capacity and addressing other boiler limitations.

The delivered cost of fuel would be less than the current cost of 1.6 lb - SO2 / mmBtu coal and fewer SO2 allowances would be required. Note that SO2 emissions probably would be conservatively on the order of 0.8 lb - SO2 / mmBtu or half the current emission rate.

Recent developments in carbon injection using a finishing baghouse indicate that the unit could remove 60% to 80% of the mercury at a capital cost of less than $50 / kW. This means that for less than $150 / kW, SO2 emissions could be cut half and mercury emissions could be reduced by more than 60% (assuming that carbon injection technology is available to meet regulatory deadlines) while burning a lower cost fuel.

The incentive to switch to PRB coal increases as the sulfur content of the existing fuel increases.  Nearly all the unscrubbed units along and west of the Mississippi River either blend or have switched to 100% PRB coal because the fuel costs savings are so significant. At least one generator in this region found it more cost effective to turn off its scrubber and switch to PRB coal rather than use a local high sulfur coal.

Finally, the unit could retrofit a scrubber and switch to a high sulfur coal.  Assume that the scrubber costs $250 / kw and removes 95% of the 6 lb - SO2 / mmBtu that is in the coal. The scrubber in combination with the SCR probably will remove close to 90% of the mercury in the eastern bituminous coal. The scrubbed unit will have lower SO2 and lower mercury emissions, but at what cost?

The difference in SO2 emissions between the scrubbed unit and the unit that burns 100% PRB coal is only 0.5 lb - SO2 / mmBTU. If the difference in mercury removal and O&M costs are ignored, and assume the delivered price of PRB coal and high sulfur coal is the same, a $150 / kw difference in capital costs between the two options would be equivalent to a SO2 allowance price of about $1000. Now consider the benefits of lower mercury emissions for scrubbed units.  What does the implied price of mercury need to be to justify the additional costs of scrubbing?

The analysis of multi-pollutant regulations requires sophisticated analytical tools that take full range of options into that account. Concrete and steel solutions are not only the ones available.  Blending PRB coal can provide coal-fired generators with options by pushing out the date when expensive retrofit decisions must be made and allow generators to invest in better and lower cost technologies in the future. Switching to PRB coal can provide coal-fired generators that have limited access to capital with a low capital cost compliance option today.

Scrubbing high sulfur coal is likely to be the optimal strategy for most large, baseloaded coal units, particularly for regulated generators. However, for the owners of smaller, older, less efficient coal-fired units that are looking for lower capital cost options for reducing emissions, blending or switching to PRB coal may be the most cost-effective compliance strategy.

Jerry M. Eyster is a managing consultant with PA Consulting Group's Global Energy Practice in Washington, DC.  He has 30 years' experience analyzing coal markets and the impacts of environmental regulations on the coal and electric power industries.  He can be reached at jerry.eyster@paconsulting.com or by phone at (202) 442-2543.

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