Analysts from Morgan Stanley recently identified all of Vectren’s coal fleet as uneconomic by 2024 relative to wind resources in Indiana.
Vectren, which is owned by Houston-based CenterPoint Energy, provides electricity to 145,000 customers in southwestern Indiana primarily derived from five coal-fired power plants: A.B. Brown Units 1 and 2; F.B. Culley Units 2 and 3; and Warrick Unit 4.
The Morgan Stanley report, “The Second Wave of Clean Energy – Part 2: Who Can Ride The Wave?,” led by equity analyst Stephen Byrd, used an asset-by-asset assessment and confirms modeling the utility conducted about the uneconomic nature of its coal fleet in its previous integrated resource plan (IRP).
Additionally, a new Sierra Club analysis further highlights the economics of the F.B. Culley plant and how the continued investments at Culley Unit 3 harm ratepayers.
The analyses should not come as a surprise to Vectren since the utility has admitted to regulators it will have an uneconomic coal fleet.
Despite that, Vectren is ignoring the economics which show that retiring coal plants and replacing them with renewable energy is best for customers and can grow shareholder earnings; instead, it is doubling down on coal at the Culley plant.
In 2018, Vectren filed a certificate for public convenience and necessity (CPCN) with the Indiana Utility Regulatory Commission (IURC) to retire only some of its coal fleet. It argued that it should invest over $90 million to retrofit the Culley 3 coal unit to extend its life, replace the retiring coal assets primarily with a $900 million, 850 megawatt gas plant at the A.B. Brown coal plant location, and by self-building a lateral gas pipeline connecting from the plant to the Texas Gas Transmission interstate pipeline.
The IURC rejected the gas infrastructure plans last April over stranded asset concerns:
“Because unwinding assured cost recovery should an asset become uneconomic is not a commonly employed regulatory option, it is prudent to ensure during the pre-approval process that we understand and consider the risk that customers could sometime in the future be saddled with an uneconomic investment.”–IURC’s Order
The IURC also criticized Vectren’s request for proposal (RFP) processes, since the utility restricted available options. The commissioners directed the utility to evaluate alternatives rather than “rel[y] on the acquisition of a single large natural-gas facility.”
Regulators directed Vectren to use its 2019/2020 IRP process to address problems with its modeling. The commission also said the utility should receive competitive bids for smaller-scale options that can meet the end-of-2023 date when several coal units are likely retired. But the IURC approved the environmental compliance projects that extend the Culley 3’s useful life.
Despite models and third-parties analyses, Vectren continues to invest in coal and might propose gas investments again
In addition to saying that swapping the coal plants for clean energy would grow Vectren’s earnings, the Morgan Stanley analysts found that the utility can save its customers $62 million in 2024 if it seized the coal-to-clean profit opportunity:
“Given the economics of its coal fleet relative to renewables and management’s commentary about reducing the company’s overall carbon emissions we expect to see the announcement of coal retirements in the upcoming IRP.”–Morgan Stanley’s The Second Wave of Clean Energy – Part 2
In an interview with S&P Global Market Intelligence, Byrd said, “It’s pretty clear where the trends for renewables costs are going. We can debate around the edges sort of how much of a cost reduction, but I think it’s hard to debate whether there will be significant cost reductions. That’s quite exciting.”
CenterPoint Executive Vice President and CFO Xia Liu was hesitant to provide details about Vectren’s IRP filing on the February 27 earnings call. But days later, on March 2, CenterPoint announced a goal to reduce its operational emissions by 70% by 2035 based on 2005 levels.
Wendy Bredhold, Senior Beyond Coal Campaign Representative for the Sierra Club in Indiana, told the Energy and Policy Institute that despite the carbon pledge, the utility could again include gas power plants in its IRP and subsequent CPCN. The utility is modeling many scenarios to replace some of its coal fleet with various size gas plants, including a coal to gas conversion again at A.B. Brown, but only operating the new gas plant for 10 years.
“It will be evident if this is a serious emissions reduction commitment or just greenwashing when we see their preferred portfolio,” said Bredhold.
Imprudence at Culley 3
In addition to possibly trying again with gas investment proposals, Vectren is retrofitting the Culley 3 coal unit with environmental controls to extend its life, which the IURC approved in the April 2019 CPCN order, despite economic analysis saying otherwise. The controls and coal ash pond projects will cost customers $90 million alone, plus millions of more dollars that customers will have to pay to keep the costly power plant operating compared to cheaper resources.
A coalition of environmental and consumer advocates asked the IURC to deny that request based on the company’s failure to demonstrate the need and use of flawed modeling:
“The evidence in the record demonstrates that Culley 3 retirement is a better option than extending Culley 3. Vectren also deliberately suppressed further examination of this alternative, by rigging the updated Burns & McDonnell modeling to prevent selection of Culley 3 retirement.”–Citizens Action Coalition, Sierra Club, and Valley Watch post-hearing response brief
In a reply brief filed by Vectren, the utility admitted that their plan was not cost-effective:
“Vectren South has been very open: the Preferred Portfolio is not the least cost option … more expensive than the heavy gas portfolio and portfolios that replace Culley with renewables.”–Vectren’s reply brief in support of proposed order
Still, Vectren chose to retrofit Culley 3 because of “fuel diversity” and “preservation of Indiana coal-mining jobs that the Culley Unit 3 retrofit would provide.”
Southern Company’s subsidiary in Mississippi similarly pleaded with state regulators to approve coal ash projects and investments in Plant Daniel for “fuel diversity” reasons. The Mississippi Public Service Commission approved of the plan in October despite Mississippi Power’s own calculations demonstrating a net savings to customers of $25 million Plant Daniel closed in 2022 rather than 2046. In assessing Southern Company’s coal fleet, Morgan Stanley similarly noted that Southern’s 2.2 gigawatts of coal capacity, including Plant Daniel, would be uneconomic by 2024 at the latest due to lower-cost solar resources in the Southeast.
Since August, Vectren has conducted three IRP public advisory meetings as it prepares to file its plan with the commission in May. At the December 13 IRP stakeholder meeting, Vectren continued with its imprudent decision when it said it does not plan even to run a model portfolio that retires all of its coal assets by 2024. Instead, Vectren will include portfolios that close Culley 3 by 2030 and by 2034.
Sierra Club recently analyzed the economics of the Culley units and found that further investment in unit 3 and keeping it operating through 2030 will cost more money than replacing the plant with renewables, storage, and demand-side resources:
“FB Culley units would lose $53 million over the next decade. That is, they would incur $53 million more in costs than the market energy revenues received by the coal plants. Unit 3 alone would lose $46 million.”-Sierra Club’s Comments on Vectren’s 2019/2020 IRP Stakeholder Meeting #3
Additionally, Vectren customers can benefit from a portfolio of wind, solar, storage, and demand-side technologies that replace the coal plants’ energy and capacity services, according to the report.
Vectren recently notified IRP stakeholders that it plans to hold the final IRP stakeholder meeting on April 20, rather than March 20 as originally planned. The utility plans to share its preferred portfolio at that time, file the IRP on May 1, and then file a CPCN that reflects the IRP outcomes.
Will Indiana lawmakers prevent other coal closures?
As Vectren approaches the finish line in its IRP process, the Indiana legislature passed House Bill 1414, led by Rep. Ed Soliday (R), that will make it harder for utilities in the state to retire coal plants as it adds additional proceedings before the IURC, which could allow coal interests to drag the issue out and through the courts.
The bill was received by Gov. Eric Holcomb (R) on March 18. He has seven days to sign or veto the bill; otherwise, HB 1414 automatically becomes law on the eighth day after receipt.
The governor appoints members of the IURC, and all five commissioners have either been appointed or reappointed by Gov. Holcomb.
While no utilities plan to retire coal plants before the bill’s sunset date of May 2021, legislators can remove the sunset date in future legislation.
Caryl Auslander, policy director at Advanced Energy Economy, a trade association representing the advanced energy industry, said the legislation “would create uncertainty for advanced energy companies seeking to invest in the state” and “put Indiana at a competitive disadvantage for corporate location and expansion plans.”
Rep. Soliday is expected to continue co-chairing the state’s 21st Century Energy Policy Development Task Force and will issue a set of recommendations by December 1, 2020 for the General Assembly. A range of interests has presented to the task force, including Michael Nasi, a partner at the Texas-based firm Jackson Walker LLP. The Indianapolis Star reported last year how Nasi is part of an out-of-state coal interest network that is lobbying to prevent the closure of coal plants. Nasi appeared in Indianapolis again to help advance HB 1414 last month.
Update: On April 3, Vectren notified stakeholders that it received approval to move the IRP filing to June 30, 2020. The final stakeholder meeting will take place on June 15.
Image source: The F.B. Culley Power Generating Station in Warrick County, Indiana by Peter Burzynski.