Coal-to-gas conversion not an easy decision for Midwest utilitie - Business, Government Legal News from throughout WV

BECKER, Minn. (AP) — Sherburne County Generating Station, better known as Sherco, is a power-producing workhorse. But even good workhorses head to the glue factory eventually.

The 2,400 megawatt coal-fired plant in Becker, 45 miles northwest of the Twin Cities, has generated the bulk of Xcel Energy's electricity for Minnesota for more than three decades.

In the next year, Xcel will have to decide what to do about Sherco as it takes what regional vice president Laura McCarten calls "a deep dive analysis" of its power needs. As part of the analysis required of all regulated utilities by the Minnesota Public Utilities Commission, Minneapolis-based Xcel will look at all its alternatives for the next 20 years, making decisions on which plants it will upgrade and keep and which it may retire or replace in the coming years.

McCarten, who oversees Xcel's operations for Minnesota and the Dakotas, isn't saying that Sherco is on the chopping block. For one thing, Xcel is already spending $50 million at Sherco Units 1 and 2 to meet new Environmental Protection Agency rules. A third unit is offline as Xcel tries to repair it.

Utilities don't spend that kind of money on a plant just to shut it down tomorrow.

But the fact that Xcel is looking seriously at what to do with Sherco's oldest units reflects two converging trends that will change electricity production in Minnesota and the Upper Midwest in the coming decades, the St. Paul Pioneer Press reported

First, utilities are facing decisions about what to do with their oldest and dirtiest coal-fired power plants in the face of coming environmental regulations and concerns about greenhouse gases associated with climate change.

And second, they're considering an answer that less than a decade ago would have seemed crazy — using natural gas to replace coal.

For more than a century, coal was king when it came to making power — cheap and abundant, particularly in the Midwest. But coal plants are massively expensive to build, requiring an operating lifespan of 30 to 50 years to pay off their costs, and they are increasingly controversial.

Natural gas plants are relatively cheap and quick to build, but the fuel was more expensive and prone to price spikes. So natural gas has been mostly used for intermittent or peak power that can be ratcheted up and down quickly.

But lately coal prices have been creeping up and natural gas prices this spring plunged to $2 per million BTUs — or about half the cost of last year — making gas competitive with coal.

Furthermore, the U.S. Energy Information Administration has estimated that the recent phenomenon of drilling into previously untouchable shale gas deposits has given the United States a 90-year supply of natural gas. The gas glut promises stable prices for a decade or more, industry experts say.

On top of that, natural gas had acquired a reputation as "the environmentally friendlier fossil fuel," said Michael Noble, executive director of St. Paul-based Fresh Energy, an renewable energy advocacy nonprofit. Natural gas plants emit almost no mercury, sulfur dioxide and nitrogen oxides, and only half the carbon dioxide of coal-fired power plants.

The fuel is so attractive that top executives at utilities such as American Electric Power of Ohio have said that natural gas is going to fill an increasing amount of their energy portfolios. Companies in Texas, Tennessee — and Colorado where Xcel also operates — are building or buying more natural gas capacity too, according to America's Natural Gas Alliance, an industry trade group.

In the Midwest, coal-fired power plants capable of producing about 12,000 megawatts of power will be replaced in the next few years with gas-fired turbines, at a cost of $33 billion, according to a study released this spring. The sponsor of the study, the Midwest Independent Transmission System Operator, or MISO, is in charge of the electrical grid in 11 Midwest states, including Minnesota and the Canadian province of Manitoba.

The plants on the verge of retirement, which were not identified to maintain confidentiality, tend to be the oldest and smallest, and are not economical to retrofit to meet EPA regulations that go into effect in 2015, said John Lawhorn, MISO's senior director of regulatory and economic studies.

Lawhorn believes natural gas will penetrate the coal-dominated MISO territory, where some utilities have few or no natural gas power plants.

"It's not a question of 'if' but of how much will gas make inroads onto the grid," he said.

Some Minnesota utilities remain wary of natural gas, however.

On the Iron Range, Duluth-based Minnesota Power gets 88 percent of its power generation from coal and the remainder from hydro and wind power. Minnesota Power gets no power from natural gas, spokesman Pat Mullen said.

Earlier this year, the company finished a "baseload diversification study" for Minnesota regulators that examines how it could make itself less dependent upon coal, and Mullen said natural gas "makes a lot of sense" for the utility as a way to boost output during times of peak demand.

But Minnesota Power has two old coal-fired plants — Taconite Harbor on Lake Superior and Laskin Energy at Hoyt Lake — and the idea of retiring and replacing them with natural gas plants makes the utility a little queasy.

More than half of the utility's power is contracted out to taconite plants and paper mills, which demand a heavy, steady supply of inexpensive power, and Mullen does not like natural gas' history of price volatility.

In Fergus Falls, Otter Tail Power is conducting its own baseload diversification study, due in early November. More than half of the utility's customers are outside Minnesota, as are its two biggest coal plants — Big Stone, a 475-megawatt coal-burner in Milbank, S.D., and Coyote Station, a 427-megawatt coal plant near Beulah, N.D. Both are co-owned with other utilities.

Which leaves little Hoot Lake, an aging plant near Fergus Falls that began life in 1914 producing hydro power but now burns coal to make 138 megawatts of electricity.

Environmentalists have been clamoring to shut down Hoot Lake. The company estimates it could cost $40 million to install the technology needed to meet EPA requirements, but building a modern natural gas plant to replace it could cost even more, spokeswoman Cris Kling said.

Otter Tail officials, like many energy experts, wonder what would happen to the price of natural gas if suddenly every utility wanted more.

"I'm not sure everybody's jumped on the bandwagon yet, but everyone's talking about jumping on the bandwagon," Bill Swanson, Otter Tail's manager of supply engineering, said.

There is one big obstacle for the natural gas bandwagon, though — not enough pipe to deliver the gas.

MISO's Lawhorn said his study concluded that the region's 21 natural gas pipelines are already constrained and could not accommodate the demand if utilities tried to produce an additional 12,000 megawatts of gas-fired power.

"It's like rush hour — maybe you could add a car or two but not a whole lot," he said.

Environmentalists, once boosters of natural gas, may be having second thoughts too. Drilling shale for natural gas injects chemical-laden water into the rock to fracture it, and some people wonder if this "fracking" is harming groundwater, Noble said.

There are additional concerns that drilling is letting too much methane escaping unchecked into the atmosphere. Methane contains 20 times the carbon of carbon dioxide, posing the possibility that the cure for coal could be worse than problem, he said.

Xcel's McCarten said she's hedging her bets on a diversified energy portfolio. NSP Minnesota, which she runs, gets 44 percent of its power from coal, 29 percent from its two nuclear plants, 10 percent from wind, 11 percent from hydro and biomass and only 7 percent from natural gas.

The company has no need for additional baseload power in Minnesota, and, indeed, it's going to ask the PUC to reconsider its request to increase the output at its Prairie Island Nuclear Generating Plant, a baseload generating plant.

Xcel has been running two natural gas plants built to replace old coal plants — High Bridge in St. Paul and Riverside in Minneapolis — harder this past winter to take advantage of the low gas prices, McCarten said.

While Sherco, as the backbone of the utility's power generation, looms large in Xcel's decisions about the future, the utility is facing a more pressing deadline with the 538-megawatt Black Dog power plant in Burnsville.

Initially, Xcel was going to shut down the four-unit plant's two remaining coal-fired burners, which date to the 1950s, and replace them with modern gas turbines in a $600 million makeover. But the utility abruptly put that plan on hold late last year, saying lower forecasts for electricity demand made the project unnecessary.

Copyright 2012 The Associated Press