East Kentucky Power Cooperative wants to buy lease on 594 MW Bluegrass plant
EKPC needs Bluegrass to fill capacity hole in part created by coal retirements
East Kentucky Power Cooperative applied July 24 with the Kentucky Public Service Commission for approval to acquire and operate the existing simple-cycle combustion turbine facilities in LaGrange in Oldham County, Kentucky, from Bluegrass Generation Co. LLC and for approval to assume certain evidences of indebtedness related to this acquisition.
While the coal-fired Spurlock Station, Cooper Station Unit 2 and Smith Station were all well-positioned to comply with the existing environmental rules, the economic viability of the coal-fired Dale Station and Cooper Station Unit 1 was called into question in light of the investments that would have been required to bring them into compliance with the EPA's new and forthcoming rules (i.e., the Mercury and Toxics Standards, Coal Combustion Residuals, Effluent Limitation Guidelines).
To address the potential loss of over 300 MW of capacity due to possible plant retirement (199 MW at Dale, 116 MW at Cooper Unit 1), EKPC retained The Brattle Group in May 2012 to assist with a request for proposals (RFP) and provide independent and unbiased analysis of the power supply opportunities submitted as part of the RFP. The 2012 RFP was structured to compare the costs required to bring the Dale Station and Cooper Station Unit 1 into compliance with MATS with the costs of alternative power supply options available in the market.
The Brattle Group concluded that the reconfiguration of Cooper Station Unit 1 so as to flow its air emissions through the existing air quality control system servicing Cooper Station Unit 2 was the highest value-added option available to EKPC. The Commission approved that project in 2014. By retrofitting Cooper Station Unit 1, EKPC was able to affordably retain 116 MW of its existing generation portfolio that would have otherwise been lost as a result of MATS.
"The Cooper 1 retrofit was only a partial solution, however," the application noted. "EKPC still needs to replace the loss of approximately 199 MW of capacity from the retirement of the Dale Station as well as plan for future load growth and increases in load factor. The extreme weather occasioned by the 2014 Polar Vortex, combined with new demand peaks in winter 2015 and increased market volatility, confirmed that significant additional capacity is also necessary to mitigate market risk arising from EKPC's capacity shortfall, which totaled nearly 650 MW at the point of EKPC's recent historic winter peak. In addition, the Commission recently issued an Order in a Fuel Adjustment Clause review case that further underscored the importance of having physical generation capacity on hand."
Units 1 and 2 at the Dale Station were permanently taken out of service on April 15, 2015. Together they had a combined capacity of 50 MW. Units 3 and 4 (149 MW total) at Dale are scheduled to be placed in inactive status on April 15, 2016.
To fill the capacity gap, EKPC undertook a "refresh" of the competitive bids from the 2012 RFP during the summer of 2014. Brattle was once again engaged to provide independent and unbiased analysis. The RFP Refresh identified the purchase of the Bluegrass Station as the best available power supply alternative.
Among other things, the acquisition helps EKPC achieve its strategic objectives of diversifying its power generation portfolio, maintaining financial strength, reducing reliance upon the PJM Interconnection market and power purchase agreements to provide capacity and energy during peak demands, provides a physical hedge against volatility in energy and capacity markets, and presents very little technology and performance risk.
Bluegrass leases and operates three natural gas-fired simple cycle combustion turbine units at the Bluegrass Generating Station, pursuant to a lease agreement, dated November 2000, with Oldham County. Each unit has a rated capacity of 198 MW, giving the Bluegrass Station a total rating of 594 MW of winter capacity. The Bluegrass net summer capacity is 165 MW per unit, for a total of 495 MW.
Bluegrass Unit 3 is currently subject to a tolling agreement that was entered into between Bluegrass and Kentucky Utilities and Louisville Gas & Electric in 2014. The fact that the Bluegrass Station is located on the western end of EKPC's territory helps achieve one of EKPC's strategic goals of giving greater geographic diversity to its generation fleet. Each of the units at the Bluegrass Station is projected to have a capacity factor that is consistent with other combustion turbines in EKPC's fleet. While the initial capacity factors are lower in the 2016-2022 timeframe, they are forecasted by Navigant to increase thereafter as federal carbon policy is implemented.
On June 26, EKPC and Bluegrass entered into an asset purchase agreement whereby Bluegrass agreed to sell and assign, and EKPC agreed to purchase and assume, substantially all of the assets and certain specified liabilities of Bluegrass. Because the Bluegrass Station is currently leased by Bluegrass from Oldham County as part of a complex financing plan put in place as part of the development of the plant, EKPC will take an assignment of the lease between Bluegrass and Oldham County and certain bonds held by Bluegrass and payable by Oldham County.
The power plant purchase agreement requires EKPC to file this application for approval of the contemplated transaction on or before July 26, and to request that the commission approve the proposed transaction no later than Dec. 1, 2015. Additionally, the agreement contemplates that the proposed transaction will close by or before Dec. 31, 2015.
In November 2014, the commission approved the request of KU and LG&E to enter into a four year tolling agreement with Bluegrass. Under the tolling agreement, KU and LG&E will have access to 165 MW of firm generation capacity and output from Bluegrass Station Unit 3 from May 1, 2015, through April 30, 2019. While the capacity may be split between the two companies, it was initially allocated 100 percent to LG&E. KU and LG&E estimated that they would pay approximately $38.5 million in capacity and fixed operations and maintenance costs over the four-year term of the tolling agreement.
As part of the contemplated transaction, the tolling agreement will be assigned by Bluegrass to EKPC. EKPC said it has begun the process of seeking the consent of KU and LG&E to the assignment of the tolling agreement. Preliminary discussions suggest that consent to the assignment would be given as part of the closing of the transaction. Navigant has considered the relative value of the tolling agreement to what benefits EKPC would likely otherwise recognize in the PJM markets for the Bluegrass Station in the absence of the tolling agreement and has concluded that the tolling agreement provides a net benefit to EKPC.
After engaging Bentek Energy and ACES to perform a study on the availability and affordability of natural gas at the Bluegrass Station, EKPC has determined that it will have access to fuel on a reliable and economic basis. The Bluegrass Station is located adjacent to a Texas Gas Transmission LLC pipeline. Recent developments in the Utica and Marcellus shales in Western Pennsylvania and Eastern Ohio have created a surplus of natural gas production that is expected to result in the reversal of natural gas flows along the Texas Gas and other pipelines. As such, the Bluegrass Station is well-situated to benefit from major natural gas producing basins on either end of the Texas Gas pipeline, thereby reducing the risk of interruptions to sustainable sources of natural gas fuel, the application said.
In addition to an independent Due Diligence Evaluation Report prepared by Burns & McDonnell Engineering, EKPC said it also engaged Siemens (the Original Equipment Manufacturer) to perform detailed borescope inspections on each of the Bluegrass units, witnessed the units in operation, and conducted extensive research into the specifications and quality of the assets involved.
There are currently five full-time equivalent (FTE) positions associated with Bluegrass' operation of the Bluegrass Station. Upon the completion of the acquisition, EKPC anticipates using the generation assets more frequently than they are currently used and, therefore, an around-the-clock labor presence will be necessary. EKPC may expand the current workforce at the Bluegrass Station to as many as ten FTE positions.
EKPC is a not-for-profit, member-owned generation and transmission rural electric cooperative corporation with its headquarters in Winchester, Kentucky. It provides wholesale electricity to its sixteen owner-member distribution cooperatives, which in turn serve approximately 525,000 Kentucky homes, farms and commercial and industrial establishments in 87 Kentucky counties.
In total, EKPC owns or purchases a total of about 2,794 MW of net summer capability and 3,009 MW of net winter capability. EKPC owns and operates coal-fired generation at Dale Station (149 MW), Cooper Station (341 MW) and Spurlock Station (1,346 MW). EKPC also owns and operates natural-gas fired generation at Smith Station (774 MW summer/989 MW winter), and landfill gas-to-energy facilities in Boone County (3.2 MW), Laurel County (3.2 MW), Greenup County (2.4 MW), Hardin County (2.4 MW) and Pendleton County (3.2 MW). EKPC purchases hydropower from the Southeastern Power Administration at Laurel Dam in Laurel County, Kentucky (70 MW), and the Cumberland River system of dams in Kentucky and Tennessee (100 MW).