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Big Sandy 1 FGD Analysis

Big Sandy 1 FGD Analysis. February 2006 DRAFT Strategic Policy Analysis Portfolio Management Analysis Advanced Environmental Technology & Controls Resource Planning and Operational Analysis. Introduction—Big Sandy 1 Analysis. Objective :

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Big Sandy 1 FGD Analysis

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  1. Big Sandy 1 FGD Analysis February 2006 DRAFT Strategic Policy Analysis Portfolio Management Analysis Advanced Environmental Technology & Controls Resource Planning and Operational Analysis

  2. Introduction—Big Sandy 1 Analysis • Objective: • Evaluate BS1 FGD retrofit options and determine compliance strategy with CAIR and CAMR that provides the greatest value to AEP and its ratepayers • Previous Analysis: • Evaluated decision using MECO model as primary analytical tool supplemented by “spread option” model • Findings--From an internal system wide compliance perspective, the NPV cost savings was significant---$28 Million. Savings were even greater when considering the market value of SO2 allowances. • Conclusion- Retrofitting an FGD on Big Sandy 1 in 2010 creates greatest value from a fleet, unit, and operating company perspective. • Current Analysis: • Given revised capital estimates and new fuel price forecasts, re-evaluate decision using MECO model as primary analytical tool supplemented by “spread option” model

  3. Scenarios Analyzed • Base- Assumed BS1 was retrofit on a “stand alone” basis in the post-2010 period • Retrofit “Option”- Preserved “option” to retrofit BS1 post-2010 at lower cost thru up-front investment in common stack (w/BS2) and enlarging limestone handling and dewatering areas • FGD 2010: Install BS1 FGD along with BS2 project to eliminate need for remobilization, separate coal handling equipment, and separate stack and limestone prep and dewatering facilities

  4. BS1 FGD Updated Assumptions • BS1 Capital Costs Increased Significantly Since November (all in $2006) • Base Cost: +36MM to $140MM • Option Cost: +37MM to $121MM + $4.6MM option • 2010 FGD Cost: +29MM to $106MM • Scrubbed fuel price also increased • Minimal benefit from switching to higher sulfur coal • Given the new fuel price forecasts, scrubbing a 2.0 lb coal at BS1 is cheapest option. Thus there is no fuel price advantage. • Analysis was conducted with both $.30/MMBtu fuel savings (for scrubbing) as well as the current fuel price forecast of no change in fuel costs

  5. MECO BS1 FGD Analysis-Cost Impacts • If there is a scrubbed fuel savings then 2010 Big Sandy 1 FGD Retrofit is slightly more economic due to: • NPV of cost savings based on assumed $.30/MMBtu fuel cost savings through FGD Retrofit (~$29MM in NPV savings) • NPV of incremental SO2 reductions (14.7k tons/yr) & Hg reductions (40 lbs/yr) from 2010-2019. • This cost savings is somewhat offset by the higher NPV capital and O&M costs of scrubbing Big Sandy 1 earlier • Under the current fuel price forecast, BS1 is not economic. • Scrubbing Big Sandy 1 in 2010 slightly delays future FGD retrofits, but does not change the total amount of FGD retrofits in the AEP system

  6. Coal Price Comparison Very small price spreads are projected between 1.6 lb. and 4.5 lb. coal at Big Sandy

  7. MECO Conclusions • The economics of adding FGD to Big Sandy 1 in 2010 is very sensitive to fuel price premiums • Additional review of current fuel price forecasts is warranted, as well as consideration of cheaper, high sulfur Midwestern coal options • Postponing decision is best course of action given uncertainty with economic inputs

  8. Unit Market Valuation – Spread Option Model • Assumptions (when applicable): • FGD retrofit in-service 2010 burning 4.5# Coal • Assumes turbine addition is a replacement-in-kind due to NSR issues associated with the turbine upgrade • Assumes 2# coal without FGD • Analysis includes external market value of allowances Minimal value derived from 2010 FGD

  9. Spread Option Model w/ Fuel Savings • Assumptions (when applicable): • FGD retrofit in-service 2010 burning 2.0# Coal • Assumes turbine addition is a replacement-in-kind due to NSR issues associated with the turbine upgrade • Assumes current (1.67# coal) without FGD • Analysis includes external market value of allowances Additional value derived from 2010 FGD based on fuel savings

  10. Coal Price vs. ROI

  11. Conclusion and Recommendation Conclusion: • Results of reevaluation indicate that retrofitting an FGD on Big Sandy 1 in 2010 only creates economic value with a favorable fuel spread Recommendation: • Reevaluate decision with Midwestern coal option, which may validate $0.30/mmBtu fuel spread and thus 2010 BS1 FGD • Also, potentially reevaluate fuel choice / design decision at BS2

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