AEP Withdraws Request to Build Scrubber at Kentucky's Big Sandy Unit 2

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Kentucky Power Company (Frankfort, Kentucky), a unit of American Electric Power Company (NYSE:AEP) (Columbus, Ohio), withdrew its application to install $940 million of flue gas desulphurization (FGD) equipment to reduce sulfur dioxide (SO2) emissions at its Big Sandy Power Station Unit 2 generator in eastern Kentucky. On May 31, the Kentucky Public Service Commission (Frankfort, Kentucky) granted the utility's request.

"We want to reevaluate all our options in light of changing energy market dynamics," Ronn Robinson, Kentucky Power's communications manager, told Industrial Info. "Withdrawing our application to build a scrubber at Big Sandy 2 buys us additional time" to decide what to do with the 816-megawatt (MW) generator.

"We'll certainly look at natural gas, as well as other generation, that may be available in the market in the 2015-16 timeframe. We could resubmit an application to build a scrubber," he continued. "When we submitted our application (to build a scrubber at Unit 2), we believed that was the least-cost option. But there have been a lot of changes in the energy market since then."

Over the last year, the price of natural gas has fallen about 50% to about $2.50 per million British thermal units (MMBtu), as gas storage levels have swelled due to weak demand, a warm winter, and greatly expanded production of gas from shale formations. Meanwhile, coal prices also have softened in the face of slack demand and rising inventories at electric utilities around the country.

Since AEP conducted its initial cost-benefit analysis, the power market has gone through significant shifts in response to tougher environmental rules from the U.S. Environmental Protection Agency (EPA) (Washington, D.C.). Some utilities have concluded it made economic sense to install pollution-control equipment on some coal-fired generators to comply with EPA's recent rules, such as the Cross-State Air Pollution Rule (CSAPR) and the Mercury and Air Toxics Standards (MATS). Other utilities have decided to close older, smaller coal-fired units and replace them with high-efficiency natural gas generators. Still others are closing coal-fired generation but relying on market purchases to keep the lights on.

Kentucky Power, which serves about 175,000 customers, will take several months to reassess its options for the Big Sandy plant. In early 2011, AEP announced plans to close both Big Sandy units and construct a new natural gas-fired generator on that site. Then, last December, AEP reversed itself and said it wanted to install a dry FGD at Unit 2 and close Unit 1, a 278-MW generator that began operating in 1963. For more on that issue, see December 16, 2011, article - AEP Unit to Spend $940 Million to Scrub Big Sandy Power Station.

Neither Big Sandy unit is scrubbed. Robinson said Unit 1 could continue operating without emissions-control equipment until the end of 2014, while Unit 2 could continue operating without upgrades through the end of 2015.

Spending $940 million to install pollution-control equipment at Big Sandy 2, which began operating in 1969, would have increased electric prices by about 30%. The potential impact of that price increase "was a significant issue," Robinson said. "When we make decisions, we need to take account of the impact on customers and the communities we serve. We are also mindful of the impact our decision could have on Kentucky's miners."

Big Sandy burns about 2.5 million tons of coal per year, about 70% of which comes from Kentucky, Robinson said. The rest comes from Appalachia. The coal industry fought hard to keep Big Sandy burning coal. Coal leaders were disappointed with Kentucky Power's decision to withdraw the scrubber construction application.

Bill Bissett, president of the Kentucky Coal Association, said he was very concerned about the move. "At this point, I think they'll have a lot of questions to answer from the many pro-coal politicians in Kentucky who have been assured this plant would continue to use coal," he told the Lexington Herald-Leader. "We'll have to look at what those answers are in the future, but again, I think the concern is what this means economically, not just for Eastern Kentuckians but for all the commonwealth, that federal regulations out of D.C. change the way we generate electricity in the United States."

Environmental groups, on the other hand, welcomed Kentucky Power's decision. "I think the company saw the writing on the wall, which is that environmentalists, industrial interests and the state attorney general all made a pretty persuasive case that spending nearly a billion dollars on an aging coal plant was not the least-cost option," Shannon Fisk, an attorney for environmental law firm Earthjustice, told the Lexington Herald-Leader. "Kentucky Power was proposing to raise rates by over 30% in one of the most impoverished parts of the state to continue an aging coal-fired power plant, which doesn't make sense."

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