What killed FirstEnergy’s coal plants in southwestern Pennsylvania?

watt-metersPower Source

By Anya Litvak

There are several suspects in the case of Tunnel Ridge vs. Allegheny Energy Supply, a lawsuit that aims to identify what killed two southwestern Pennsylvania coal plants in 2013 — and, by extension, a multimillion-dollar coal contract.

Was it, as the power plants’ owner FirstEnergy Corp. said, environmental regulations that did them in? Was it competition from cheap natural gas that took Hatfield’s Ferry and Mitchell power stations off the grid before their time? Was it fewer consumers wanting less electricity after the recession?

The who-done-it is buried in a contract dispute between a coal company that had an agreement to feed fuel to FirstEnergy’s subsidiary, Allegheny Energy Supply Co., until 2020 and the utility, which unilaterally cancelled that contract last summer claiming that factors beyond its control — specifically government regulations — made operating those and other power plants “unfeasible.”

“The true reason Allegheny Energy cancelled the agreement,” Tunnel Ridge wrote in its lawsuit filed Jan. 15 in Allegheny County Court of Common Pleas, is “its desire to purchase coal at a lower price.”

When the two parties negotiated their initial deal in 2008, coal from this region was in its third consecutive year of substantial price increases. It was trading at $97 per ton with no signs of slowing down. Allegheny Energy penned the agreement to protect itself against the price escalation.

Tunnel Ridge, in turn, got a long-term customer to justify spending “hundreds of millions of dollars” on building out a longwall mine that would stretch along its coal reserves from Ohio County, W.Va., to Washington County, Pa. The mine went into business in May 2012.

Since then, the coal industry’s back flip has ushered in an era of oversupply, shrinking demand and low prices. So far this month, this region’s coal was being sold on the spot market for about $61 a ton, a 37 percent drop from its 2008 average.

With about 60 gigawatts of the nation’s coal-fired capacity scheduled to retire by 2020, according to estimates by the U.S. Energy Information Administration, the kinds of conflicts in this lawsuit are bound to multiply. As in this case, the argument for breaking a coal contract is likely to hinge on a concept called force majeure, which allows parties out of their obligations if an event beyond their control prevents them from delivering on their promises.

Because the coal industry is so vulnerable to shifting environmental regulations, coal contracts have for years included such developments in their force majeure clauses.

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