Case Study: Duke Energy

Table 1: Duke Energy / Progress Energy Electricity Generation

This case study on Duke Energy accompanies "White Paper: Financial Risks of Investments in Coal."

Duke Energy faces significant risks due to its reliance on coal.

Duke provides electricity to approximately 4 million customers in North and South Carolina, Ohio, Kentucky, and Indiana.

It is the 3rd largest producer of coal-fired electricity in the US, and the 6th largest electricity producer [Table 1].i It is the 4th largest consumer of coal. Duke has proposed to merge with Progress Energy, the 15th largest consumer of coal and the merger is targeted for completion by the end of 2011.ii The combined company will be the largest utility in the U.S. The combined company will own and operate 29 coal-fired plants with a total capacity of over 23,000 MW and 6,600 MWiii of unscrubbed coal-fired capacity.iv

Combined, the companies produce 19,621 MW of electricity from coal from 75 units [Tables 2 & 3].

Table 2: Duke Energy Age and Size

Table 3: Progress Energy Unit Age and Size

Duke has $5 billion slated for capital expenses (CapEx) related to pollution controls over the next 10 years [Table 4]. Duke plans to spend $60 million between 2011 and 2015 to upgrade pollution controls to comply with state clean air mandates that may help satisfy the EPA's new Clean Air rules. However, the standards are expected to be revised before the upgrades are completed, requiring further investment.v

Instead of investing in its North Carolina coal units that do not have scrubbers, Progress will retire them by 2014.vi Progress expects CapEx for environmental compliance through 2013 to be approximately $70 million.vii

Table 4: Duke Energy Emissions from Coal

Duke is a defendant in litigation brought by the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, and other plaintiffs, alleging that the company's emissions of CO2 is a public nuisance.viii The U.S. Supreme Court reviewed the case on 19 April 2011 and a decision is expected by the end of June 2011.ix In 2000 the EPA cited 25 of Duke's plants for New Source Review (NSR) violations. Some of the claims were rejected, but a trial on the remaining claims will be scheduled for after 2011.x

Duke's coal ash is predominantly stored in wet handling ash ponds on-site; these present significant future financial and litigation risks. 12 of Duke's coal plants have on-site ash ponds. Eight of these are noted by the EPA to have a hazard potential—a high risk for five of them, and a significant risk for two.xi Cliffside pond experienced "a significant localized flood event" and the W.C. Beckjord pond was noted for significant deterioration around the embankment.xii

14 of Duke's 23 coal and nuclear facilities withdraw over 50 million gallons of water per day for cooling and would likely be required to invest in new intake technology if the EPA mandates improved water cooling systems.

In 2010, 61.5% of Duke's generation was derived from coal [Table 5].

Table 5: Duke Energy / Progress Energy Coal Source xiii

Although Duke is retiring 17 coal-fired units at 6 of its plants, the company is investing in new coal: an 800 MW unit (Unit 6) at Cliffside, NC and a 618 MW IGC plant in Edwardsport, IN. It is also building two new combined cycle natural gas plants.xiv

Duke faces significant construction risk on these projects. Cliffside Unit 6 costs have risen to $2.4 billion from the $1.8 billion originally estimated. Construction costs for the Edwardsport IGCC plant have increased by $530 million to $2.88 billion. Costs over $2.76 Billion are subject to "prudence review" in the next base rate increase. xiv

Such overruns raise the prospect of disallowance of these costs by regulators because Duke operates in jurisdictions that do not favor cost recovery.vi The Company's capital plan includes nine new coal plant proposals.xvi

Footnotes
i. M.J. Bradley & Associates, "Benchmarking Air Emissions of the 100 Largest Electric Power Producers in the United States," 2010, available here.
ii. Duke Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p. 5.
iii. Duke Energy, "Creating the Leading U.S. Utility," 10 January 2011, available at: http://www.duke-energy.com/pdfs/Slides_011011.pdf.
iv. Duke Energy, "Creating the Leading U.S. Utility," 10 January 2011, Slide 19, available at: http://www.duke-energy.com/pdfs/Slides_011011.pdf.
v. Duke Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p. 138.
vi. Duke Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p.141.
vii. Duke Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p.83.
viii. Duke Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p.140.
ix. Reuters, "Supreme Court Questions Global Warming Lawsuit," 21 April 2011, available at: http://www.greenchoicestandard.com/latest-news/supreme-court-questions-global-warming-lawsuit/.
x. Duke Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p.138-139.
xi. U.S. EPA, Wastes- Non-Hazardous Waste- Industrial Waste, "Information Request Responses from Electric Utilities," last updated 23 November 2010, available here.
xii. U.S. EPA, 23 November 2010.
xiii. EIA 923 Database; Progress Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p. 21, 23.
xiv. J. Gilbert and M. Niven, "Upcoming, recent coal-fired power until retirements," SNL Energy, 22 February 2011.
xv. Duke Energy, "2010 Form 10-K," U.S. Securities and Exchange Commission, p. 10-11. Also see: J. Russell, "Contractor says Duke took risks at plant," Indy Star, 29 January 2011, available at: http://www.indystar.com/article/20110129/NEWS14/101290350/Contractor-says-Duke-took-risks-Edwardsport-power-plant?odyssey=tab|topnews|text|IndyStar.com.
xvi. Bernstein Research, "EPA Sets Dates to Regulate CO2 from New & Existing Power Plants & Refineries; What Are the Implications?," 4 January 2011 p. 12.