For both price and diversity reasons, coal-fired electric generation plants are destined to remain a key part of San Diego-based Sempra Energy’s future, although the company’s experience and history are deeply rooted in natural gas.

For Sempra, coal is similar to liquefied natural gas (LNG), however. Both are being pushed to the forefront by declining gas production and continued higher wholesale gas prices, according to Mike Niggli, president of Sempra Energy Resources. He summarized the utility holding company’s attitude toward coal during an interview Tuesday with Power Market Today.

“A couple of years ago we looked carefully at where we thought the prices and supply of natural gas would go, and it appeared to us there would be continual pressure on the upward side. That brought into our focus the need for additional supplies, and in turn, the need for regasification facilities for LNG as a primary focus.

“In the same construct — that gas prices would stay high for some time — it stands to reason that we would be focusing on an alternative solid fuel that could be less expensive, such as coal.”

In mid-March another Sempra company, Sempra Energy Partners, and Carlyle/Riverstone, an energy and power-focused private equity fund, announced a joint purchase and sales agreement with American Electric Power (AEP) to acquire 50-50 ownership of AEP’s Coleto Creek Power Station, a 632 MW coal-fired power plant in Goliad County, Texas, for $430 million. The purchase price also included nine other Texas power plants — five other active and four inactive — but Sempra emphasized the coal-fired plant, which represented only about 20% of the more than 3,000 MW collectively represented by the 10 plants (see Power Market Today, March 16).

As of Dec. 31, 2001, the combined book value of these plants was approximately $266 million. The sale is contingent on federal clearance pursuant to the Hart-Scott- Rodino Antitrust Improvements Act of 1976 and approval from the Federal Energy Regulatory Commission. The transaction is expected to close in July 2004.

“The value of these [Texas] power plants, particularly Coleto Creek, is directly related to the strong potential for new long-term contracts, due to the higher power prices being driven by costlier gas-fired generation in the region,” Niggli said at the time the deal was announced. “Furthermore, Coleto Creek is among the top-performing baseload coal units in Texas and expands our footprint in the rapidly growing ERCOT power market.”

Sempra Energy Resources previously acquired the coal-fired, 305 MW Twin Oaks Power plant from Texas-New Mexico Power Co. in November 2002.

Together, Niggli said, the coal-fired plants represent about 20% of Sempra’s merchant portfolio of plants, and it has a proposal for at least two coal-fired units in northern Nevada, totaling 1,200 to 1,400 MW, along with eyeing potential projects in other states. Sempra has no specific target goal in megawatts or percentages-of-portfolio for coal, however, he said.

“We don’t have a specific percentage or megawatt goal right now, but we do have a strategic desire to have coal in the portfolio because it would advantageous, given where natural gas prices are at now, and are likely to be, it could be an important resource for us and for our customers.”

Sempra has a long history with natural gas distribution and gas-fired electric generation, mirroring California, its headquarters state, which is heavily dependent on natural gas. There are no major coal-fired power generation plants in California. Its merchant energy strategy, Niggli reiterated, is concentrated on three broad domestic regions — the West, Gulf coast, and areas in and around PJM transmission grid in the Mid Atlantic region.

With the California and natural gas ties, Sempra prides itself on a long track record of being environmentally sensitive, and Niggli said this is played out today in power plants Sempra Energy Resources has developed along the Mexican border in North Baja California near Mexicali and in southern Nevada southeast of Las Vegas. He claims those natural gas-fired plants are the cleanest of their kind, and he stressed the future coal-fired plants owned and operated by Sempra will always employ “best available control technology” (BACT) to mitigate against emissions.

“We want to ensure that any facility we’re promoting would meet or exceed the environmental standards in place,” Niggli said. “I think you see that in the facilities we purchased in Texas and in the power plant in Baja, near Mexicali.”

Sempra has concluded that coal is going to remain a “substantial contributor” to electric production in the United States as it has historically, although not at the all-time high proportion of more than 55%-60% of total power generation. “It is a source that is abundant, it is a domestic supply, and compared to other forms of energy, it is a good value, although we know that changes from time to time as do gas prices and other central sources,” Niggli said. “For now, there appears to be an opportunity for coal to be in the thick of things.”

In response to questions about what Sempra knows about coal and whether it is a more difficult generation source to deal with because of environmental, labor and general societal concerns, Niggli said he has no doubts about integrating coal into the company’s long-range strategy. In fact, he said that over the past five years, his operating unit has acquired what he called “one of the more stellar (merchant energy) development groups of any company in the nation,” and that group now includes professionals with “probably hundreds of years of coal experience.”

“So we feel pretty comfortable that we understand the technology very well, and we have studied all parts of the value chain from engineering/constructing of coal plants, operating them, maintaining them, and mobilizing the systems of procedures,” Niggli said. “I personally don’t have a concern about that.”

With coal or any of his projects, Niggli said what “keeps him up in the middle of the night” are the same issues: “Do we have a good piece of land, located in the right area, a good [fuel] supply source, and some nearby transmission and water supplies?” These are the factors that make or break any project, he said.

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