A complicated calculus keeps the remaining coal fleet alive

The U.S. coal fleet is half the size it was 10 years ago. How are the remaining plants hanging on?

by Peter Maloney of Utility Dive

t's no secret that the coal fleet in the U.S. is shrinking. The number of coal-fired power plants is roughly half it was about 10 years ago.

Some of the coal plants that are still running are scheduled to retire, but that still leaves a sizable fleet of operating coal plants. What's keeping them alive? The answer isn't simple — it's a mix of economics, commodity pricing and regulations.

“Deciding when to retire a coal plant is a complicated matter,” Metin Celebi a principal at The Brattle Group, told Utility Dive. He said it's a complex calculus that involves location, both in terms of market dynamics and renewable penetration, as well as the characteristics of the particular power plant.

The Sierra Club, which collects data on coal-fired plants and updates it on a daily basis as part of its Beyond Coal campaign, lists 262 operating coal plants as of March 9, compared with 530 in 2009.

The Trump Administration wants to stem the pace of retirements and the Department of Energy last year proposed a rulemaking that would provide support for coal plants based on the reliability support they provide to the grid. But DOE's proposal, which called on FERC to take action, was unanimously rejected by the commission. FERC is now engaged in its own proceeding, receiving feedback from regional grid operators and others about how to ensure grid resilience and reliability.

Meanwhile, more and more coal plants are retiring.

Several reasons to retire

There are several reasons why owners retire coal plants, including low natural gas prices, the increasing penetration of renewable resources, a lack of load growth and environmental regulations.

In wholesale power markets, where the lowest cost resources are the first to be dispatched, low cost natural gas is often cheaper than coal and that forces coal plants out of the market.

In cost-of-service markets — states that have not deregulated wholesale power markets — coal plants also feel some regulatory pressure from cheap natural gas. Both they and plants in competitive markets can also face higher capital expenditures because of new or pending regulations.

The most often cited example is the Mercury and Air Toxics Standards (MATS), which the Environmental Protection Agency finalized in 2013. The regulations were contested in the courts, and in July 2015, the U.S. Supreme Court sent MATS back to EPA for review. The agency issued a supplemental rule in 2016, but by then many coal plant operators had already decided to retire their older coal plants rather than install costly pollution control equipment. There were 12.9 GW of coal plant retirements in 2015 alone.

The remaining coal fleet still faces pressure from low cost gas and pending environmental regulations. But the environmental pressure has subsided to a degree with the coal-friendly policies of the Trump Administration. In addition, the remaining fleet is larger and younger, which potentially gives the plants more favorable economies of scale and makes them less likely to incur capital expenditures for refurbishments, upgrades or the addition of pollution control equipment.

An October 2017 analysis by the Union of Concerned Scientists found that the coal plants most likely to remain economic in the near future average a capacity of 510 MW, compared with an average 469 MW capacity for uneconomic coal plants, and a 317 MW average for plants either retired or converted to natural gas. 

The uneconomic plants also ran less frequently, the report found, operating at a capacity factor of 41% compared with 58% for plants that passed the UCS’ economic stress test. Retired plants tended to be smaller, older units with an average capacity factor of 35%.

Merchant vs. regulated environment

In deciding whether or not to retire a coal plant, one of the first considerations is whether a plant operates in a merchant environment or under a regulated, traditional cost-of-service regime, Celebi said.

Since 2011, more than half of coal plant retirements have been in regulated markets, the Brattle analyst said. Looking ahead, regulated coal plant retirements are expected to continue to outpace merchant retirements with 18 GW of a total of 26 GW of announced retirements expected in regulated markets.

While merchant coal plants lag in total GW of retirement, as Celebi noted, the total capacity of the merchant fleet is much smaller than the fleet of regulated coal plants, so on a percentage basis, a bigger portion of merchant plants have retired compared with the percentage of regulated plants that have retired.

In addition, for merchant plants, the analysis on whether to keep operating can be stark. Less run time means lower revenues. If revenues are too low, they can’t cover costs. It can be a hard decision for the owner of a merchant coal plant to abandon an asset, but an expectation of continued losses can tip the scales toward retirement.

Last fall, Vistra Energy, citing “sustained low wholesale power prices, an oversupplied renewable generation market, and low natural gas prices,” announced it would close three “economically challenged” coal plants with a total capacity of about 4,100 MW.

The decision can be tougher for a regulated utility because a retired plant might need to be replaced to meet load, and often a new plant is more costly for ratepayers than keeping an existing plant running. But as Celebi pointed out, “it’s plausible that the excess capacity we have been having in many regions could have made it easier for regulated plants to be retired.” 

Location and plant O&M

Plant retirement decisions also vary by region, Celebi said.

Most of the coal retirements – 32 GW of the 52 GW – have been areas managed by a regional transmission organization (RTO) or Independent System Operator (ISO). Most of those have been in the PJM Interconnection region, which has seen 21 GW of coal retirements. There have been about 5 GW and 7 GW of coal plants retired in the Southwest Power Pool and the Midcontinent ISO (MISO), respectively.

One non-RTO area, the SERC Reliability Corp. region in the Southeast, stands out in terms of coal retirements, with about 18 GW of coal plant closures.

Looking forward, it appears that the pace of retirements in the Midwest and in Texas could quicken as the pace in PJM slows. As noted, there are already at least 4 GW of coal plants closing in the Electric Reliability Council of Texas (ERCOT) region with Vistra's announcement, and there are 8 GW of announced retirements in MISO. In PJM, there are 6 GW of announced retirements.

Another factor in determining whether or not to keep a coal plant running is the nature of the plant itself, Celebi said. A plant’s operational characteristics can provide a snapshot of its financial well being. A low heat rate means a plant can efficiently convert fuel to electricity. In addition to a low heat rate, a plant with low operation and maintenance costs has an advantage, especially in competitive markets.

Overall, coal plant O&M costs range from about $50/kW-year to about $100/kW-year, Celebi said. Gas plants have a range of O&M costs between roughly $12/kW-year and $20/kW-year, according to EIA data.

Individual plants also vary in terms of their pollution control equipment.

The implementation of MATS served as an impetus for coal plants to upgrade their pollution control equipment. According to EIA data, about 87 GW of coal-fired plants installed pollution-control equipment between January 2015 and April 2016. In that same time frame, nearly 20 GW of coal capacity retired rather than make the capital investment in pollution control equipment.

That leaves the remaining post-MATS coal fleet better positioned to meet pending environmental regulations, except for possible carbon dioxide emission restrictions, which have moved to the back burner under the Trump administration. But the need for large capital expenditures is still a major driver in determining whether a coal plant remains operating.

Capex, reliability considerations

The main difference between coal plants that have retired and those that are still operating is how much capital costs they are facing, Joshua Rhodes, a postdoctoral research fellow at the Energy Institute and the Webber Energy Group at the University of Texas at Austin, told Utility Dive.

“I think what is happening is that operators are running their coal plants until they need major capital expenditures (capex), and then they are shutting them down.” If those plants can defer capex, Rhodes said, they stand to make money when prices spike, as they are expected to in ERCOT this summer as hot weather drives up power demand in the face of retiring coal capacity. 

Relatively short run costs and reliability concerns may also keep some coal plants open, Steve Sanders, a director at ScottMadden, told Utility Dive.

“Even with low natural gas prices, some coal plants have marginal production costs low enough to keep them in the money,” he said. But, those costs might not be low enough to keep those plants operating in the long run. In terms of reliability, some regions do not have any alternatives for providing baseload power other than coal plants.

Given what Sanders calls coal plants' “razor thin margins,” he said it seems likely there will be more coal plant retirements. The EIA expects 2018 coal plant retirements to outpace 2017 retirements. And the Union of Concerned Scientists report found that more than 20%, or 57 GW, of existing coal power plants are uneconomic and could face retirement before 2030.

In addition, UCS said even “modest” changes in cost assumptions — such as lower natural gas prices or a charge on CO2 emissions — could lead to “significant” changes in the coal fleet’s economic competitiveness, resulting in 26% of the fleet being uneconomic compared with a combined-cycle gas plant.

That view is shared by the Sierra Club. “Many plants operating today are not competitive with other sources,” Al Armendariz, deputy campaign director of the Beyond Coal campaign, told Utility Dive. “They are only operating because of the inertia and the profit motive of many U.S. utilities.”

In many parts of the country, wind and solar power are the lowest cost resources, Armendariz said. Coal plants are “making money because utilities have hoodwinked regulators” into allowing those costs and allowing the plants to continue to operate, he said.

A degree of stasis

Despite the dramatic shrinkage of the nation’s coal fleet, there is still a sizable slate of coal plants that provide about 30% of the country’s electricity. After the next round of retirements, the fleet could reach some degree of stasis in which the remaining plants are stable and relatively economic.

Sanders at ScottMadden believes the coal fleet is already reaching that point. Large, supercritical plants comprise about one-third of the current coal fleet and most of the smaller, low efficiency coal units have already retired, he said. But those plants will continue to face the pressures that forced smaller, older plants into retirement.

Eventually, the remaining plants may reach the point where they're unable to earn sufficient margin to justify ongoing maintenance and will effectively be run to failure, Sanders said. Some plants will be strained by being cycled to provide support for intermittent resources, which puts tremendous pressure on equipment and procedures to meet emissions standards, and they will just not be able to keep up, Sanders said.

Meanwhile, retirements have lowered the average age of the coal fleet — from about 49 years to about 40 years — but the fleet is still aging and is not getting much new blood.

The EIA only list three coal plants under construction or in development. There is a 17 MW project under construction at the University of Alaska, Fairbanks. The fate of the 320 MW Two Elk coal project in Wyoming is up in the air after the original developer was convicted of fraud charges. The 850 MW Power4Georgians project in Washington County, Georgia, is still listed as in development, but there has been no recent movement on the project.

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