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The Losing Economics of Investing in Aging Coal Plants: Part 1

coal plant investment

Noah Long, Legal Director, Western Energy Project, Energy & Transportation Program; and Clean Energy Counsel, Land & Wildlife Program, San Francisco

This entry is the first of a two-part follow up to the blog I wrote last fall. This first entry focuses on the national story, the next entry will focus on coal in the west.

Across the United States, economics are increasingly favoring investment in renewable energy at the expense of dirty coal energy. As the price of solar dips below coal and even natural gas in some instances, the domestic demand for coal wanes and a growing number of companies are eager to get out of their investments in aging coal plants that cost more than they’re worth to upgrade and, in a growing number of instances, just to keep running.

As the nation’s coal power plants age, they become more expensive to maintain. The costs associated with making long-term investments in an aging coal plant, including replacing breaking parts and upgrades like scrubbers and other pollution controls, often exceeds the economic viability of coal in the long-term. Meanwhile, the natural gas prices remain low, ample wind and solar energy provides cost-effective alternatives, and energy efficiency, always the lowest-cost resource, reduces demand. Further public health protections and the first federal standards limiting carbon pollution from power plants—a key driver of climate change—are also on the horizon, all making dirty coal a shaky investment proposition.

Electricity Customers and Tax Payers Share Financial Risk of Coal Investment

Electricity customers bear the burden of long-term gambles made by utilities that coal will remain a viable energy investment. When deciding whether it makes economic sense to upgrade coal plants or retire them, utility regulatory boards are weighing utilities’ bids to pass these growing costs on to customers.

Recent examples of failing coal plant economics include:

  • In Illinois, coal plant owner Ameren Corp. recently had to pay a company, Dynergy, to take five coal plants off its hands – they couldn’t give away these plants for free. And there’s no guarantee Dynergy plans to invest to keep the coal plants up and running either. They’ve already announced plans to shut at least one of the units.
  • In Michigan, when a coal plant when on the auction blocks, no bidders offered to purchase the Upper Peninsula coal plant.
  • Recently, the Washington Utilities and Transportation Commission told Puget Sound Energy it needed to reconsider its bid to continue investing in a Montana coal plant rather than decommissioning it, citing the financial risk involved as natural gas prices continue to plummet.  The utility board pointed out that the likelihood of new emissions standards for coal plants from the U.S. Environmental Protection Agency may also reduce the cost effectiveness of doubling down on the Colstrip plant in Montana.
  • In Oregon, PacifiCorp is facing a similar questioning from the utility board about whether ratepayers should be on the hook to finance for its plan to invest billions to upgrade its fleet of coal plants.

Even though companies are paying to have others take over their coal plant portfolios and utility boards are examining what costs should be borne by electricity customers, the public may still be on the hook for long-term investments in the fossil fuel. As a report by CTBA made clear, the coal industry actually cost Illinois taxpayers $19.8 million in 2011 when revenues, subsidies and the expenses of regulation were netted out. And that cost doesn’t include the environmental and public health costs from related air and water pollution and climate change that are borne by the public.

Coal’s Shrinking Market Share as Clean Energy Becomes More Economical

Internationally, financial support for new coal-fired plants is quickly fading. Last June, the U.S. Export-Import Bank, the World Bank and the European Investment Bank –lending organizations that had formerly invested billions of dollars into coal plants around the world – pulled out of financing overseas coal plants except in special circumstances.

Coal’s share of America’s energy market is also way down from just a few years ago. Investors already expected another bleak year for the U.S. coal industry – but 2014 may be the record-setting worst year for coal producers, according to a new report by ICF International.

Looking ahead, nearly a quarter of the nation’s coal fleet could be retired by end of the decade. Of 536 coal-fired plants in U.S., 84 have already announced retirement and Bloomberg New Energy Finance estimates that 146 units more may retire by 2020. Coal’s contribution to the U.S. energy supply also is falling. Coal accounted for 39 percent of total U.S. electricity generation last year, down from about 50 percent from 2003-2008 and a rebound from a record low 37 percent in 2012.

The natural gas boom has certainly played a big role in coal’s shrinking market share, but the lower cost of clean energy is also a growing trend. In fact, solar energy is making headlines for its record-low prices, including in Texas. Austin Energy (a city-owned utility) is about to sign a 25-year power purchase agreement with Sun Edison for 150 megawatts of solar power at “just below” 5 cents per kilowatt-hour (kWh). In comparison, the municipal utility estimates that natural gas would cost 7 cents per kWh and coal would cost 10 cents per kWh – meaning solar is the most affordable source of energy available for the utility, in addition to being the cleanest option. And the utility can lock in that price for 25 years through this contract, a winning proposition given the volatility predicted on the horizon for the other energy options.

As coal plants become more financially untenable and renewable energy continues to become more economical, long-term investments in clean energy is quickly becoming the smart economic choice for investors, electricity customers, and the planet.

Co-authored by Meredith Connolly, NRDC Energy Law & Policy Fellow

Content Discussion

John Miller's picture
John Miller on March 30, 2014

The future for Coal Power generation does not look promising with possible pending EPA regulations to control carbon emissions.  But in the short- and medium-terms Coal Power will still absolutely be very critical to providing reasonably adequate baseload capacity required to meet Consumer demand and maintain power grids’ reliabilities.  Surprisingly in 2012-13 Coal Power net generation actually increased by 72 thousand (K) GWhr.  This compares to increased Wind+Solar net generation of only 32 K GWhr. 2012-13.  Today Coal Power net generation still provides the majority of U.S. total power supply; 39% Coal power vs. Wind+Solar of only 4%.

As far as cost, most existing Coal Power plants are still much more economic than the ability of average Utility Companies to replace a large percentage of this ‘fully dispatchable baseload’ capacity with ‘non-dispatchable variable’ Wind or Solar power generation; variable power effectively requires up to 100% reserve or backup Natural Gas peaking power generation capacity to maintain power grids’ supply-demand balances and reliabilities.  The primary factor being the relatively poor capacity factors of Wind/Solar (20-35%) vs. Coal or Natural Gas (80-90%).

Besides the substantial increased capital costs of new Wind/Solar power generation, at some point the availability of existing excess Natural Gas backup or peaking power capacity will further and substantially increase the costs of variable-renewable power needed to displace most of existing Coal Power in the future.  I.e. capital costs will effectively double as needed-new fully dispatchable, backup/peaking power capacity must also be installed in parallel to new future Wind/Solar power capacity.  For further details refer to a past TEC post on this subject.   

Joe Deely's picture
Joe Deely on March 30, 2014

Agree that coal will play an important role for at least the medium-term. However, wanted to throw out some other points.

– Capacity factor for coal was 59.7% in 2013 and 56.7% in 2012. With plants closing this will improve but don’t expect to see anything close to 80-90%.

– Coal generation peaked in 2007 at about 2,000,000 GWh and even with the added 72,000 you mention in 2013 coal generation is down below 1,600,000 GWh. With extremely cold first few months of this year I would expect coal-based generation to be up again slightly in 2014. However, after that it will drop over the next six years. By 2020, it will be in 1,200,000 – 1,400,000 range – a 30-40% drop from its peak.  

– Solar and wind displacement of coal will grow to at least 50,000 GWh per year from the 32K you mentioned.

– if we could get some nuclear online in 20’s – then coal could be displaced by 100,000 GWh per year with little or no gas added. (50K from wind and solar and 50K from nuclear)

– assumptions above are based on flat electricity usage – which a lot of people would disagree with.

John Miller's picture
John Miller on March 30, 2014

Joe, a couple points of clarification and further details to your comments:

­   Maximum coal capacity factors can be up to 85% based on state-of-art facilities.  The reason why actual capacity factors are in the 55-60% range is due to scheduling/planned dispatching; not generally due to mechanical design limitations (in most cases).  Natural gas of course can be slightly higher, but actual capacity factors are lower due to scheduling and ‘peaking/intermediate’ power generation operations required to continuously balance power grid supply-demand.

­   Yes, coal power net generation peaked in 2007 and declined to 2012.  Somewhat surprising, coal net generation increased in 2013, while natural gas net generation actually peaked in 2012 and then decreased in 2013.  Fuels switching from NG-to-Coal?

­   Solar and Wind generally cannot directly displace baseload, fully dispatchable coal power.  These variable, non-dispatchable renewable power sources generally can only displace natural gas and/or petroleum peaking/intermediate power generation.  Petroleum power, by the way, bottomed in 2012 and also increased in 2013.  Why?  Economics?  Fuel/power capacity availability?  Your guess is as good as mine at this time.

 

­   Agreed, nuclear is the most ideal replacement for coal power.  This source of power will be absolutely critical to substantially reducing coal power in the future since it can directly displace coal baseload generation capacity. 

Joe Deely's picture
Joe Deely on March 31, 2014

John some follow-up to your follow-up…

You said –  “Solar and Wind generally cannot directly displace baseload, fully dispatchable coal power.  These variable, non-dispatchable renewable power sources generally can only displace natural gas and/or petroleum peaking/intermediate power generation.”

Really?? Interesting. So when looking at the actual data  – http://www.eia.gov/electricity/data/browser/ – for Oklahoma you can see that coal production went from 48% in 2008 to 41% in 2013. Meanwhie wind went from 3% to 15%. Are you saying that the wind did not displace any coal?  You could also look at Minnesota, Kansas, Iowa , etc… Coal is being displaced in all these states.

You might also want to read the recent PJM Renewable Integration study… 

http://pjm.com/~/media/committees-groups/task-forces/irtf/postings/pris-executive-summary.ashx  

“Table 6 shows how several economic and energy parameters are affected by increased renewables in the study scenarios. Changes are measured relative to the 2% BAU scenario. In the 14% RPS scenario, 47% of the additional renewable energy displaces gas-fired resources and 31% displaces coal. In several of the 20% and 30% scenarios, proportionately more coal energy is displaced. “

Look at the coal displacement numbers in Table 6 – pretty substantial.

Finally, wondering what you mean by baseload… Below are some graphs from the CAISO control area of California yesterday. http://content.caiso.com/green/renewrpt/DailyRenewablesWatch.pdf

Looking at the Hourly Average Graph what would you say is the baseload?  If you want to see the actual generation numbers broken out by fuel type you can look here. http://content.caiso.com/green/renewrpt/20140330_DailyRenewablesWatch.txt






John Miller's picture
John Miller on March 31, 2014

Joe, ‘baseload’ power capacity is the minimum constant capacity put on-line to meet normal (statistical/average) demand for a given power grid and period of time.  Since coal and nuclear are not normally designed to be ramped up/down (peaking/intermediate power operation such as NG CCGT designs) to meet variable demand and variable supply from wind/solar, some minimum level or amount of reserve/backup peaking/intermediate power generation capacity must be available on-line.  To provide the required backup peaking/intermediate power is normally supplied by NG and/or petroleum.  Most states give wind/solar power grid ‘supply priority’ over fossil fuels.  In other words, wind/solar generation capacities are normally not trimmed when supply exceeds demand, instead peaking/intermediate power plants are trimmed first.  This is how the capacity factors of variable wind/solar power sources are maximized, but at the expense of having adequate reserve peaking/intermediate power on-line to reliably manage power grid supply-demand balances above the minimum or constant baseload power requirements.

Yes in some areas of the country where wind is more predictable and reliable for a given day the amount of baseload coal can be trimmed, provided adequate backup power reserves are available to displaced lost wind/solar power if the wind unpredictably stops blowing or blows too high and clouds shield the sun.

Unfortunately, most of the published data is based on average operations and generally don’t cover the short-term critical power grid operating variables such as reserve power requirements/use, wind/solar generation short-term variances, etc.  Until large power storage or variable demand becomes much more dominate, variable wind/solar significantly above 20% penetration levels will very likely require up to 100% reserve/backup power (on average).  There of course will always be short-term, regional, and seasonal exceptions.

Bas Gresnigt's picture
Bas Gresnigt on April 4, 2014

Since coal and nuclear are not normally designed to be ramped up/down … to meet variable demand and variable supply from wind/solar, some minimum level or amount of reserve/backup peaking/intermediate power generation capacity must be available on-line.

That is a reason the major German utilities recently build so much new coal plants, closing the old plants. Those new plants use the circular fluidized bed process which gives them almost the same flexibility (fast up and deep down) as gas plants.

That process allows to burn mixtures of waste, bio-mass, lignite and coal. That gives these new plants some future in an environment in which 80% of all electricity is generated by renewable.

In addition, the new plants situated in the lignite mines have cost prices which are hard to beat (~3cent/KWh). Here in NL we even have new plants at sea harbors burning cheap coal imported from USA, that are now halted as they cannot compete.