Utilities Are Embracing The Coal Closure Trend: Smart Policy Provides Economic Solutions
- May 26, 2017
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A flurry of federal policies designed to loosen environmental regulations of coal-fired generation and roll back emissions reduction targets aren’t having their intended effect: Utilities across the United States continue to announce coal plant closures and reaffirm previous plans to remove coal from their generation fleets.
So what’s behind this seemingly ironic trend? And if this is the new normal, how can U.S. utilities profitably transition themselves and affected coal communities to a 21st century mix of cleaner, more affordable generation?
The Coal Closure Wave Is Widespread And Keeps Swelling
More than 250 coal plants have retired since 2010, and while this trend had primarily affected older and smaller coal generation, recent plant retirement announcements are trending younger and larger than ever before, evidencing a widening economic effect. In fact, the U.S. Energy Information Administration’s Annual Energy Outlook 2017 reports nearly 90 gigawatts (GW) of coal capacity could be retired between 2017 and 2030 under business as usual.
Utilities big and small are announcing a shift away from coal toward natural gas and renewables. Consider three recent examples:
- In March the utility owners of Arizona’s Navajo Generating Station, one of America’s largest coal plants, unexpectedly announcedthey would close the 2,250-megawatt plant when their lease expires at the end of 2019. The utilities cited low natural gas prices rendering it uneconomic to run.
- In April America’s largest utility Duke Energy outlined a 2030 goal to reduce coal’s supply of its generation mix by a third, while increasing natural gas nearly 30 percent and roughly doubling renewables. Duke CEO Lynn Good recently remarked, “our strategy will continue to be to drive carbon out of our business,” despite “talk of reviving the coal industry.”
- Also in April Appalachian Power CEO Chris Beam—the head of West Virginia’s largest utility—told the state’s governor, “we’re not going to build any more coal plants, that’s not going to happen.” Beam cited corporate customer demand for renewables and cheap natural gas for the shift.
Utilities Keep Closing Coal For Economic Reasons, Led By Gas, Efficiency And Renewables
The central thread in these utility decisions is that coal is increasingly priced out of power markets by natural gas and renewables, or made obsolete by shrinking demand.New research by Columbia University’s Center on Global Energy Policy attributed 49 percent of coal’s collapse over the past six years to increased competition from cheap natural gas, 26 percent to lower-than expected electricity demand and 18 percent to expanded renewable energy.
Declining electricity demand—which has steadily decreased since it peaked in 2007—may have been coal’s Achilles Heel, since it put further economic pressure on already uncompetitive coal as natural gas increased market share. Without this new demand, coal-fired generators saw reduced revenue as natural gas combined cycle plants become the relatively less expensive option in much of the country.
Data suggests past is prologue for coal, except now wind and increasingly solar may play the role as coal-replacers-in-chief. Analysis by Moody’s Investor Services finds 56 GW of Midwest coal-fired generation is at risk of early closure due to falling wind energy costs. Related modeling of U.S. government data by the Energy Policy Simulator finds that even without the Clean Power Plan, U.S. coal capacity will decline from 266 GW today to 228 GW in 2050, and lower-than-forecast natural gas prices would cause an additional 26GW of coal retirements by 2050.
Survey Says… Utility Execs See The Writing On The Wall
Utility decision-makers understand the trend of declining coal economics, according to Utility Dive’s 2017 State of the Electric Utility Survey, which found utilities are most confident in the growth of utility-scale solar and wind, distributed energy resources, and natural gas generation.
While 49 percent of more than 600 respondents have a “more positive outlook” for the future of coal after President Trump’s election, few expect to deploy more coal capacity at their own utility: 52 percent expect coal to “decrease significantly” in their utility’s generation mix over the next 10 years, and 27 percent say it will “decrease moderately.”
This sentiment isn’t limited to organized markets or blue states—no region of the country had more than 10 percent of respondents say they expect goal growth in the fuel mix.
What’s A Utility Exec To Do When Coal Closures Happen?
This is an epochal change for America’s utilities, and while the future of coal in their generation mixes seem clear, the choice of what happens next when power plants are pushed into retirement is opaque. So what should utilities do when facing the decision to retire coal generation?
The first answer is to not blindside regulators or the communities who depend on coal generation. Navajo Generating Station’s sudden retirement decision, giving only two year’s notice before closure, may save ratepayers and the utilities money, but it threatens tens of millions in unexpected economic damage upon the already disadvantaged Navajo and Hopi communities, whose livelihoods depend on the plant’s operation.
Utilities faced with closures should consider a long-term shift, working with regulators and communities. New Mexico Utility PNM Resources’ latest Integrated Resource Plan (IRP) proposes gradually phasing out coal-fired generation in New Mexico between now and 2031, making new investments in renewables and energy storage, and working to transition affected communities.
This post-coal transition cannot be overlooked. Fortunately, applying existing financial tools like ratepayer bond refinancing to the coal transition challenge can benefit utilities, ratepayers, and coal communities. Duke Energy used ratepayer bonds in 2015 to save $700 million when refinancing a shuttered Florida nuclear facility, and Colorado’s state legislature just considered a bill that would have allowed utilities to refinance stranded coal assets and dedicate funds to economic transition of the local community. Bill sponsors estimated every $100 million in coal plant refinancing would save ratepayers $44 million and generate $8.5 million to retrain workers and replace lost property taxes in affected communities.
Utilities Can Make The Coal Closure Trend Work For Them, Not Against Them
The second answer for utilities wondering how to operate in a post-coal landscape is embracing new regulatory models that can make coal closures work for them. For instance, the 2017 State of the Electric Utility Survey showed a majority of utility executives prefer some measure of performance-based regulation over preserving traditional cost-of service utility regulation.
Under performance-based regulation, rather than rewarding utilities for providing cheap, steady electrons (a role coal was well suited to play in the past), utilities are instead called upon to provide improved services to their electric customers and meet new goals for the power sector – clean, reliable and affordable energy. This approach is unfolding in states like Minnesota and New York, and can help utilities in these states and beyond remain profitable while delivering value for customers.
In addition to regulation, more options exist than ever before to help utilities manage coal retirements with a combination of cheap renewable generation and demand-side resources. As storage continues its rapid cost decline, it could replace gas-fired “peaker” units as the default option for managing variability on the grid.
America’s utilities of the future don’t need more coal to balance the grid—they can shift away from the traditional rigid baseload foundation toward a more nimble system with clean energy as its backbone. By doing so, they can embrace market trends and reduce costs and emissions, while improving reliability and safety.
By Hallie Kennan
Photo Credit: Alexander G via Flickr