Is Coal-fired Generation Ready to Face Retirements?

By Lindsay Morris, Associate Editor

At 316 GW, the U.S. coal fleet accounts for approximately one-third of all capacity and generates about half of all electrical output. A large portion of the current coal fleet lacks major environmental controls that will be required for most coal-fired plants once emerging U.S. Environmental Protection Agency (EPA) regulations on air quality, water use and ash disposal take effect. According to the Brattle Group, an economic research firm, approximately 52 percent (165 GW) of the coal-fired fleet has no scrubbers. Approximately 57 percent (180 GW) is lacking selective catalytic reduction (SCR) and about 96 percent (300 GW) is without activated carbon injection (ACI) and baghouse controls.

This leaves a looming question for the power industry to address: How much of the current fleet will need to retire? Many of the existing units are considered old and retrofitting would not prove economical, while others are young merchant plants that would not produce enough return on investment if retrofitted.

Recent studies by ICF International, the North American Electric Reliability Corp. (NERC) and Credit Suisse estimate anywhere from 10 to 75 GW of coal capacity are at risk for retirement by 2020. The implementation of EPA regulations is expected to be the major driver for these retirements, but anticipated low electricity and natural gas prices may create added pressure.

Retirements, retrofits, the increased use of natural gas – all of these are expected to cause a metamorphosis of sorts in the power industry. As a result of these changes, NERC predicts that coal-fired generation will drop to less than one-third of total generation by 2030, down from 47 percent in 2010.

Types of plants expected to retire

Regions of the country where much of the coal-fired generation operates in older facilities are more susceptible to plant retirements. In addition, areas of the nation with a higher number of merchant plants—many which could be considered young—are more likely to see a higher number of retirements. About one-third of the units facing retirement are considered young (40 years or younger), says the Brattle Group. Additionally, about one-third of the units expected to retire are large: 500 MW or larger.

According to the Brattle Group, market areas with the highest number of retirements will be MISO, ERCOT and PJM.

“Retirements represent large portions of existing total regional capacity: 15 percent in ERCOT, 11 to 14 percent in Midwest ISO and 6 to 11 percent in PJM,” the Brattle Group reported in a presentation authored by Metin Celebi, Frank Graves, Gunjan Bathla and Lucas Bressan. The Brattle Group also predicts that all merchant coal plants in ERCOT would retire if scrubbers, SCR and cooling towers are mandated. Credit Suisse found that MISO, SERC, PJM-West and SPP are the markets facing the greatest impact.

John Moura, technical analyst for NERC, said the Northwest will see “virtually no issues because they have cleaner, more efficient coal and more hydro.” He said regions like RFC will see a greater impact.

Merchant units are expected to face more retirements than regulated units. Up to 75 percent of the entire merchant capacity could be affected, the Brattle Group found.

Celebi, senior associate with the Brattle Group, said merchant plants will be affected due to their dependence on energy and capacity revenues. “The only way they can recover is from market revenues, which are expected to stay low for a while.”

Steve Fine, author of the study “Clean Air, Ash and Water Regulations: Potential Impact of EPA Proposed Rules” and vice president of ICF International, said that merchants in general face tougher decisions. The companies that invest in merchant plants must decide prior to investments if a particular plant can pay back an investment. Because the cost of retrofitting could set back the investments of many merchant plants, many operators will make the decision to retire their plants.

“Merchants are second-guessed all the time by the reality of the market. They have a higher hurdle rate because of the additional risk,” Fine said.

Economic retirements are expected to occur mostly on merchant units, but more than half of coal capacity (approximately 235 GW) could experience small (about 10 percent of costs) or negative energy margins under an EPA mandate to install scrubbers and SCR, the Brattle Group found.

Retrofitting: Another concern

Retirements are not the only concern haunting the industry. The cost of retrofitting will take its toll, said Moura of NERC, who is also an author of the study, “The 2010 Special Reliability Scenario Assessment: Resource Adequacy Impacts of Potential U.S. Environmental Regulation.” The biggest concern for the power industry is not the amount of capacity (NERC predicts approximately 300 GW) to be retired, Moura said, but rather the “700 to 800 units within just 200 GW of generation that need to be retrofit.”

He said the retrofits that need to take place within a short period of time is “not impossible, but it is extremely difficult not only in terms of financing, but in the coordination of outages.”

In order to install a scrubber on a unit, the unit must go offline for a period of time. “That kind of coordination in a condensed period of time can really create some issues both in the adequacy and in the operating reliability,” Moura said.

The study by NERC further exposes this potential problem: “Potential constraints of skilled construction labor, material shortages, financing, and escalation of compliance costs coupled with coordination of overlapping outages resulting in congestion expenses could present challenges in meeting the compressed time schedule.”

For plants that choose to retrofit instead of retire, $70 to $130 billion will be invested on scrubbers and SCR, with an additional $30 to $50 billion compliance investment if cooling towers are necessary, according to the Brattle Group.

The Brattle Group found RFC and SERC to be the regions with the largest number of units lacking one or more of the following: scrubbers, SCR or activated carbon injection (ACI). In addition, about 50 GW of existing small (under 500 MW) and old (40 years or older) coal units have no environmental controls. Most of these units are in RFC and SERC regions.

Rule implications

Decisions to retire or retrofit depend largely on rulemakings EPA has yet to make, as well as the timeline by which plants are expected to obtain compliance. The Brattle Group found that if all coal units are required to install scrubbers and SCR by 2015, 39 GW of coal capacity would find it economic to retire by 2015. However, under base case assumptions (no equipment mandates), around 6 GW would retire.

The NERC report provides a look at how each regulation may affect coal-fired generation. According to the report, the Clean Water Act’s Section 316(b) Cooling Water Intake Structures Rule has the greatest potential impact on planning reserve margins. Estimates predict the majority of retirements resulting from this rule’s implementation will occur by 2015 and that more units will be retired rather than retrofitted.

Implementation of this rule will apply to 252 GW, or 1,201 units, of coal, oil steam and gas steam, as well as 60 GW of nuclear capacity. Of this capacity, 33 to 36 GW may be vulnerable to retirement if the proposed EPA rule requires power suppliers to convert to recirculating cooling water systems, according to the NERC report.

The MACT Rule, or Title I of the Clean Air Act—National Emission Standards for Hazardous Air Pollutions (NESHAP) for the electric power industry—could trigger between 2 to 15 GW of existing coal capacity retirements by 2015. In order to meet compliance, owners of the remaining capacity would need to retrofit anywhere from 277 to 753 units with added environmental controls.

The Clean Air Transport Rule (CATR) could have a great impact on the industry as soon as 2015 if EPA requires emission limits with no offset trading. This is expected to be the earliest rule to hit the industry, as it is slated to take effect by 2013. This ruling could result in 3 to 7 GW of potential retirements and derated capacity, also requiring the retrofitting of 28 to 576 plants with environmental controls by 2015. NERC predicts that the effects of CATR will be felt mainly by RFC and the SERC-Gateway.

The coal combustion residuals (CCR) disposal regulations are expected to have the least impact on coal-fired generation, triggering the retirement of up to 12 coal units (388 MW).

The greatest impact will be felt by units and regions that need to retrofit in order to comply with not just one, but several rules. While the CCR regulations affect only select units, the need to retrofit a plant for another rule(s) impacting that unit may influence an operator to instead choose to retire the unit. Since all of the rules are scheduled to be implemented within a five-year period (2013 to 2017, according to Credit Suisse), operators will be required to schedule retrofits and retirements with increased diligence.

Reshaping fuel demand

What kind of impact will 10 to 75 GW of coal-fired generation retirements have on coal and natural gas demand? Do these retirements have the potential to reshape fuel demand?

According to the Brattle Group, coal demand is expected to fall by about 15 percent relative to base case in 2020. That translates to a loss of 157 to 324 million tons of coal demand per year, according to Credit Suisse.

With coal generation and natural gas prices both expected to fall, U.S. gas demand is projected to increase by about 10 percent of total demand, or 5.8 Bcfd (billion cubic feet per day) with regional variation, Brattle Group said. For example, RFC-MISO gas demand would increase about 0.7 Bcfd, compared to 0.1 Bcfd in FRCC.

Current low natural gas prices have been driven by the state of the economy as well as shale gas developments on the supply side. However, coal plant retirements could actually contribute to low natural gas prices in the next few years, said Fine of ICF International. “Natural gas demand will grow considerably as a result of the coal retirements and also cause a good number of retirements.”

According to NERC’s report, retirements could increase gas generation by up to 5.8 Bcf/d in 2020, assuming that all of the decrease in coal generation is replaced with 8000 btu/kWh gas generation. According to the report, “Growth from Subtraction: Impact of EPA Rules on Power Markets,” Credit Suisse estimates that with natural gas generation as a replacement option for retiring coal-fired generation, demand from a 22 TCF (trillion cubic feet) base could grow 1.8 to 3.7 TCF (8 to 16 percent) with an incremental 1.2 to 2.5 TCF (5 to 10 percent).

Shifts in fuel demand would have significant effects on CO2 emissions, which are expected to decrease by 150 million tons by 2020 (about 10 percent of coal CO2 emissions) if the lost coal generation is replaced by gas generation at the 8,000 Btu heat rate, Brattle Group said.

Though retirements and retrofits will bring about the intended environmental benefits, several industry risks could also ensue, one being the potential lack of grid and reserves reliability. Coupling this risk with a likely decrease in coal demand and a likely increase in gas demand, an ultimate increase in electricity prices could occur.

However, some sectors of the power market could experience positive repercussions as a result of coal retirements.

“Under the gas prices, the absence of a very high CO2 price and the regulations that seem to be coming for coal plants, it could have a good outlook for nuclear,” said Celebi of the Brattle Group.

ICF International estimates that coal retirements will also affect nuclear acceleration, as well as the growth of renewable generation. “Gas-fired generation is expected to grow from a 20 percent share in 2010 to account for 37 percent of total generation by 2030,” according to the aforementioned study. Nuclear and renewable generation will each account for 17 percent of total generation in 2030, the study predicts.

Growth opportunities

In general, coal-fired retirements will push power prices up. However, this could have a beneficial outcome for the power plants that remain, Celebi said. “If you retire 10 to 15 GW of coal in a region, it will likely result in market revenue for the remaining plants.”

Credit Suisse predicts that the power market will experience a four to five year acceleration to market recovery. “We see EPA policy accelerating the tightening of market conditions and rebound in generation earnings by four to five years, making the recovery more ‘investible.’”

For competitive power generators, Credit Suisse expects the EPA rules to help fix one of the three “legs” of the power investment thesis—power market supply— and eventually helping to fix another leg —commodity prices—by shifting the mix of power supply toward more natural gas fired generation that will increase demand for natural gas while lowering demand for domestic steam coal.

“For regulated utilities, we see the EPA rules creating an earnings growth opportunity as companies attend to their higher emitting plants through a combination of newbuild construction (likely natural gas) and environmental capex to retrofit existing coal plants.” Credit Suisse expects the annual growth rate to increase by 1 to 4 percent to comply with the rules, depending on the utility.

EPA regulations will cause a number of operators to choose retirement for their coal-fired units, but these regulations are not expected to be the “beginning of the end” for coal generation in the U.S. Operators are encouraged to closely monitor the EPA regulation process as well as continued generator participation and early retirement announcements. Susan Tierney, former Massachusetts state regulator and Department of Energy official, is on a mission to encourage speedy compliance with EPA regulations and says that delay will only create more problems for the industry.

“The friends of delay could create the very problem they are saying they don’t want to have happen by getting everyone on the delay bandwagon.”

Tierney said that in the long run, retirements will be beneficial to the power industry.

“Statutory, market and regulatory safeguards will facilitate the retirement of inefficient units, and an orderly transition to cleaner, more efficient generation.”

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