What To Do With My Aging Coal Plant?

As I discussed in my last post, companies that own coal-fired power plants are facing tough decisions these days. Some don’t want to acknowledge the challenging economic conditions that coal plants are facing and would rather blame the EPA’s mercury rule for forcing them to retire coal plants. In that blog, I asked, “… if it’s the EPA’s fault, why would FirstEnergy retire its coal plants in 2012, instead of 2014, when these older plants would have to come into compliance?”

Well, thanks to new analysis by Sue Tierney (pdf), managing principal of the Analysis Group, we have some help answering that question. As Tierney points out, key economic factors such as lower natural gas prices, higher coal prices, reduced demand for electricity and increased competition from demand response and energy efficiency are coming together in a perfect storm that is making many of the nation’s old, inefficient coal plants particularly unattractive. Let’s take a look at each of these factors to understand what is pushing coal plants to the dust heap.

Natural gas has clearly become a game-changer for the power sector. Abundant supplies of shale gas have depressed natural gas prices dramatically and enabled natural gas power plants to compete very effectively against coal-fired electricity. While it is unlikely that natural gas prices will remain as low as they are today, most analysts expect gas to remain fairly low and be competitive with coal for the foreseeable future. In fact, a Barclay’s analyst just indicated that low natural gas prices, “could hasten more coal plant retirements than environmental rules alone”.

As for coal prices, all of the big U.S. coal producers – Peabody Energy, Arch Coal and Alpha Natural Resources – are telling their investors that they are exporting more coal, and see exports as a key driver of growth going forward. This may provide some short-term benefit to the coal industry, but exports are increasing the price of coal; making coal plants even less competitive against natural gas, renewables and demand-side resources.

Meanwhile, a slower economy has reduced electricity demand. In 2009, industrial demand was at its lowest point in a decade. Commercial and industrial demand has been gradually recovering, but is still not back to 2008 “pre-crash” levels.

Concurrent with a slowing economy has been the growing impact that demand-side resources, such as energy efficiency, demand response and distributed renewables, have had on reducing electricity demand. It has been fascinating to watch these resources effectively compete in the market against traditional fossil-fuel generation.

For example, in a recent PJM auction, these demand-side resources contributed 10% of all energy resources in the PJM market, the largest electricity market in the U.S. And the following graph from DOE’s Energy Information Administration illustrates the growing role that renewable energy will play going forward.

So, let’s answer my question: EPA’s Mercury and Air Toxics Rule may be a factor in Ohio-based FirstEnergy’s decision-making, but if the plants in question were economically viable, they would operate them until the last possible day they could in 2014. There are other bigger factors at play here and I’d encourage Congressional leaders to inquire about these major market factors the next time a utility comes complaining to them about the EPA rules.