Wood Mackenzie: Long-term Viability of Many US Coal Plants at Risk
HOUSTON, 17th September 2010 – The long-term economic viability of much of the coal-fired generation facilities across the U.S. is at risk, according to Wood Mackenzie’s latest analysis of potential premature coal plant retirements. The power industry is facing unprecedented challenges, as regulatory and policy forces in conjunction with lagging economic activity align, resulting in significant uncertainty over the future of much of the existing coal fleet.
“Representing about a third of the country's installed generating capacity and supplying half of our energy requirements, the coal-fired power plant fleet is facing mounting pressures that potentially threaten its very existence,” reported Hind Farag, North American Power Research Manager for Wood Mackenzie. “Depending on their magnitude and timing, these coal plant retirement decisions could have considerable implications on the long-term power generation supply mix in North America.”
Wood Mackenzie’s analysis notes that key drivers for the anticipated power plant retirements include: the aging coal-fired fleet and the increasingly stringent multi-pollutant, hazardous air pollutant (HAP) and coal ash handling rules currently under consideration by the Environmental Protection Agency (EPA). Also, perhaps less imminent, but certainly not the least impactful, is the now ever-present potential for climate change legislation. In addition other factors including rising capital costs, retarded economic activity and power demand, coupled with low to moderate natural gas prices are changing the economics for many aging, less efficient coal generators versus alternative sources such as renewables or natural gas generation.
“The future of the nation’s coal-fired generation fleet has recently garnered attention as several large utilities continue to disclose plans to retire some of their existing coal-fired units,” noted Farag. “These announcements highlight the end of a tumultuous decade for coal-fired generation and are a harbinger of even tougher times ahead. To put this into context, over the last decade, less than 30 gigawatts (GW) of power plants have been retired in North America, mostly representing old gas and oil-fired steam generators. Over the next 10 years retirements could double to 60 GW, mainly from coal plants.”
Compliance with the anticipated EPA rules for further regulating non-carbon emissions would require installing expensive emissions controls on generators not yet retrofitted; otherwise, these plants may incur extremely high SO2 and NOx emission allowance costs. This, Wood Mackenzie said, compounds existing challenges to the industry.
Wood Mackenzie has outlined the impact of all the proposed regulations likely to factor into coal retirements. Of the several EPA anticipate and proposed non-carbon regulations, those with the most significant anticipated impact on the coal-fired fleet are: the Clean Air Transport Rule; Mercury Maximum Achievable Control Technology (MACT) standard; Hazardous Air Pollutants (HAP) standards; and a new rule under the Clean Water Act (CWA)
- The Clean Air Transport Rule alone could have dire consequences for the existing coal-fired fleet in a relatively short timeframe, with the potential to ultimately force many generators into retirement.
- The potential EPA Mercury MACT standard would mandate a 90-percent reduction in mercury emissions – which may require capital cost equipment upgrades in the range of $100 per kilowatt to multiples of that amount. Thus, upgrading a 500 megawatt generator, under such a standard could cost $50 million or more.
- The HAP standards, also considered by the EPA, involve costs that are similar to those of the Mercury MACT.
- The EPA is also expected to release a new proposal under the CWA defining Best Technology Available (BTA) regarding cooling towers, the adoption of which would be uneconomic on older, less efficient plants.
“These non-carbon pollutant emission control costs not only diminish profitability prospects, but more importantly, put much of the coal-fired fleet at risk of becoming less competitive than natural gas-fired combined cycle plants. In fact, utilities are increasingly looking to switch to the more efficient combined-cycle natural gas-fired generation as they seek to comply with both the anticipated federal greenhouse gas legislation and the other pending emission reduction regulations,” Farag said.
“Power suppliers will need to decide how to address compliance with emission reduction policy – invest in emission control retrofits, repower with natural gas or alternative fuels or prematurely retire some of their coal-fired capacity,” Farag expanded.
Most of the recent retirement announcements have been accompanied by plans to replace retired capacity with natural gas-fired combined-cycle facilities or repower the facilities with natural gas. Consequently, the extent of the resultant uplift in natural gas demand from coal-plant retirements is surrounded by many uncertainties.
Farag offered “Our analysis suggests that incremental natural gas demand from power generation in North America could see a 20-percent increase in the long term as a result of implementing a moderate carbon policy and more stringent multi-pollutant EPA regulations, in addition to otherwise expected gas demand growth. By 2030, this translates to upwards of 5 billion cubic feet per day of additional gas demand, given the retirement of 60 GW of coal plants, under this moderate long-term scenario.”
As far as identifying which power plants are most at risk of being retired, Farag stated “The regional nature of power markets complicates the outlook. In regions where coal-fired generation dominates the resource mix, retirement decisions will have to be accompanied by plans for replacement with low-emission resources. Currently, most of the regional markets in North America have ample reserve margins and are expected to remain overbuilt in the short and medium terms, offering large amounts of new efficient natural gas-fired generation currently running at low utilization rates and readily providing some replacement potential.”
Wind resources, which have been the dominant choice for renewable energy growth, also pose a direct threat to coal-fired generation for several reasons including their very low production costs. Furthermore subsidies such as the Production Tax Credit (PTC) and other financial instruments like renewable energy credits (RECs) will allow wind generators to provide their output at low prices, thereby displacing some of the coal-fired generation.
The growing reliance on wind generation also further benefits natural gas. The intermittent nature of wind energy depends on back-up from flexible resources with the ability to cycle more frequently, a characteristic of gas-fired generators which increases competitive pressures on coal plants.
Farag continued “While the outlook for much of the existing fleet remains in doubt, several factors could limit the amount and schedule of coal-fired plant retirements, such as regional and local reliability concerns, the cost impacts to wholesale power markets and ratepayers, the location of some of the existing coal plants and their role in maintaining grid stability, as well as decommissioning and replacement costs.”
Although many questions still remain unanswered, Wood Mackenzie concludes that for now, coal remains squarely in the crosshairs.