Don’t expect the Investment Recovery Association’s electric utility members to have a lot of free time in the immediate future. They’re going to be busy. REALLY busy! Depending on the source, somewhere between 32 and 200 coal-based generating plants are scheduled to shut down in the next three to fi ve years. A large number of coal units are retiring or are expected to retire because of new rules from the U.S. Environmental Protection Agency (EPA), and other factors including age of the units.
How many power plants will close? According to a December 2011 survey by the Associated Press, more than 32 mostly coal-fi red power plants in a dozen states would be forced to shut down, and an additional 36 might have to close because of new federal air pollution regulations. But according to a more recent analysis released in September 2012 by the American Coalition for Clean Coal Electricity, as many as 200-plus plants will be shuttered. The closures are spread across 25 states, but Ohio, Pennsylvania, West Virginia, Virginia and North Carolina are expected to see the most closures, with a total of 103 coal units scheduled to shut down, according to the analysis. The GAO report indicates that as many as 12 percent of coal-fi red power plants may be closed because the EPA regulations make it too expensive for power companies to operate them, despite coal being one of the world’s cheapest fuels. EPA uncertainty The plants reported in these surveys are some of the oldest in the country and are not likely to be able to be retrofi tted to meet the stringent guidelines of pending EPA regulations. However, some of these regulations have yet to be fi nalized by the EPA. In fact, one of the regulations— the Cross-State Air Pollution Rule—was struck down by a federal court after the GAO issued its fi ndings in July 2012. (In a 2-1 decision, a panel of the U.S. Court of Appeals for the District of Columbia Circuit said the EPA’s Cross-State Air Pollution Rule—which sought to reduce downwind pollution from power plants—exceeded the agency’s statutory authority. The court faulted the EPA for imposing “massive emissions reduction requirements” on upwind states without regard to limits imposed by law.) “It is uncertain how power companies may respond to four key Environmental Protection Agency (EPA) regulations, but available information suggests companies may retrofit most coal-fueled generating units with controls to reduce pollution, and that 2 to 12 percent of coal-fueled capacity may be retired,” GAO said. Electric rates to increase These changes—either installing expensive retrofits or closing power plants—will drive up electricity prices by as much as 13.5 percent in some areas of the country. “Available information suggests these actions would likely increase electricity prices in some regions,” GAO said. “Regarding prices, the studies GAO reviewed estimated that increases could vary across the country, with one study projecting a range of increases from 0.1 percent in the Northwest to an increase of 13.5 percent in parts of the South more dependent on electricity generated from coal.” Coal is the country’s single-largest source of electricity, accounting for 42 percent of power generation in 2011, GAO reported. It was noted that other economic trends can also contribute to the closing of coal-fired power plants, something that makes it difficult to fully account for the impact of the EPA’s new regulations. Many coal-powered generating plants are aging, making the decision to decommission a plant more likely. The next two decades will see substantial changes in the way electricity is generated in the United States. As coal loses favor to natural gas and other alternatives, utilities will retire a significant portion of their coal fleet and invest substantially in other energy resources around the country. Improved energyefficient design and alternative sources such as wind and solar represent significant near-term opportunities to make highly cost-effective investments in new energy resources that can more cleanly and efficiently meet the nation’s demand for electricity. Many coal plants are decades old, and in some areas of the country, coal can be more expensive than other fuels, such as natural gas, which is currently experiencing a production boom. The regulations at issue were all put in place by the current administration to deal with power plant emissions and industrial waste called coal ash, the by-product of burning coal. Four Regulations from the EPA • The Cross-State Air Pollution Rule (CSAPR), mentioned above, would have cut emissions of sulfur dioxide and nitrous oxide in 28 states by establishing a cap-and-trade system. • The second regulation is the Mercury and Air Toxics Standards (MATS), which seeks to regulate the emission of mercury and other gases and could force power plants to install expensive scrubbing technologies to remove the gases from power plant emissions. • The third regulation is the Coal Combustion Residuals (CCR) regulation, which controls how power plants dispose of coal ash, which can contain poisons such as arsenic, mercury and cadmium. This regulation, which has not been finalized, could empower EPA to treat coal ash as hazardous waste—allowing the government to set strict standards for how power plant operators must handle and dispose of it. Coal ash has its beneficial uses, however, as an ingredient in concrete and wall board. • The fourth regulation is known simply as a 316(b) regulation and deals with protecting aquatic life from industrial waste. Its name refers to Section 316(b) of the Clean Water Act, which requires the EPA to establish standards for water used to cool power plants. Federal courts struck down the government’s old 316(b) regulations, forcing EPA to write new ones. This regulation would set fish mortality rates for cooling-water intake pumps or require power plants to use pumps that bring water in slower in order to allow fish to swim away from the intake pipes. GAO said those four regulations would increase the cost of maintaining coal-fired power plants, leading to some plants closing, electricity prices rising, and power companies facing problems providing reliable electricity to consumers. “These potential changes, which include retrofitting many coal-fueled units and retiring more coal-fueled capacity than has been retired over the past 22 years, have implications for electricity prices and reliability,” GAO said.
Challenges for GENCOs For electric generating companies (GENCOs), these are critical times. Electric power production is dominated by an aging fleet of power plants. Evolving energy demand and energy feedstock patterns are altering the economics of power plant operations. Regulations are emerging rapidly that create both compliance obligations and compliance opportunities for GENCOs. Because of this unprecedented level of economic and regulatory change, the future of the industry will be won by those who address these issues in a strategic and decisive fashion. The U.S. electric generating market will soon belong to low-cost producers of clean energy. The 6,275 electric power plants in the U.S. average more than 40 years of service. These GENCOs continue to actively maintain older and economically marginal plants, and must therefore pay high operating and maintenance costs. This profile is not sustainable indefinitely. Meanwhile, the pace of change is robust. The price of gas, a cleaner fuel, has become competitive with coal. Domestic gas supplies, with the advent of the shale plays, are plentiful. The EPA, along with several state regulatory entities, has proposed new regulations that will ultimately lead to the installation of expensive retrofits, the creation of offset credits, or closure of marginal plants. Most states have even established renewable objectives that establish targets that shift energy generation portfolios of regulated utilities toward technologies such as wind, solar and biofuels. Traditional GENCOs have the best opportunity to trim costs, reduce emissions and become profitable after many years of difficult market conditions by rationalizing capacity, adjusting portfolios of power generation and, ultimately, closing less efficient power plants. Why Decommission now? GENCOs are reluctant to decommission existing conventional power production because they do not want to give up generating sites, or because they can’t yet make sense out of the uncertain regulatory and economic environment. Replacing power generation portfolios is not a short-term activity. It takes years to seek permission to close plants, to decommission facilities, to address fuel shifting issues, and ultimately to permit and construct new capacity. Decommissioning antiquated power plants is an essential step in the new generation development process. It is often the one that requires the most time to plan. There are often complications that arise with closing permits, addressing environmental issues above the surface, below grade, and in ancillary facilities such as coal ponds. It is because of the lead times that characterize any decommissioning process, that element of work must be deemed to be on the critical path for any plant modernization upgrade. Any actions contemplated today may take years to fully implement. But clearly, the forecast for GENCO investment recovery managers is for a busy time in the months as years ahead. NEXT: Utility company IR managers talk about how plant closings will impact their workload –SOURCES: American Coalition for Clean Coal Electricity, American Council for an Energy-Efficient Economy, Bloomberg.com, Business Week, Chicago Tribune, CNSNews.com, Electric Light & Power Magazine, Energy Biz Magazine, Environmental Leader magazine and website, Institute for Energy Research, New York Times, U.S. Environmental Protection Agency, Wall Street Journal