Coal Power's Competitive Edge? Politics.
In April, U.S. Department of Energy Secretary Perry ordered his staff to produce a report on the degradation of baseload power, stating his expected conclusion: that “the diminishing diversity” of U.S. generation “resulted in part from regulatory burdens introduced by previous administrations that were designed to decrease coal-fired power generation.”
On July 14th, Bloomberg reported on a leaked draft of the report prepared by DOE staff. Industry experts agree: the report almost certainly tells a different story than Perry expected and will likely be heavily modified to reflect the current administration’s views.
Let’s take a closer look at a few of the draft report’s conclusions and consider them through the lens of recent history.
“Many of the coal retirements in 2015 were prompted by decisions about whether the costs of investing in a plant to comply with MATS regulations would ever be recovered given market prospects for continuing low demand and low prices, or close the plant to avoid that investment…. Environmental regulatory requirements may have been the straw that broke a baseload’s camel’s back – particularly for coal plants – but it appears that most baseload plants were already burdened by the effects of low natural gas prices, eroding customer demand, and lower capacity factors before the incremental burden of new regulations tipped the balance over to retirement.”
DOE staff is correct here, although the story is more complicated—and interesting. The first wave of eastern U.S. retirements were announced shortly after the Mercury and Air Toxics Standards (MATS) rule was finalized in late 2011. Around that time, we saw the first regulatory battles form in Appalachia, where plants burning local high sulfur coal were contemplating large capital investments to reach compliance by 2015. Western U.S. retirement announcements came shortly after as utilities started to contemplate Regional Haze Rule findings and started to realize that retrofit decisions weren’t so straightforward. What may have been simple choices before 2011 to retrofit a coal plant had suddenly turned a lot harder as the floor fell out of the natural gas market. The retrofit option started looking much less attractive.
As we reached the record low gas prices of 2012, other utilities had to ask questions they had never contemplated before: Were they holding coal assets that were now a lot more expensive than their value? And if so, what were they going to do about it?
In deregulated markets, the answer was obvious. If merchant power plant operators couldn’t make margins on the electric market and didn’t foresee an uplift in the reasonable future, they needed to leave the market—and they did. These operators, having reaped the rich benefits of high gas and market prices through the early 2000s, now had to take their lumps and write off losses.
Investor-owned vertically integrated utilities faced a different choice, one bounded by regulatory risk and politics. Under the “used and useful” construct, utility regulators have the option of taking a retired plant out of rates, even if the utility still carries substantial capital debt on that plant. The regulatory risk was (and remains) the risk that the public utility commissioners would take a retiring plant out of rates and pass any remaining debt back to utility shareholders. How to get that money back if the plant retires? IOUs with non-economic coal plants faced a political decision: admit they had non-economic plants and hope for a sympathetic hearing…or create an alternative narrative.
And this is where the story gets interesting. In some states, utilities didn’t dodge the truth—they conceded that their coal fleets were in trouble, and in many cases received favorable treatment. In other states, utilities floated test balloons—offering up one or two units to test the regulatory waters—and their narratives reflected the results of those experiments. In yet other states, utilities simply opted out of the question, pushing through retrofits and life extension projects without a serious review.
In some early cases, environmental regulatory requirements were in fact the straw that broke the camel’s back: a coal plant struggling to make margins simply couldn’t support $300 million in capital and hope to stay competitive. But moving into 2014 and 2015 the story shifted yet again. Industry experts realized that low wholesale electricity market prices weren’t going away any time soon and that coal plants were now facing the prospect of never breaking even, even without additional environmental compliance obligations. By the time we hit 2016 and 2017, plants were becoming non-economic even in the absence of that proverbial straw. Environmental regulatory requirements triggered the necessary conversations about coal-plant economics, only to become a bogyman, railed against even as coal fundamentals collapsed.
Secretary Perry’s memo calling for an investigation into the cause of the erosion of baseload power suggests that the closure of coal-fired power has been a surprise to the industry. But has it really? Our examination of utility resource plans back as far as 2010 suggests that utilities knew something was coming down the pike. By 2011, public utility industry research suggested that a large fraction of the coal fleet was at risk due to impending regulations and falling gas prices. By 2011 and 2012, utilities recognized (although generally still rejected) that if market prices stayed low, their coal fleets would be on the rocks. In case after case, Synapse saw utilities argue that while prices were low in 2012 and 2013, they would assuredly recover by 2019 or 2020. Maybe 2021. They claimed that ratepayers would benefit in the future when gas supplies tightened, capacity prices rose, renewable energy prices stabilized, demand increased, or coal prices fell again.
Those hopeful predictions, having failed to pan out, have left those aspirations high and dry.
When DOE staff says that “each retirement decision is unique to a particular situation,” they’re right—but for the wrong reason. What makes these decisions unique and particular is how they’re influenced by regulatory risk and politics.