COVID-19. Negative oil pricing. Wildfires. Grid instability. Rolling Blackouts. Global energy market shocks. These are just a few of the disruptive forces facing owners and operators of traditional power generation assets. For asset owners on the edge of the dispatch curve, rapidly changing regulatory requirements and consumer preferences further cloud capital planning programs as 2020 kicked off a market in transition.
Consistently low power prices driven by COVID-19 demand reductions and other macroeconomic forces placed significant pressure on owners of coal and aging natural gas assets, driving investments in transmission and distribution (Figure 33). Renewable energy, distributed energy resources (DER) and moon-shot technologies aimed at decarbonization garnered not just headlines but capital while the decline in generation likely reflects technologies on different stages of a similar curve.
Nearly 10 years ago, the Black & Veatch Energy Market Perspective predicted the ensuing decade would see the retirement of roughly 65 gigawatts (GWs) of baseload coal capacity across the United States. In fact, the decade would see more than 75 GW of coal plants removed from the bulk electric system, mostly in the form of older, smaller plants often in the PJM and New England markets. Air quality control (AQC) regulations played some part in spurring the flight from coal as costly AQC investments were weighed for return on investment (ROI), while the incentives for and embrace of renewables would shift market generation capacity. Ultimately, however, sustained low gas prices would accelerate coal plant closures due to economics and spur the boom in highly efficient gas-fired generation.
For those coal plants that continue to operate, the future is increasingly challenging with current market conditions. The desires to boost production of green energy and source it are tangible market forces, but the reality is that sustained low prices for gas at $2 to $3 (US), a price range once unheard of, is both crushing coal operators chances of dispatch, and appears to be the effective trading range for the foreseeable future. Nearly three-quarters of respondents anticipate less investment in coal asset improvement capital than in the prior five years. In a world where dispatch is king, the trend is bleak for slow-reacting base load resources.
Depressed power prices are making all of the above even worse, especially in markets that don’t have capacity prices. If a plant isn’t dispatching “in the money,” there’s often no point in firing up the unit at all. Even in PJM, the nation’s largest ISO which features a capacity price, the amount of dispatch opportunities is limited for coal.
So what is an operator to do with a functioning coal plant? There are some newer units that have firm long-term contracts, but those increasingly are exceptions to the rule. Many are exploring the low hanging fruit that can help improve the odds of dispatch and demonstrate some ROI. Start-up costs are a big factor in where coal assets sit on the dispatch queue. Can investments in a natural gas start up system versus an older, more costly (at startup) oil system pay back?
Other operators are starting to make choices about accelerating start-ups to capitalize on demand spikes. This comes with a cost as coal plants were never intended to cycle, but as the 50- to 60-year life span of many coal plants built in the 1960s and 1970s now seem highly unlikely with younger units, the risk is being deemed acceptable.
The challenging market landscape is creating a rethinking of where the value play is with coal assets. Unless an operator has committed funding to upgrade a facility, they still may be holding onto an asset that gets harder and harder to extract value from. Units that cannot make the money to cover coal assets’ fixed costs and cannot make money because of gas and renewables are unlikely to see the contrary investment play of certain coal assets in the mid-2010s.
In short, many remaining coal plants are becoming teardowns in real estate parlance. The value isn’t in the equipment anymore but in its location to critical grid assets. Repurposing is the emerging thesis with the purchased asset being less about potential to produce power and more about the location. New owners can still make money in a capacity market if they buy a dispatchable coal asset or repower it, but a lot of investors now are more interested in buying the asset to repurpose the site, leveraging the supporting infrastructure. These highly integrated brownfield sites are increasingly popular sites for data centers or other emerging assets that could benefit from proximity to bulk transmission assets.
As we examined the survey data, we noted that in the past 12 months the authors haven’t had a single U.S. inquiry for a resource plan seeking new coal assets. The data and our experience centers more on whether owners should retire more of it and faster.
Given the importance of reliability, complexity of adding baseload generation in many areas and continuing uncertainty around emerging power generation technologies, many experts expect that coal generation may be around for another 20 to 30 years. But it will be in select areas such as Montana, Wyoming and the northern U.S. areas, the latter where it would be increasingly seasonal, as gas pipeline constraints makes it more challenging to get resources to the demand center.
About the Authors
Jason Rowell is an associate vice president and global technology portfolio manager for Black & Veatch. He is responsible for developing projects and implementing industry leading solutions through technology innovation. Technology portfolio areas under Rowell’s direct leadership include carbon capture and utilization, hydrogen, supercritical CO2, waste-to-energy, biomass, and environmental and sustainability.
Mark Dittus is the plant modernization global technology manager for Black & Veatch’s conventional generation business line, responsible for overall engineering team leadership, guidance and performance within this service area. During his 27-year career at Black & Veatch, he has managed numerous plant upgrade projects encompassing air quality control systems, turbine modifications, steam generator modifications, control and electrical system upgrades, and balance-of-plant installations.
Chris Klausner is a senior managing director in Black & Veatch Management Consulting, providing technical advisory services and direction for clients for planning and transaction-related engagements. He is responsible for performing independent engineering assessments for project lenders, sponsors and various investors pursuing acquisitions of generation assets. In the past few years, Klausner has led engagements representing several thousand megawatts of generation capacity and several billion in valuation and financing for clients across the power, transmission, oil and gas, and water industries.
Thiam Giam is a senior managing director in Black & Veatch Management Consulting. With more than 20 years of experience, Giam has completed various due diligence engagements — technical, environmental and market analysis — related to development, transaction and refinancing involving various energy and water projects and companies globally. He has advised international companies on various merger and acquisition (M&A) and financing activities, and he has more than eight years of experience in the design, development, engineering, procurement, construction, testing and commissioning phases of transmission and distribution projects.