Study: Market Factors, Not the EPA Drive Coal-Fired Power Plant
Closures
The State Journal
17 February 2012
By Taylor Kuykendall, Reporter
A study released Thursday points primarily to market factors, not
environmental regulation as the driving force behind coal plant
closures.
While environmental regulations have received the bulk of
attention when it comes time to close a coal-fired plant, closure
are generally known to be a result of multiple factors. A new
study conducted by Susan Tierney managing principal at the
Analysis group, an economic, financial and strategy consultant
group, finds market factors, not the Environmental Protection
Agency, have driven coal plant closures.
Tierney also served as assistant energy secretary during the
Clinton administration.
"Putting aside the political context of the current debate, a
closer examination of the facts reveals that the recent retirement
announcements are part of a longer-term trend that has been
affecting both existing coal plants and many proposals to build
new ones," Tierney wrote. "The sharp decline in natural gas
prices, the rising cost of coal and reduced demand for electricity
are all contributing factors in the decisions to retire some of
the country's oldest coal-fired generating units. These trends
started well before EPA issued its new air pollution rules."
While environmental regulations do place "financial pressures" on
coal operators, Tierney wrote, power market fundamentals,
particularly thin gas-to-coal price differentials and low
electricity demand are contributing "significantly" to retirement
of marginal plants. Those same factors, Tierney wrote, is likely
to put continued pressure on coal-generated electricity.
"For example, a plant with marginal economics due to fuel market
pressures might be tipped into retirement at the point when the
company faces a maintenance-cycle milestone that would require a
large investment just to keep the plant open for business,"
Tierney wrote in her conclusion. "Similarly, a company might be
facing more generalized work force consolidation or
labor-agreement issues that contribute to the timing of closures
of marginal plants."
Tierney compared the decision to retire a coal plant to that of a
family deciding to repair or replace and old vehicle and "often,
making the repair is more expensive and risky" than moving on to
another vehicle.
A major influence on coal plant profitability is the difference in
price of natural gas and coal. Plummeting natural gas prices have
continued to make natural gas a more attractive option for
electric generation while coal prices have continued to rise.
"In the past year, coal plants have been facing a perfect storm of
falling natural gas prices, a continued trend of high coal prices,
and weak demand for electricity," Tierney wrote.
A reduced demand for electricity has yet to recover to
pre-recession levels of 2008. The reduced demand has caused a
number of companies to cancel new projects or idle plants.
Tierney said that low demand for electricity has reduced the
amount of time companies is able to operate "relatively
inefficient" coal plants.
The recent announcement that FirstEnergy Corp. would retire six
older coal plants, Tierney wrote in her paper, likely was
influenced by market conditions. In a release from the company,
they pointed to the cost of retrofitting equipment to comply with
the EPA's new mercury and air toxics standards.
"FirstEnergy had already idled most of these units beginning in
2010 because of reduced demand for electricity and the need to
reduce operating costs," Tierney wrote.
"FirstEnergy's prior decision to retire the units by September 1,
2012 suggests that market fundamentals led the company to reach
the conclusion now, rather than closer to the date on which the
company would need to comply with EPA's mercury and air toxics
rule (which is March 2015, at the earliest)."
She added that FirstEnergy has been closing their oldest coal
units for several decades, citing examples of closures since 1981.
The June 2011 announcement of coal plant retirements by American
Electric Power was also examined in Tierney's paper. Again, she
points out EPA regulations were cited as the reason for closure,
but prior statements from AEP officials suggested market dynamics,
including the high cost of operations of those plants were
responsible.
"In 2007, AEP had signed a consent decree covering many power
plants including all but one of the units in the 2011 retirement
announcement; in that consent decree, relating to prior
environmental litigation surrounding the plants, the company had
already agreed to retire, retrofit or repower 4,500 MW of these
plants," Tierney wrote.
The analysis group is the largest private economic consulting firm
in the country.
Tierney's full report is available online at the Analysis Group
website:
http://www.analysisgroup.com/uploadedFiles/News_and_Events/News/2012_Tierney_WhyCoalPlantsRetire.pdf