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: