Despite President Trump’s order to rescue the nation’s struggling coal power plants, utilities are considering the shutdown of unprofitable units. Since the year 2000, U.S. utility companies have announced closure of more than 200 coal-fired units. For example, Michigan-based CMS Energy Corp. announced on June 13 that it was shutting down two coal-fired power plants. Likewise, utility giants Southern Co. and Dominion Energy Inc. are planning for the future shutdown.
Faced with potentially long-term revenue loss and strict regulations to reduce emissions, utilities are now considering going forward with retirement plans. They are looking for solutions that meet environmental, safety, financial, and stakeholder goals. The utilities have learned important lessons from the closures that happened in the past and have developed best strategies. That’s what we are going to discuss in this article today.
The drivers for coal plant retirements have changed over time
Utilities closing power plants is not something which has started happening only recently. In the past also power plants were closed due to loss of money or when they became too unreliable.
Today, the reasons for closures are different. The primary drivers for retirement these days are:
- Low natural gas prices
- New environmental regulations
- Intense competition in the market
- Recent policies involving renewables and carbon pricing
- All coal plants have a finite life beyond which it is not economically feasible to operate them. Some of the power plants closing now date back to 1940s.
The price of closing coal plants
Power plant closing, decommissioning and redevelopment involve lots of money and risks. Whether a company would choose to abandon, convert or replace an existing facility, depends on a number of complex factors, such as –
- Asset valuation
- Cost studies
- Site remediation
- Possible redevelopment
It is important for the companies to have an upfront understanding of all the aspects that go into this process.
Who bears the decommissioning cost?
It depends on the following factors:
- In regulated states, decommissioning costs could be passed through to ratepayers, subject to public service commission approval (Source)
- In deregulated states, it is shareholders who pay for decommissioning, subject to management’s approval.
- Since there is no legal requirement to demolish an old power plant and no return on this investment, management typically chooses not to spend money on decommissioning. They rather sell it ‘as-is’ to the developers or the government that offers economic development incentives to decommission and redevelop sites.
Decommissioning old coal plants – some considerations
Since coal plant owners look to decommission old coal plants, several considerations emerge, which include –
As-Is Sale: Some companies opt to sell closed power plants as-is as the sites have significant redevelopment potential. It lets the buyer assume the risk in exchange for a lower price.
Replacement with new generation gas turbines and Retrofitting: Replacement of aging coal-fired steam turbine generation with new gas turbines is another option. It will enable the power companies to produce power at a lower price without investing in extensive pollution controls.
Conversion from coal to natural gas is one of the best options to bring new life to aging coal plants. Presently, there are about 30 gas conversion projects underway across the United States. It employs the existing grid infrastructure and is often more economical than building a new plant.
Sale for redevelopment: Sale for redevelopment is often a preferred option for power company owners because it allows them to monetize their asset and mitigate the risks. The decommissioned site is sold to the government so that it may be used for some other commercial or industrial application. It helps generate employment for the local community. For example Con Edison has sold several sites in New York City for redevelopment. The sites were sold for a significant value and the decommissioning costs were shared with the purchaser.
Selling specific assets: Specific assets within a plant can be sold. For example, recently, hardware from a defunct plant in the U.K. was moved to another plant in South Africa.
Since the ultimate outcome often depends on the economics, it is crucial for the companies to understand the costs and benefits of all options before going forward.
According to various reports, the decommissioning of coal-fired power plants is going to see a rise in the next decade. So, the utilities need to plan and take strategic steps to curb rising costs and prevent spiraling liabilities. The right strategy, executed well, will be helpful for both power companies and local communities.