As an increasing number of older coal-fired power plants are shutting down, the reasons seem to vary depending on whom you ask.
In news releases, power company officials are quick to blame environmental regulations, while acknowledging that low demand for power and cheap natural gas prices are also major factors. Meanwhile, environmentalists point to grassroots opposition to coal power and say plant operators have failed to adequately prepare for new rules they knew were coming.
Ultimately, energy markets are complex, and defy simple explanations. All of these factors play a role in the closing of coal plants, with the unexpected boom in shale gas production exacerbating market and regulatory trends that were already underway.
Natural gas prices are hovering at a very cheap $2 per MMBtu this spring – and gas is so abundant and cheap that drillers are cutting back on production. Natural gas plants emit almost no harmful toxins, and because of their much lower carbon emissions can meet the recently announced Environmental Protection Agency proposed greenhouse gas standards that – if adopted – would mean virtually no new conventional coal plants could be built.
The proposed EPA standards don’t affect existing power plants, but the past two years have also seen the closing or announced closing of more than 100 older coal-fired power plants.
In many cases the natural gas factor and low electricity demand hastened the demise of plants that were scheduled to close at later dates when environmental regulations kicked in. Many plants cannot comply with the new Mercury and Air Toxics Standards (MATS) and the Cross-State Air Pollution Rule (CSAPR) without expensive new pollution control equipment that would make them unprofitable to run.
For example, Dominion had originally planned to close its State Line Power Station just outside Chicago at the end of 2014 rather than comply with environmental regulations, but bumped up the date to this spring because it could no longer compete with natural gas.
Merchant generators affected most
The impact of low natural gas prices depends greatly on whether power companies sell their energy primarily through long-term contracts, or as “merchant generators” on the spot market (power companies can sell some of their power through contracts and some on the spot market).
When coal-fired power plants have long-term contracts to provide energy to utilities at a fixed price, they are not affected by natural gas prices until their contract is up. And natural gas prices don’t have a strong immediate effect on power companies in states like Georgia and South Carolina where the same company is allowed to own power plants and deliver energy to customers, rolling the cost of generation and infrastructure into customer rates.
But natural gas has already had an extreme effect on coal plants in deregulated states where much power is bought and sold on the spot market through daily auctions – operated by regional transmission organizations like the PJM Interconnection and MISO.
Many of the older coal plants slated for closure are such merchant generators that produce power and sell it to utilities at auction. Each power company offers its energy for whatever price it deems profitable.
But the way the auctions are structured, all the power bought in a given auction on a given day sells for the same price – the price offered by the most expensive seller whose power was purchased in that auction. Traditionally natural gas had always been the most expensive energy source, so coal generators would be paid the same price per unit of energy as the natural gas generators – reaping a healthy profit.
Now that power from natural gas is so much cheaper to produce, companies providing coal-fired power at auction are paid less for their energy than they were in the past.
Merchant generators selling power at auction are also hit harder by the decreased demand for electricity during the economic downturn, which also drives prices down.
Environmental regulations also have major impact
Even coal plants with long-term contracts that are not immediately affected by natural gas prices and lower electricity demand are closing rather than comply with tougher pollution rules.
Dominion spokesman Jim Norvelle and FirstEnergy spokesman Mark Durbin noted that their companies are closing both merchant plants and also plants that sell power through long-term contracts.
Durbin said the mercury and toxics rule, finalized in December and taking effect in 2015, is the main reason FirstEnergy is closing coal plants in Ohio, Pennsylvania and Maryland. A 2011 study commissioned by the American Coalition for Clean Coal Energy says that almost half the nation’s coal plants generating a fifth of coal-fired megawatt hours are more than 40 years old and lack scrubbers – meaning they are likely to shut down rather than install expensive new equipment.
“When the mercury MATS rule was announced, that gave us the clarity we needed to determine it was necessary to retire six competitive units,” said Durbin. “The determining factor for us was the cost of the retrofits.”
He added that many of FirstEnergy’s plants run only infrequently to meet peak demand, so it was not worth investing in new pollution controls.
“You might have a power plant in reserve status on the chance the economy picks up,” he said. “With the new environmental standards, when you look at the cost of what it would take to make those plants compliant, that’s something we’re just not going to do.”
GenOn Energy spokesman Mark Baird said the company is closing plants by 2015 because of MATS along with stricter federal regulations on sulfur dioxide, fine particulates, ozone and water quality. But he also said the decision to close some plants this year, before the strictest federal requirements take effect, was made because “our evaluation indicates that they are not expected to be profitable under current and forecasted market conditions.”
Natural Resources Defense Council Midwest program director Henry Henderson says blaming environmental regulations for coal plant closures is “wildly disingenuous and manipulative.” He pointed specifically to two Ameren coal plants in Illinois that closed last year, in Meredosia and Hutsonville. The utility blamed environmental laws, but Ameren’s CEO later told investors the company used the plants’ nitrogen oxide and sulfur dioxide emissions allowances to avoid installing $70 million worth of upgrades at another of their plants.
“It’s not simply environmental regulations driving the closure, environmental regulations have induced forward-looking planning in a whole range of (other) utilities,” Henderson said. “They’ve not prepared for what they’ve known for a long time was inevitable.”
Will coal plant closures cause pain?
Coal industry proponents have said the closing of coal plants will mean energy shortages and/or rate increases in coming years. New natural gas plants will not be built quickly enough to pick up the slack, they argue, especially if the price of natural gas rises from the current cost of about $2 per MMBtu to $7 per MMBtu by 2035, as the Energy Information Administration (EIA) has projected.
“Just given the history of volatility in the natural gas markets, there is some residual concern,” said Jeffrey R. Holmstead, a former assistant administrator for the U.S. EPA for Air and Radiation, who now heads the Environmental Strategies Group at the public relations firm Bracewell-Giuliani, which advocates for the coal industry.
“I think everybody believes that natural gas prices will go up from where they are today,” he said. “One of the big issues with the EPA rules is that with all these coal plants coming off-line in 2015, even if natural gas prices are reasonable we just don’t have the pipeline capacity to get it where you need it.”
Holmstead and others have raised concerns that new pollution rules will lead to power outages, but the EPA has maintained reliability won’t be compromised.
The EIA predicted in 2011 that at least 216 gigawatts of generating capacity will be added by 2035, compared to 42 gigawatts of coal power going off-line in coming years.
The agency projected that the share of electricity generated by natural gas will increase from 24 percent in 2010 to 27 percent by 2035, while renewables (including hydro) will increase from 10 to 16 percent and coal’s share will fall from 45 to 39 percent. This was before the proposed EPA rules on greenhouse gas emissions, which could prevent almost all new coal plants.
Even before the proposed EPA greenhouse gas rules were announced, experts said it is extremely difficult to obtain financing for new coal plants in the current climate, even state-of-the-art “clean coal” plants. The Sierra Club says ground has only been broken on one new coal plant since 2008. Last fall the brand new Spiritwood Station coal plant with state-of-the-art pollution controls in North Dakota was taken off-line just after completion because Great River Energy said it could not run it profitably.
“It’s not just the fact that (specific new) environmental regulations are coming, the other thing is the lack of clear direction from Washington and state capitols” about future regulation, said American Coal Council spokesman Jason Hayes.
“People are saying, ‘Should we invest $3 billion in a new coal plant or should we wait and see what’s going to happen with these regulations and incoming legislation?’ Cap and trade is a good example – it was there, then gone, then back on, then gone. People were having difficulty deciding whether they should invest.”
Environmentalists, natural gas, and wind
Public opposition to older coal-fired plants has grown over the past decade as environmental organizations (including members of RE-AMP, which publishes Midwest Energy News) and grassroots community groups have rallied against individual power plants and drawn attention to the health and climate impacts of coal power in general. The role natural gas played in helping these groups ultimately achieve their goal – closing coal plants – put some in a difficult position.
The Sierra Club this year said it would no longer accept contributions from the gas industry, after members complained about $26 million worth of donations connected to Chesapeake Energy since 2007. Sierra Club National Coal Campaign director Bruce Nilles said that even if natural gas is largely to thank for forcing coal plant closings, it should not replace coal as the nation’s primary source of electricity.
“We care not one whit about why” coal plants are closing, Nilles said. “But we do care a lot about ensuring it happens and that we are seeing the full benefits by ensuring that the replacement power is as much clean energy and energy efficiency as possible.”
But the same public health and environmental groups that are happy to see natural gas causing coal plants to close may now be frustrated by the fact that cheap natural gas could hamper renewable energy development.
For instance, it will be much harder for wind projects to obtain long-term contracts now that they are competing with cheap natural gas, and many utilities also have the option of buying gas power at auction instead of committing to power from a wind farm. Wind power is seldom sold on the spot market, as long-term contracts are typically needed for new wind farms to get financing.
“State Renewable Portfolio Standards will continue to drive wind development in certain parts of the country,” said William Boyd, an energy law professor at the University of Colorado Law School. But natural gas will bite into wind’s market share, even with coal increasingly out of the picture.
“Now the choice is between gas and wind, or actually it’s a question of gas and how much wind,” Boyd said. “Gas and a little bit of wind, or gas and a very little bit of wind?”
Kari Lydersen is a Chicago-based freelancer and author whose work has appeared in The Chicago News Cooperative, The Washington Post, The New York Times and other outlets.
This work by Midwest Energy News is licensed under a Creative Commons Attribution-NoDerivs 3.0 United States License.