Between 59,000 and 77,000 megawatts (MW) of U.S. coal-fired power generating capacity will be retired over the next five years, according to economists at The Brattle Group. That’s an increase of 25,000 MW over their December 2010 estimate, in part due to low gas prices. Upcoming coal retirements could bring “modest increases in natural gas prices,” they said.
Since December 2010 when the prior estimates of potential coal plant retirements were released, both natural gas prices and the projected demand for power have decreased, and environmental rules have been finalized with less restrictive compliance requirements and deadlines than previously foreseen, Brattle said.
“These shifts in market and regulatory conditions have resulted in an acceleration in announced coal plant retirements. As of July 2012, about 30,000 MW of coal plants (roughly 10% of total U.S. coal capacity) had announced plans to retire by 2016.”
The study highlights that retirement projections are even more sensitive to future market conditions than to regulations, particularly natural gas prices. Likely coal plant retirements drop to between 21,000 and 35,000 MW if natural gas prices increase by just $1.00/MMBtu relative to April 2012 forward prices. Similarly, projected coal plant retirements would increase to between 115,000 and 141,000 MW if natural gas prices were to decrease by $1.00/MMBtu, according to the study, “Potential Coal Plant Retirements: 2012 Update.”
The authors said “a large portion” of the coal-fired capacity that retires will be replaced with gas-fueled plants, “…which could raise the price of natural gas from the levels prevailing today (and assumed in this retirement analysis).”
To reflect regulatory uncertainty, the authors developed “strict” and “lenient” scenarios for required environmental control technology. About 59,000 MW of capacity will likely retire under lenient rules versus 77,000 MW under strict regulations. The authors said they suspect that final rules will lean toward the lenient scenario.
“As an upper bound on the potential increase in gas demand in the electric sector, we calculated the gas required to replace the 2011 generation output of all projected coal plant retirements (59 GW) by 2016 in our lenient base case scenario,” the authors said. “The retiring coal plants generated approximately 266 terawatt-hours in 2011. Using an assumed 8,000 Btu/kilowatt-hour heat rate for the average gas plant providing the replacement power, about 2 Tcf/year (or about 6 Bcf/d) of gas would be needed. This additional gas demand represents about 10% of the total natural gas consumption in the United States in 2011 (23 Tcf/year) — large enough that it could result in modest increases in natural gas prices.”
Future coal retirements will be a bit more than double the level announced to date, said Brattle Principal Frank Graves, a co-author of the study. “The impacts will be modest over large areas but more acute locally, especially for owners of smaller fleets that are predominantly coal-based,” he said. “Everything else being equal, this amount of retirement will be enough to increase prices in both electric and gas markets for a few years, but we do not envision that impact to be large or persistent enough to alter retirement decisions.”
According to the study, $126-144 billion of investment will be needed to retrofit and replace coal capacity. About 80% of the likely coal plant retirements will be generating plants owned by traditionally regulated utilities as opposed to unregulated merchant generating companies.
The changes could be difficult for smaller generation companies or utilities with predominantly coal-fired generation, Brattle said. An estimated 4% of coal plant owners (controlling about 20,000 MW of U.S. coal plant capacity) would need to retire more than 50% of their fleets.
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