Old Coal Plants Shift Blame As Well As Costs

On February 16, the day  the Environmental Protection Agency's rule limiting power plant mercury emissions hit the Federal Register, the National Mining Association petitioned a federal appeals court for a review.

The group was quick to argue that FirstEnergy's announced plans to close nine coal-fired power plants was the fault of the rule. FirstEnergy itself made the same claim when it said the nine plants, totaling more than 3,300 megawatts of capacity and located in Maryland, Ohio, Pennsylvania, and West Virginia, will be shuttered by September 1.

Not so fast, says a report published the same day by energy analyst Susan Tierney, who served as assistant energy secretary during the Clinton administration and as a Massachusetts utility commissioner under Republican and Democratic governors.

Tierney said there's a lot more going on in the energy market that is to coal's disadvantage than EPA's rules, which in any event, as other utility executives have noted, have been in the works for more than two decades. "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," her report noted.

Let's unpack Tierney's argument. Since 2008, wholesale power prices have plunged more than 50 percent on average. Gas prices are at their lowest point in 10 years, but coal prices have continued a steady upward march, partly as a result of growing coal exports. What Tierney called "tighter price differentials" between gas and coal have put an economic hammerlock on coal-fired power plants, especially decades-old beaters that are less efficient than newer plants. The old coal plants have been sitting idle longer as a result.

Also, the recession cut electricity demand. "Low demand for electricity moderates electricity prices by reducing the amount of time a relatively inefficient coal plant might otherwise be called upon to operate." Electricity prices also have softened as a result of efficiency. That's a good thing. When customers can get more value out of kilowatt-hours, they save money, utilities don't need to maintain as many generating horses in their stables, and there is less pollution emitted. Only an ideologue stuck on the notion that energy efficiency is a manifestation of hippie liberalism would find that a bad thing.

As a resource, efficiency and its kissin' cousin demand-response--e.g., paying factories to go off line temporarily during demand peaks--can beat generation in the market and the market has noticed. The PJM Interconnection, a grid operator that runs a competitive wholesale electricity market in 13 Northeastern and Midwestern states, purchased efficiency and demand-response resources in its 2014-2015 auction seeking "forward capacity," a tool for securing sufficient resources for meeting forecast energy demand.

Yet another factor cutting prices and making life hard for inefficient coal plants has been milder than normal winter weather. Fewer really cold days translates into reduced gas demand, putting downward pressure on gas prices, and enhancing gas' competitive advantage over coal.

Tierney took a gander at dissecting FirstEnergy's argument that its plan to close nine coal plants is EPA's fault. Most of the plants destined for the boneyard are more than half a century old. They are "merchant" plants, meaning they must compete with newer, more efficient plants in competitive wholesale power markets where gas has the aforementioned cheapness advantage. Most of the plants were idled two years ago in response to unfavorable market conditions.

Sure, EPA's rules don't do any favors for the economics of old, inefficient plants. Pollution cleanup requirements, however, are more of a final straw than a catastrophic bolt from the blue. When inefficient coal must compete in a softer market against cheap, abundant, and cleaner gas, the costs of pollution control rules--which, remember, have been in the works since the first Bush administration--might be the tipping point for a utility CEO to say out with the old and dirty and in with the new and cleaner.

Old coal plants finally are being forced to internalize the pollution costs they have been shifting onto society at large. Think of it as a market correction.