Natural Gas underprices coal, responsible for more coal plant retirements

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A team of economists says it now has a better understanding of the impact of emerging air quality regulations on coal-fired power plants, imposed by the Environmental Protection Agency (EPA).

Economists at the Brattle Group released a report earlier today. The new study found that 59,000 to 77,000 MW of coal plant capacity are likely to retire over the next five years. That’s approximately 25,000 MW more than previously estimated.

In December 2010, estimates of potential coal plant retirements were released. Both natural gas prices and the projected demand for power have decreased since then, and environmental rules have been finalized with less restrictive compliance requirements and deadlines than previously predicted.

The team says these shifts in market and regulatory conditions are responsible for more 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 updated study takes into account the most recent market conditions and the shifting regulatory outlook facing coal plants.

“Our analysis indicates that future coal retirements will be a bit more than double the level announced to date,” said Frank Graves, Brattle principal and 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. 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.”

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Meanwhile, the authors found that $126 to $144 billion of investments will be needed to retrofit and replace coal capacity. Approximately 80% of the likely coal plant retirements will be generating plants owned by traditionally regulated utilities, such as investor-owned utilities and public power companies (as opposed to unregulated merchant generating companies). These changes could be difficult for smaller generation companies or utilities with predominantly coal-fired generation; for instance, an estimated 4% of coal plant owners (controlling about 20,000 MW of the total U.S. coal plant capacity) would need to retire more than 50% of their generation fleet.

However, says the team, once industry-wide compliance adjustments are made, the coal fleet should be as profitable as it would have been absent the environmental rules.

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