Record Coal Retirements

2015 will be a historic year for the retirements of coal fired power plants in the United States and more specifically Ohio, West Virginia, Kentucky, Virginia and Indiana. Of the 13 gigawatts (GW’s) of retirements coming this year 81% is coming from coal-fired generation. This is primarily due to costs related to the Environmental Protection Agency’s Mercury and Air Toxic Standards (MATS). Utilities are making the decision to retire older power plants with low run rates rather than to retrofit them to meet the MATS requirements.  Even though many of the plants retiring have been running at less than 25% of their potential output it is hard not to wonder about the future impacts to the markets and to reliability.

Once a utility proposes the deactivation of a power plant it must notify PJM, the transmission grid operator whose mission is to maintain reliability at the lowest cost possible. PJM evaluates the impacts on the grid of removing the plant from the system and, in some cases, may require to the power plant to continue operation if deactivation would cause any instability of power flowing on the grid.

So what do these generation retirements mean for energy and capacity pricing in Ohio? The immediate impact has already been felt in the capacity markets. The 2015/2016 capacity auction took place nearly three years ago on the heels of FirstEnergy announcing 2,500 megawatts (MW’s) of retirements. This sent the auction pricing running with clearing prices three times that of the rest of Ohio. Since then, the subsequent capacity auctions have provided clearing rates at more reasonable historic levels.

Long term energy pricing has really not responded to the announced retirements. Wholesale electricity pricing, all the way out to 2020, remains near historic lows.  However, day-ahead index pricing has seen increased volatility over the past few years especially during the winter. Both electric utilities and gas utilities are fighting to secure natural gas during the extremely cold months. This competition for the gas has put a spotlight on operational issues and coordination shortfalls between the two utilities. As these issues are being worked out one should expect more short term volatility as power prices will more closely track the natural gas market.

Needed generation capacity will now come from both existing assets in areas where demand has decreased and the construction of cleaner more efficient technologies. PJM expects around 9,000 MW’s of new generation, of which  nearly all is natural gas, to be installed in its territory in the next two years. These new additions will make up for a large portion of the announced retirements. In a region dominated by coal and nuclear power, natural gas is certainly the new darling.