Premature Power Plant Retirements: Drivers and Responses

Over the past 15 years, there have been dramatic changes in the US power industry. These changes have culminated in premature retirements for many power plants and a shift away from the coal-fired baseload power plant.

According to a memorandum on electricity markets and reliability by the Department of Energy (DOE), 132 GW of electrical generation capacity was retired from 2002 to 2016. This is equivalent to around 15 percent of the total installed capacity in 2002. Over the same timeframe, 390.5 GW of new capacity was added.

Here's a look at the factors driving these retirements, responses to the shifting power mix, and projections on what the future holds.

Cheap Natural Gas Fuels Unprecedented Shift

The DOE memorandum identified cheap natural-gas-fired generation as the most significant contributor to premature plant retirements. From 2005 to 2016, as a result of the shale gas boom in the US, domestic natural gas production increased by about 50 percent. This surge of production pushed natural gas prices down from a range of $5-10 per million Btu (MMBtu) to a range that has mostly been less than $3 per MMBtu in recent years.

This drop in prices made natural gas cheaper than coal in many cases. This was compounded by the fact that highly efficient, natural-gas-fired combined-cycle (NGCC) plants can be built quickly compared to a coal or nuclear baseload power plant. The net impact was the displacement of coal-fired power by natural gas. Last year, natural gas surpassed coal as a source of power for the first time.

Renewables Rise

Since 2007, renewable sources of power like wind and solar have proliferated. This growth has been driven by a combination of government policies, mandates, and subsidies.

The biggest driver, estimated to be responsible for 60 percent of the growth since 2000, has been state-level renewable portfolio standards (RPS) that require the generation of a certain amount of power from renewable sources. Other drivers for the growth of renewable power sources include government research and federal tax credits like the solar Investment Tax Credit—a 30 percent federal tax credit for the capital cost of solar systems on residential and commercial properties.

The variable nature of these power sources also created a demand for power plants that can be cycled up and down quickly. NGCC plants are ideally suited for this role, and they became the preferred option to smooth out the variability of renewable power.

Compliance Demands

Regulation-driven cost increases also helped force the premature shutdown of some power plants. One of the most troublesome regulations for these plants to comply with, the Mercury and Air Toxics Standard (MATS), took effect in 2015 and required oil- and coal-fired power plants to limit their emissions of air pollutants like mercury and arsenic.

In a 2015 white paper, Bloomberg New Energy Finance forecasted that 23 GW of power—accounting for about 7 percent of US electricity generation—would be retired in 2015. Bloomberg also forecasted that another 30 GW would be idled by 2020, primarily in response to the MATS. The organization's predictions largely panned out. In 2015, the US retired a record amount of electrical-generating capacity.

Demand Growth Stalls

A slowdown in electrical demand growth was also a factor in premature plant retirements. According to the DOE memo, in the 1990s electrical demand grew at an average annual rate of about 2.5 percent. From 2000 to 2008, that growth slowed to 1 percent. Since then, demand has been flat. This was partially attributable to the 2008 recession, which caused a substantial drop in electrical demand that didn't recover for several years. This slowdown, combined with the 390.5 GW of new capacity additions, pushed some older, less-efficient plants into redundancy.

Balancing Authority Responses

The US power system's balancing authorities work to ensure that power supply and demand are balanced across a region. These systems have had to respond in different ways to the shifting power mix.

PJM Interconnection (PJM) is a regional transmission organization (RTO) that operates mostly in the Middle Atlantic region. Notably, PJM operates directly over the Marcellus and Utica Shales, which have become the most prolific natural gas producers in the US. In part because of insufficient infrastructure to transport it from the area, prices for natural gas in the PJM area began to trade at a discount to the Henry Hub Gulf Coast trading point. Cheap natural gas became an increasingly important baseload power supply in the region and started to competitively displace coal.

MISO is the Mid-Continent Independent System Operator (ISO). This region encompasses some of the leading wind power resources in the country. Iowa, for example, is in the MISO region and leads all states in the share of power derived from wind. In 2016, Iowa derived more than a third of its power from wind. MISO operates across a large geographic area, and that helps smooth out variability. However, the growing amount of variable power in the system meant that MISO had to place a greater focus on fast-ramping reserve power than PJM.

The Federal Energy Regulatory Commission (FERC) regulates the sale and transmission of electricity in all of these markets and has undertaken initiatives to improve grid reliability for variable power sources. Examples are updating California's solar photovoltaic connection requirements to include smart inverters and adopting policies to better facilitate the use of hydropower to balance wind power resources. FERC has also sought to improve the utilization of shortage pricing, which helps with the economics of fast-responding, reliable resources.

What's Next?

Growth in renewables and natural-gas-fired power will continue, though recent developments suggest this growth may slow. The EPA's Clean Power Plan (CPP) would have required a 32 percent cut in utility-sector carbon emissions from 2005 levels by 2030, which would have boosted natural gas and renewable energy, primarily at the expense of coal.

However, the Trump administration has announced that it will repeal the CPP. Last year, the US Energy Information Administration estimated the impact of a CPP repeal in its Annual Energy Outlook (AEO) 2016.

The CPP was projected to force the retirement of 92 GW of coal-fired capacity by 2030. Without the CPP, an estimated 60 GW of coal power will be retired. Natural gas and renewables were forecasted to grow even without the CPP.

Most of the factors that have driven the early retirements to date remain in place, but the CPP repeal should slow the pace of coal-fired retirements.