Energy transition: Unlock incremental value from retiring coal plants
November 24, 2020
November 24, 2020
The US coal industry is facing declining growth. Raw material prices and electric power demand for coal have experienced single-digit compound annual growth rate (CAGR) declines, proposed new coal generation capacity has evaporated, and the total market capitalization of the top four US coal producers has diminished by close to 80% from 2011 to 20181. Unprecedented uncertainty has accelerated the pace of coal generation retirement, quadrupling annual closures over that same timeframe.
The coal industry is experiencing declining growth
Coal generation plant retirements are accelerating
Under mounting cost pressure, plant operators need to better understand and quantify three categories of risk—market, regulatory, and investor—each of which has the potential to push coal “out of the money” and drastically accelerate the pace of closure. Variables influencing this are:
Our analysis suggests power market pricing heavily influences operator decisions to expedite plant shutdowns—starting with the least efficient units as defined by O&M cost and heat rate. We found that from the time of announcement to approximately 5 years prior to closure, retiring baseload coal plants’ median O&M cost per MWh is 25% higher than that of the operating fleet2.
Examining market risk in isolation, up to 50% of PJM large coal (>500 MW) capacity is expected to retire by the end of 2035 if market capacity prices follow the same linear trajectory as 2018-2022 auction prices3. A 25% step reduction of the forecasted capacity price curve, however, could lead to a near doubling of closures.
Power market prices will have a significant impact on the pace of coal plant closure
Up to 50% of PJM capacity is expected to retire by 2035 EOY if capacity prices follow a linear trajectory
Operators should recognize the long 8-10 year planning cycle and adopt a meaningful “run to retire” strategy—one that unlocks incremental value by optimizing the organization and supply chain, managing assets for recovery, and honing planned capital expenditures, while retraining and transitioning the workforce.
Experience tells us operators can achieve meaningful cost savings (potentially in the millions of dollars) in three cost categories:
To achieve these incremental savings, coal operators should adopt a "run to retire" strategy, ideally 8-10 years before closure, that:
Market, regulatory, and investor forces are squeezing coal generation profitability. And units with the highest operating costs are most at risk of being pushed "out of the money." Operators have a unique opportunity to unlock incremental value by adopting a "run to retire" plan that focuses on optimizing the organization, workforce, assets, and planned capital projects, while at the same time transitioning to a renewable generation portfolio.
Sources:
1 S&P Market Intelligence (2011 Market Capitalization – BTU, CNX, WLTGQ, ANRZQ; 2018 Market Capitalization – BTU, ARLP, ARCH, CEIX)
2 Accenture Analysis of 596 coal baseload and large units, of which 110 retired between 2015-2019
3 PJM Resource Clearing Price Auction (CP, BRA, RTO Prices)
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