April 24, 2014

Retirements to Boost Prices $3 – $11/MWh: Study

Coal plant retirements will boost PJM on-peak energy prices by $3 to $4/MWh — and as much as $11/MWh if gas prices increase — according to a study released last week by The Brattle Group.

(Source: The Brattle Group)

(Source: The Brattle Group)

The analysis — which evaluates the “feedback” effects from coal plant retirements, retrofits and increased gas demand on capacity and energy prices — is a case study of PJM’s Mid-Atlantic (MAAC) region.

Brattle said the retirement of 2.8 GW of coal capacity in MAAC, 15% of the region’s total, would increase on-peak prices $3-4/MWh by 2015, assuming delivered gas prices of $5-6/MMBtu. The impact would decline to about $1/MWh by 2025 as new gas-fired plants increase supply. Off-peak prices would increase by $1-2/MWh under the same scenario.

If all of the replacement capacity came from combined cycle units and combustion turbines, however, the increased fuel demand would boost gas prices by 5% to 10%. As a result, on-peak prices could jump more than $10/MWh by 2015, declining to $6/MWh by 2025. Off-peak prices would increase about $5/MWh throughout.

The analysis compared projected prices with futures prices for the PJM-West hub as of summer 2012. It noted that PJM West prices in October 2013 were about $5/MWh lower than the 2012 baseline.

The increase in margins — with a present value of $100-300/kW — “are not likely to be large or persistent enough to alter the extent of overall plant retirements,” Brattle said but could be enough to reverse some retirement decisions.

Capacity Price Impact

Feedback Loops between Coal Plant Retirements and Markets (Source: The Brattle Group)Capacity prices will rise in the short-term as reserves drop but drop long-term as increased energy prices reduce the net Cost of New Construction Entry (net CONE). “This effect decreases the long-run equilibrium price of capacity until the energy price impacts of retirements disappear,” the study said.

While numerous studies have projected the volume of coal capacity likely to retire and undergo retrofits, Brattle said few studies have evaluated the impact of these changes on energy and capacity prices and the feedback effects on plant economics. (A 2011 MISO study estimated an increase of up $4.80/MWh in its region due to environmental regulations. Exelon predicted in 2011 that the regulations could increase PJM prices by $12/MWh.)

Caveats

PJM MAAC Region: On-Peak Energy Price Increase & Impact on Energy Margins (Source: The Brattle Group)

Note: For On-Peak Energy Prices.

The size of the price increases will depend on the amount and timing of plant retirements, the spread between coal and gas prices and the mix of peaking, intermediate and baseload generators that enter the market. The study did not evaluate the impact of retirements on renewable generation or new transmission projects, which in turn would also influence power prices.

Brattle also cautioned that its results did not take into account other potential changes in the market. “For instance, it is possible that a material portion of the nuclear fleet in the U.S. will shut down if gas prices and resulting wholesale power prices continue to be low. And gas usage itself could increase sufficiently that it begins to dampen its own attractiveness.”

The study included a sensitivity analysis to determine the impact if natural gas prices remain at current levels of $3-4/MMBtu. Under this “Low Gas” scenario, coal retirements had almost no impact except for near-term on-peak prices. “This is not surprising because the coal plants that would potentially retire are the less efficient ones and they would not run a lot under such low gas prices if remained in-service. Thus, the marginal units that set the market prices would stay the same whether or not the coal plants retire.”

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