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FEATURE: Despite February storm, US coal plant retirements likely to continue


Coal's share hit two-year high in February

Retirements fail to impact prices

Biden impact on coal may be muted

Houston — Despite the Feb. 14 winter storm's triple-digit natural gas prices, massive gas-fired generation outages, soaring power prices and rolling blackouts in the southern Great Plains of the US, coal-fired generation is likely to continue to show net capacity reductions across the Lower 48 in the next few years.

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About 9.2 GW of coal-fired generation retired in 2020, down from 2019's 14.2 GW, and another 3.2 GW is expected to retire in 2021, followed by 4.9 GW in 2022, S&P Global Market Intelligence data shows.

"The February cold shot was an outlying weather event," said Manan Ahuja, manager of North American power at S&P Global Platts Analytics, in a March 8 email. "It was also short-lived and hasn't had a large impact on forward gas/coal prices."

For example, Platts Analytics has estimated that coal-fired generation's share of the Lower 48 states' average daily generation mix hit 28.4% this February, the highest level since January 2019's 29.2% and well above February 2020's 18.8%.

Platts Analytics forecasts coal-fired generation's share at an average of about 24% in 2021, flat with 2019 but above 2020's 20%. All of these shares are smaller than the previous seven years' average of 34.8%, according to Platts Analytics data.

Platts Analytics projects coal's share to fall to about 22% in 2022, dip below 20% in 2023 and continue to drop below 16% by 2026.

Little impact on prices

Coal plant capacity cuts likely over the next few years would tend to boost power prices, but weak demand and surging supplies from other types – renewables and natural gas, especially – would likely mitigate upward price pressure, industry observers have said.

From 2016 through 2020, more than 50 GW of coal-fired generation capacity has retired in the Lower 48 states, according to the Market Intelligence power plant database, but in most places, wholesale power prices have fallen and fallen over that period.

For example, the average of on-peak prices for seven hubs geographically dispersed across the Lower 48 states shows a decrease of about $5.25/MWh or about 16.7%, from 2016 through 2020, according to Platts Analytics data.

Morris Greenberg, Platts Analytics managing director of North American power, attributed power prices' lack of response to coal plant retirements to "a combination of renewables growth, low gas prices and also weak loads."

"Coal retirements would cause higher prices during peak periods in places with tight reserve margins," Greenberg said.

The numbers in the Electric Reliability Council of Texas the week of Feb. 14 represented a stark example of that peak-period pricing, with systemwide real-time prices at or near the $9,000/MWh cap for most of the work week. For the month, real-time systemwide on-peak locational marginal prices averaged almost $1,465/MWh, compared with $21.61/MWh in February 2020.

Day-ahead on-peak LMPs surged similarly, averaging more than $1,500/MWh this February across the four major hubs, compared with this January's averages in the mid-$20s/MWh and averages less than $20/MWh in February 2020.

Biden impact on coal

One might expect coal retirements to accelerate under the Democratic administration of President Joe Biden, but the effect on coal retirements may be muted because of the existing economics of coal-fired generation.

Jeff Berman, Platts Analytics manager for climate and clean energy transition, said a recent federal court vacating of the former Trump administration's Affordable Clean Energy rule "gives the Biden administration a clean slate to use regulations as a way of addressing power sector CO2 emissions – which would have clear downside implications for coal-fired generation."

But Greenberg said, "Federal policy is just one of several factors influencing retirements with gas prices and state policy playing major roles" in coal plant retirements.

"The extension of renewable tax credits are a negative indicator for coal, but there is still potential for a rebound in gas prices to improve margins -- so probably not much change in retirements in the short run," Greenberg said.

The February winter storm brought unprecedented gas price spikes in the southern Great Plains, with the Houston Ship Channel spot gas price hitting $400/MMBtu on Feb. 17, and averaging $55.353/MMBtu for the month, according to Platts data. In February 2020, the average was $1.848/MMBtu.

Platts Analytics considers the February power and gas market disruption an anomaly brought on by a once-in-a-generation winter storm, but gas price strength might persist – albeit at more reasonable levels -- as the national economy recovers from the novel coronavirus pandemic. Gas prices it could also strengthen as an unintended consequence of efforts to reduce reliance on natural gas.

Houston Ship Channel spot gas averaged about $1.99/MMBtu in 2020, but Platts Analytics projects that price to average more than $3/MMBtu the remaining 10 months of 2021, declining slightly to less than $2.95/MMBtu in 2022, and to average around $2.80 for 2023-26.

Carl Larry, senior vice president of communications at Opus Resource Partners, a company that acquires, decommissions and redevelops coal plant sites, noted that large numbers of coal plants have been uneconomic "once natural gas became abundant."

"It is not anticipated that these trends will change unless the Biden administration invokes a ban on fracking," Larry said. "If this happens, natural gas prices could rise and make coal economic again."

But Eric Smith, Tulane Energy Institute associate director said he thinks coal retirements and conversion to burning gas "are likely to increase under a Biden administration, in large part because of his mandate to go green and the lack of any organized political opposition to coal retirements."