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Analyst sees mix of continued coal plant retirements, slowing gas development

Coal plant retirements are likely to continue if not accelerate while natural gas-fired generation development is likely to stagnate, attendees of the Gulf Coast Power Association's monthly luncheon in Houston were told March 22.

Since October 2017, almost 5,300 MW of generation has been announced for retirement in the Electric Reliability Council of Texas region, including 4,200 MW of Vistra Energy Corp.'s coal-fired fleet.

While federal air quality regulations may provide less pressure under the current administration, state-level water quality issues are causing the continued operation of coal-fired power plants to make less economic sense, Julien Dumoulin-Smith, a power-sector equity analyst at Bank of America Merrill Lynch, said during his presentation, "Investors' Perspective on ERCOT Markets."

Another factor is that recent federal tax reforms could accelerate the depreciable life of coal assets, while utilities see renewables as assets that produce energy at near-zero marginal cost that can also be rolled into rate bases and thereby generate a regulated return on investment.

Also, the cost of renewable energy generation equipment continues to fall, Dumoulin-Smith said. While tariffs on crystalline photovoltaic cell imports may result in postponed solar project developments, solar generation technology's efficiency continues to improve. Meanwhile, the makers of wind turbines "are engaged in a price war," he said.

"How much incremental hurdle am I willing to invest in order to keep a coal plant operating?" Dumoulin-Smith asked, adding that "2019 is going to be a pivotal year for coal plants."

In addition to various states' efforts to limit coal plants' environmental effects, the limited willingness of railroads to absorb reduced revenues-per-ton-mile of coal reduces the long-term viability of America's aging coal fleet, Dumoulin-Smith said. For example, he said it will become increasingly difficult for low-sulfur Powder River Basin coal from Wyoming to compete as pipeline capacity catches up with fast-growing natural gas production from West Texas' Permian Basin.

LNG developments affect gas generation

Significant amounts of that natural gas may be siphoned to LNG terminals on the Gulf Coast as Asian power markets, particularly the Chinese, show increasing interest in shifting from nuclear and coal power generation to cleaner sources. Gulf Coast LNG development is likely to benefit from the difficulty of developing LNG terminals on the Pacific Coast, from California to British Columbia, Dumoulin-Smith said.

While countries along the tropics have a strong incentive to develop renewables, especially solar power, "obviously, intermittency is a problem," for which LNG is the solution.

"It's a reliability product," Dumoulin-Smith said.

With more natural gas being exported from the U.S., development of gas-fired generation resources has slowed, at least in the Gulf Coast region, due to concerns over the availability of gas.

However, steel tariffs could have an effect that is "not straightforward" on LNG development, Dumoulin-Smith said.

"There are not many providers of cryogenic steel for the LNG market," he said, adding that most Asian companies that would contract with Gulf Coast LNG facilities "want to be an owner" of those facilities.

"Is the U.S. going to allow the Chinese to invest in LNG here?" Dumoulin-Smith said. "That is the big question."

Meanwhile, as storage costs fall, it is being combined with other renewables, mainly solar and wind, to supplant more conventional generation technologies. Areas such as Texas, New Mexico and California benefit from having the ability to combine both wind and solar power with storage, Dumoulin-Smith said.

Mark Watson is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.