PSEG Power LLC,a subsidiary of the PublicService Enterprise Group Inc., plans to retire its and coal plants on June 1,2017.
The subsidiary's board on Oct. 3 decided to cease operationsof the 620-MW Hudson unit 2, which began operating in 1968, and the 632-MWMercer station, which consists of two steam turbines that began operating inthe early 1960s, according to PSEG's latest Form 8-K.
The Newark-based utility said "sustained low prices ofnatural gas" along with the fact that neither plant was able to clear thelast two PJM Interconnection LLCcapacity auctions left it unable to justify any significant investment toupgrade the plants to meet reliability standards.
"The plants' capacity payments have been critical totheir profitability and PSEG's ability to continue to invest in modernizingthem," the company said in a release.
The closures are expected to have a material impact to PSEG'sresults in the third quarter of 2016. In that quarter, PSEG will realizeone-time, pre-tax charges of $40 million to $70 million in energy costs relatedto inventory reserve adjustments and $35 million to $77 million for operationand maintenance costs related to impairments of materials and supplies andconstruction work in progress, according to the Form 8-K. The operation andmaintenance costs also include employee-related severance benefits.
PSEG also expects to incur ongoing incremental non-cash chargesto earnings this year and in 2017 because of the accelerated depreciation ofthe plant assets and additional asset retirement costs, PSEG said in its Form8-K. The depreciation and amortization pretax expense is $560 million to $580million in 2016 and $940 million to $960 million in 2017.
Total expenses are estimated between $635 million and $727million in 2016 and $940 million and $970 million in 2017.
If PSEG Power determines not to use the sites of the twoplants for other industrial activity, that could incur further costs fromtriggering "implementation of investigation and possible remediation ofany existing environmental contamination…," the company said in itsfinancial disclosure.
A "sustained period" of depressed wholesale powerprices and reduced capacity factors as a result of low natural gas prices hasmade coal generation in the region less competitive to natural gas-firedgeneration. Though the two plants are also capable of burning natural gas, "theyhave higher operating costs and fuel consumption as well as longer start-uptimes compared to newer combined-cycle gas units," PSEG said.
Coal purchases fell dramatically in recent years with theHudson 2 unit purchasing about 153,000 short tons or less annually since 2012,down from 916,000 tons in 2010. The Mercer plant purchased 75,000 tons in 2015,down from about 378,000 tons purchased in 2010, S&P Global data shows.
Since 2010, the units have increasingly been relying onnatural gas. Average capacity factors since 2012 show that the two stationsoperated mainly during peak periods. Capacity factors for Mercer averaged at11% or lower since 2012 while the Hudson station had capacity factors at about20% or lower in that same timeframe, S&P Global data shows.
The financial filing also mentioned that the regional gridoperator, PJM, will evaluate any reliability impacts from the early retirements.
Though the region experienced a warmer-than-normal summer,electricity prices were not volatile enough to lead to increased dispatch ofthe plants, which typically run during very hot or cold periods.
PSEG is working with roughly 200 employees across the twoplants and local unions "to ensure that the plants continue to operatesafely through their retirement dates and to place as many employees aspossible within PSEG's family of companies," the company said.