Coal power plant retirements could potentially increase energy prices by $3–4/MWh for on-peak hours and $1–2/MWh for off-peak hours, but if natural gas prices also rise, energy prices could rise by as much as $9–11/MWh for on-peak hours and $5–6/MWh for off-peak hours, a new report from The Brattle Group suggests.
The report, “Coal Plant Retirements – Feedback Effects on Wholesale Electricity Prices,” studies the likely causes and magnitudes of feedback effects of coal plant retirements on short- and long-term wholesale power prices and uses the eastern PJM region as a case study.
The primary drivers for feedback effects will be the reduced supply for electricity generation and increases in the cost of natural gas due to increased gas demand from replacing the coal retirements, the report assumes. “Increased plant operating costs at retrofit units also will tend to raise prices, while there could be partially offsetting impacts on the cost of coal. Capacity markets, where they exist, may show a short-term increase due to reduced reserves, then a longer-term reduction due to net [Cost of New Entry (CONE)] changing under higher energy prices.”
If incremental gas-fired generation were to replace essentially all retired coal (and the report notes this is a “strong assumption”), the eastern PJM region—which the group says is only “considering the impacts of retirements on power supply curve”—could see 10% to 15% higher gas prices that would further push PJM electric prices to as much as $9–11 MWh for on-peak hours.
The Brattle Group says, however, that it expects the effects of retirements and high gas prices to reduce in force after five or 10 years as a result of markets adding new resources. Even so, “These increased energy margins are not likely to be large or persistent enough to alter the extent of overall plant retirements. We estimate their present value to be around $100- 300/kW, depending on how much gas prices are affected,” the report says.
“Some feedback effects may already be partly reflected in forward prices, but likely not with strong certainty, because the environmental policies and market participants’ responses are not yet fully known,” said Frank Graves, a Brattle principal and co-author of the study. “Moreover, retirement versus retrofit studies often evaluate whether the plants at risk are profitable at expected market prices, without considering that if enough plants retire, the market prices themselves may increase. Thus, there may be a few dollars/MWh of risk in forward prices that could move either way depending on pending rule resolutions and market responses.”
The group says that it embarked on the study as a follow-up to its plant retirement forecast from 2012 because although many studies have projected the amount of likely coal plant retirements and retrofits due to recent environmental regulations, the implications of such supply shifts on wholesale energy and capacity prices and the related market feedback effects on plant economics “have rarely been investigated.”
For one, “It is likely that reduced supply for electricity generation, increased operating costs, and changes in fuel demands will drive up market prices,” it says. “It is also likely that, because of the uncertainty and time frames for these retirement decisions, not all of these impacts are currently reflected in public forecasts or market forward prices.”
—Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)