U.S. Coal-Fired Power Development: Full Employment for the Lawyers

The EPA began rolling out its long-anticipated power plant regulations this year, causing some utilities to shutter some older coal-fired plants. Other utilities paused, perhaps hoping that a neighbor’s closure decisions would allow continued operation of some of their own older, smaller, less-efficient plants. As the nation sweated through a scorching summer, air conditioners hummed thanks to coal-fired power plants built 50 or more years ago. How many of them will be retired, and over what timeframe?

Coal-fired power plants built during the Truman, Eisenhower, and Kennedy presidencies kept U.S. air conditioners humming during the sweltering summer of 2011. Next summer, some of those plants will be idled, a victim of regulations by the U.S. Environmental Protection Agency (EPA). As they think about the next few years, leaders of power developers, utilities, and coal companies are not convinced the lights will stay on as the U.S. marches toward a cleaner, greener energy future. The price of electricity will rise—but how far and how fast? What will coal’s role be as the U.S. works to clean and green its electricity mix?

EPA: Rules, Rules, and More Rules

This year, the EPA issued three rules that will affect the operations, economics, and continued viability of more than 1,000 coal-fired generators and countless coal mines.

Dozens, if not hundreds, of smaller, older, less-efficient coal generators are expected to be closed over the next 12 to 36 months as these and other EPA rules are proposed, finalized, and litigated. More than two dozen generators already have been marked for retirement. Industrial Info Resources is tracking well over 24 GW of coal-fired generation that may be retired because of the agency’s new regulations.

Coal-fired plants that remain open will need to install equipment to lower sulfur dioxide (SO2), nitrogen oxides (NOx), mercury, particulates, and other emissions. This is expected to lead to as much as $12 billion in environmental-control work for engineering, procurement, and construction (EPC) firms, equipment makers, and service providers. (See “An SCR Can Provide Mercury Removal Co-Benefits” in the October 2011 issue of POWER.)

The new regulations utilities facing coal-fired utilities are outlined below.

Cross-State Air Pollution Rule. The EPA finalized its Cross-State Air Pollution Rule (CSAPR) in July 2011. Phase I of the new rule is effective in January 2012, while Phase II goes into effect in mid-2014. Formerly known as the Clean Air Interstate Rule, the CSAPR applies to coal-fired generators in 28 states, mainly located east of the Mississippi River, though Texas generators were included in the final rule.

By 2014, the CSAPR will lower power plant emissions of SO2 and NOx by 73% and 54%, respectively, from 2005 levels. Phase II of the rule focuses more on NOx emissions than SO2 emissions. Industrial Info is tracking 887 coal-fired power plants that will be affected by this rule.

Complying with the CSAPR will cost utilities—and their customers—a lot. The EPA estimated it would add about $800 million annually to the $1.6 billion in capital costs per year that utilities are already paying to comply with earlier versions of the CSAPR. A raft of studies by outside consultants pegs annual compliance costs at $5 billion or more when equipment costs, fuel price impacts, and costs of replacement energy and capacity are included. Whoever’s right, there will be a lot of zeros in the industry’s compliance price tag. And that money will come out of the pockets of businesses and consumers, further slowing an already weak economy.

Maximum Achievable Control Technology. In March, the EPA released its long-awaited draft rule on reducing power plant emissions of mercury and other hazardous air pollutants (HAPs) using maximum achievable control technology (MACT). This rule, scheduled to be finalized later this year, will reduce power plant emissions of mercury by 78% and particulate emissions by 31% as a co-benefit. Owners of coal-fired generation would have four years to comply with the new emissions standards. The EPA estimated the rule would affect 1,200 coal-fired generators in the U.S. This rule replaces the Clean Air Mercury Rule, which a federal court remanded to the EPA in 2008.

The MACT rule is the first time that power plant emissions of mercury and other air toxics would be covered by the Clean Air Act. The EPA estimated the draft rule would cost the utility industry an estimated $10.9 billion per year in 2016 and close an estimated 20,000 MW of coal-fired generation. Again, consultants projecting compliance strategies and costs for utilities and coal companies see far higher costs, and far greater closures, than the EPA.

Litigation is clearly signaled for the MACT rule. Weeks prior to the release of the draft rule, the EPA asked a federal court for a 12- to 24-month extension to complete work on the rule. The agency wanted more time to address the more than 4,000 comments that were still pending at the time. The federal court denied the agency’s request and gave it a 21-day extension, until late March. Since the denial and release of the draft regulation, the EPA has been preparing itself for additional litigation on the MACT rule.

Clean Water Act Section 316(b). This past March, the EPA proposed amending section 316(b) of the Clean Water Act, which governs power plant water-intake systems. This regulation would apply to power plants and industrial facilities that use over 2 million gallons of water per day from bodies of water like rivers, lakes, and oceans and that use at least 25% of that water to cool their equipment. It seeks to protect aquatic life by required installation of appropriate technology such as screens and bubble blankets. (See “CWA 316(b) Update: Fish Guidance and Protection” in the October 2011 issue.) It also calls for power plant operators to study the impact of potentially installing cooling towers for new generation, as well as unit additions.

The CWA 316(b) rule, scheduled to be finalized by July 2012, will become effective around 2020. An estimated 670 power plants, mainly coal and nuclear, will be affected by the new rule, the EPA said. It would cost about $400 million to implement this new rule. Industrial Info Resources is tracking up to 9 GW of generators that could be retired as a result of this regulation.

Market Response: Analyze, Close, Litigate, Build, and Hope

When Michael Morris, chief executive at American Electric Power, addressed the annual Coal-Gen conference in August, his frustration and concern was evident. He asked the audience if they thought the EPA had any idea of what it was doing.

The question was not entirely rhetorical. Morris noted that the EPA estimated its new rules would result in the closure of 10 GW of coal-fired generation. But AEP and Tennessee Valley Authority already have announced the closure of 14 GW of their coal-fired generation in response to the EPA’s regulations. That’s before the agency even finalizes its MACT and CWA rules, and before factoring in closure decisions from other large coal-dependent utilities like Southern Company, Duke Energy, Ameren, and E.ON.

Morris noted that the Department of Energy (DOE) estimated the EPA’s actions could close 30 to 40 GW of coal-fired plants. The Federal Energy Regulatory Commission, an independent branch of the DOE, puts the number higher: up to 60 GW of lost capacity. POWER, in a May 2011 editorial, “Predicting U.S. Coal Plant Retirements,” made a case for up to 50 GW in coal plant retirements.

So far this year, utilities have announced the closure of dozens of coal-fired generators across the country—from Virginia and Georgia to Tennessee, Texas, and Washington state. Dozens of other utilities are still analyzing whether their economically marginal plants could remain open because of the closure decisions made by other utilities.

The number of plant closure announcements is expected to surge in the coming months as the EPA finalizes its MACT rule later this year, and its CWA section 316(b) rule next year. However, for those generators that will be kept running, Industrial Info sees at least $10 billion of environmental retrofit work over the next four to five years.

A cycle of litigation is expected as the EPA works to finalize the MACT and CWA regulations. The results of that litigation, coupled with congressional action and the 2012 elections, are expected to play a significant role in determining how broadly and deeply power plants will be regulated at the federal level.

Against this busy regulatory backdrop, two coal-fired projects came online in 2011: the two-unit, $2.1 billion, 1,354-MW Elm Road Generating Station in Wisconsin and Unit 2 of the Whelan Energy Center, a $504 million, 220-MW generator in Nebraska.

Although no new coal-fired power plants have broken ground so far in 2011, work was progressing on eight new-build plants, including these three:

  •  Duke Energy’s $2.9 billion, 618-MW Edwardsport Generating Station, an integrated gasification combined cycle (IGCC) generator that may install carbon capture and sequestration (CCS) equipment.
  • The $4 billion, 1,600-MW Prairie State Energy Campus in southern Illinois. The first 800-MW Prairie State generator is scheduled to come online by the end of 2011.
  • Mississippi Power’s $2.4 billion, 582-MW Kemper County IGCC project, which is scheduled to be operating by 2014.

Tenaska’s $3.5 billion Taylorville IGCC project went on hold earlier this year after Illinois lawmakers failed to approve a bill supporting construction of that generator. In addition, a proposed baseload project in Texas, the White Stallion Energy Center, recently stalled over the price of water the developer would pay to the Lower Colorado River Authority.

This summer, AEP surprised nearly everyone in the industry when it terminated construction of a commercial-scale CCS project at its Mountaineer Power Station in West Virginia. A smaller-scale technology validation of Alstom’s chilled ammonia carbon-capture process had been operating at that plant for about 20 months, and AEP said the technology was working fine. However, given the uncertain future of efforts to lower power plant emissions of carbon dioxide, AEP pulled the plug on the commercial-scale project and returned an estimated $334 million in clean coal grants to the DOE.

In the same timeframe, however, Southern Company began capturing carbon at its 25-MW CCS project at Plant Barry in Alabama. It will sequester an estimated 150,000 tons of CO2 per year. Moreover, other CCS projects moved forward during the year, including the FutureGen project in Illinois, the Texas Clean Energy Project, and Saskatchewan’s Boundary Dam project.

The rapid pace of EPA rules and the dramatic growth of intermittent generation like solar and wind have caused many industry executives to wonder about electric reliability and grid stability. As temperatures and electric demand soared during the summer, many wind farms stopped generating electricity precisely when utilities—and customers—needed it most. “Hope for the best, but expect the worst” summarized the views of executives from utilities and coal companies.

Looking Forward: More Clarity (and Litigation) for Coal

Though wounded, coal is not dead. In addition to new-build work, Industrial Info is tracking 145 upgrade and uprate projects worth over $4 billion that are scheduled to kick off at existing U.S. coal-fired generators over the next two years. EPA rulings are expected to create billions of dollars of environmental retrofit work at the nation’s coal-fired generators. And Industrial Info is tracking about $16 billion of coal-mining capital and maintenance projects across North America. Increasingly, that coal is going overseas, to countries like China and India, whose economies continue to grow at a torrid pace.

In the U.S., electric demand increased 4.3% in 2010 following two years of falling consumption, according to the U.S. Energy Information Administration. But a weak economy and high unemployment are expected to push down electric demand growth to a fraction of 1% this year before rising by nearly 2% in 2012. Declining electricity demand in 2008 and 2009, and a near-flat consumption growth in 2011, have enabled utilities to continue deferring building new solid-fuel generators.

Electric utilities, coal companies, EPC firms, and equipment suppliers now have a somewhat more clear picture about where the EPA is going in terms of reducing emissions and protecting aquatic life at coal plants. Utilities are starting to make the hard choices about where they will invest and where they will not. Engineering firms, economic consultants, and law firms are running flat out to cope with the new demand for their services.

In recent years, demand for energy litigators has far outpaced electric demand growth. We see this trend continuing for some time. As strong demand growth stretches the supply of energy regulators, we see 2012 as the year that energy litigators add a “congestion pricing” rider to their hourly rates.

Britt Burt is vice president of power industry research at Industrial Info Resources (IIR). Brock Ramey is IIR’s manager of power industry research for North America. Shane Mullins is IIR’s vice president of product development. IIR, with global headquarters in Sugar Land, Texas, provides global market intelligence for companies in the power, heavy manufacturing, and industrial process businesses. IIR’s databases, market forecasts, and custom analytics are used by EPC firms, power developers, utilities, financial services firms, equipment manufacturers, and professional services firms to build their business around the world.

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